Tax Residency & PE Risks –COVID-19
As a result of the COVID-19 pandemic, special measures have been taken at a global level, including restrictions on travelling, compulsory self-isolation, working from home and the suspension of employment. Such measures restrict the physical presence of individuals at their place of work.
It is within this context that the Cypriot Tax Department (“TD”) issued on 27th of October 2020, Circular 4/2020 (“Circular”) which relates to the implementation of the provisions on tax residence and permanent residence installation in accordance with article 2 of the Income Tax Law the Income Tax Law in the context of the crisis caused by the COVID-19 pandemic, aiming to provide guidance to taxpayers with regards to the potential impact of such special measures on the tax residency status of individuals and companies as well as on the permanent establishment status of businesses.
It is noted that the Organisation of Economic Cooperation and Development (“OECD”) has recently issued general guidance on tax matters triggered as a result of such measures.
The TD has indicated that although such guidance is not binding, the intention of the TD is to follow such guidance as deemed appropriate. It has further been noted that the provisions of the Circular will be applied on the condition that the taxpayer elects to do so, otherwise the provisions of the relevant tax law will apply. It has been further clarified that the circular does not take into consideration the possible different tax treatment of the matters raised by other jurisdictions and focuses exclusively on Cypriot tax related considerations.
The Circular defines the period 21 March 2020 to 9 June 2020 as one during which there were objective restrictions in movement as a result of COVID-19, and as such should not be taken into consideration for the application of the referred to legislative provisions (see below analysis). In case the period is to be extended before 21 March 2020 or after 9 June 2020, depending on the case at hand, the taxpayer is obliged to provide relevant supporting evidence which proves the objective restriction to travel by reason of COVID-19 pandemic.
Permanent Establishment (“PE”) related considerations
The continuous presence of individuals in a country other than the one where they normally work or the provision of distance employment services during the COVID-19 pandemic may trigger PE risks and consequently, tax obligations.
In this respect it has been clarified that the COVID-19 pandemic will not result in any changes in the way a PE is determined. More specifically, the activities exercised in Cyprus by persons who are physically present in the Republic exclusively by reason of the special circumstances associated with the COVID-19 pandemic, will not be deemed as activities that create a PE in Cyprus. Instead, such activities are temporary in nature and are the result of undesired factors.
Furthermore the Circular makes it clear that the physical presence of individuals in the Republic, due to employment restrictions which result from state guidelines and which have been set in the context of fighting the COVID-19 pandemic, given their temporary nature, should not create new PEs for their employer. Similarly, when employees conclude contracts in the name of a business in a state different from that of their ordinary employment by reason of the COVID-19 pandemic, they do not contribute to the creation of a PE for the business in that state. The same considerations apply for representatives.
The Circular also refers to instances where individuals stayed abroad by reason of COVID-19 pandemic restrictions, whereas under any other circumstances they would have been physically present in Cyprus for the provision of their services or for the exercise of their duties. In these instances, the days spent abroad will not be taken into consideration for the purpose of determining a PE in Cyprus. In substance, it will be deemed that such persons exercised their activities from within Cyprus.
The actual circumstances of each case should also be considered in assessing the degree of permanency of the relevant activities of employees and/or of the representatives in Cyprus, possibly in comparison to the corresponding circumstances before and/or after the pandemic crisis.
Corporate tax residency considerations
A company which is not tax resident in Cyprus, will not be deemed as establishing tax residency in the Republic by reason of the presence/ stay in its territory of staff, directors, representatives or employees under a contract of service, when the reasons of their stay in the Republic are COVID-19 pandemic related.
Furthermore, the Circular clarifies that the tax residency status of a Company in the Republic will not be affected by reason of a director not being able to travel to the Republic and attend a meeting of the Board of Directors, when the reasons are exclusively COVID-19 pandemic related.
The circular notes that the actual circumstances of each case should also be considered prior to reaching a final decision. All necessary evidence should be kept supporting the case at hand.
Individuals’ tax residency considerations (183 days rule and 60 days rule)
Where an individual is already in Cyprus and his presence as well as his stay are due exclusively to COVID-19 pandemic reasons and of the relevant travel restrictions, the period from 21 March 2020 to 9 June 2020 will not be taken into consideration for the purpose of determining the tax residency of such an individual and taxing his income.
It has been clarified in the circular that in order to prevent abuse of the provisions therein, an individual staying in the Republic for a period exceeding 183 days and wishing to call upon the provisions of this Circular, should furnish relevant evidence to support his claim (e.g. a tax residency certificate issued by a foreign tax authority).
In addition, in the case where an individual stays abroad for reasons relating to the COVID-19 pandemic and other travel restrictions, and who under other circumstances would have been in the Republic, then for the purpose of determining his tax residency and tax obligations, such an individual will be deemed to have been present in the Republic. That is, the days that the individual has spent abroad during the period from 21 March 2020 to 9 June 2020 will be ignored/ not taken into consideration (such period can be extended depending on the case at hand).