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Additional Corporate Tax Residency Test in Cyprus: Don’t Take It Lightly!

No one loves the messenger who brings bad news. But we have to alert non-resident companies registered in Cyprus about recent amendments to the Income Tax Law regarding corporate tax residency.  The good news is that our experts have studied the situation. So we are ready to discuss how this can impact your business and advise on a failure-proof strategy.

The rule of thumb is: by developing a more robust international structure of your business, you can better protect it against competitors and avoid the mounting fiscal pressure. When a change of the scene is the best remedy, go after it. Everyone is free to explore tax-free and territorial tax territories, redomicile business, and take advantage of the legal privileges where they are available.    

Cyprus

You should not linger too long if you feel a dire need for the business structure revision. The additional corporate tax residency test will come into effect in less than 1 year!  

Since January 2022, a new challenge has appeared on the agenda of “stateless” legal entities in Cyprus: the additional corporate tax residency test. The latest edition of the Income Tax Law (Article 2 effective from December 31, 2022) has expanded the term “a Cyprus tax resident company” to also include any company incorporated/registered in Cyprus that is not a tax resident in any other jurisdiction, even if it is managed and controlled from outside Cyprus. The additional corporate tax residency test means that too many businesses will become Cyprus tax residents, subject to taxation on their worldwide income and other liabilities.

Before we focus on the additional corporate tax residency test, let us remind you about the amendments to the Cyprus AML Law made in 2021 following the EU AML Directive. They prescribed to enhance transparency in Cyprus and establish the public Beneficial Ownership Registers for Cyprus companies, trusts, and other legal bodies. Besides, according to the current Cyprus Law, corporate tax residents are required to prove the Cyprus residency of director(s) – to be able to hold board meetings in Cyprus. A brick-and-mortar administrative office also needs to be located in Cyprus for the actual management and control of the business. As you see, the new definition of the Cyprus tax resident company and the additional corporate tax residency test is just a bitter ‘cherry on this cake’.

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We are ready to consult you about your company’s redomiciliation and other options, select the best solutions for the effective structuring of your business model. Sign up for a free private session with our experts now on offshore company registration and/or changing the tax residency

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Why is Cyprus determined to introduce the additional corporate tax residency test and charge the worldwide income tax? 

For a long time, particularly in 2016-2019, the status of Cyprus’s financial sector and financial services had been on a steady growth path. The economy suffered from the highly disruptive COVID-19 – pandemic and the lockdowns. The EU admits that the jurisdiction’s competitive edge has faded, so Cyprus needs some new reforms. 

According to the Cyprus Economic and Competitiveness Council report, the main current disadvantages of the jurisdiction are its judicial underperformance, heavy reliance on restrictions on trade with other countries, high costs of cross-border transactions. 

The ITL amendments adopted by the government are supposed to enhance and promote the prestige of the jurisdiction as an open and transparent country for business ventures. This noble goal aligns with the European aspirations for corporate transparency and fair taxation of shell companies. However, the question is whether the new provisions are fair enough in terms of taxation of the worldwide income of all companies that will be classified as Cyprus tax residents by default according to the additional corporate tax residency test. 

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Give it a thought! How can the additional corporate tax residency test in Cyprus (to be in force from December 31, 2022) impact your business? Will your company become a corporate tax resident of the Republic of Cyprus by default? Will this change be a threat to your business? If so, you should contact our professional team and discuss all possible solutions as soon as possible!

The companies to be formally nominated as tax residents of Cyprus will have to comply with all the requirements stipulated in the national legislation. These liabilities will include the economic substance provisions, the UBO registration in the public Registers, the mandatory contract with a registered agent, and the recruitment of the resident Top Executive(s)

On the one hand, the government is trying to upgrade the competitive advantages of Cyprus. On the other hand – many non-resident companies will redomicile to more welcoming tax-neutral hubs that do not charge the worldwide income tax.    

Simply put, your “stateless” company (i.e., a company which is not a tax resident in any jurisdiction) is at the tipping point in 2022. It should acquire some favorable tax residency – so that not to be treated in 2023 by default as a Cyprus resident subject to extended liabilities. 

If you have growing concerns that the new amendments can harm your Cyprus company, you should re-engineer the business structure and move your headquarters.

Worldwide income tax issues and other challenges stemming from the additional corporate tax residency test in Cyprus 

One cannot anticipate all the forthcoming reforms across the world. However, business structure development remains a relevant objective at all times. Think of all the limitations that you have experienced and will face in the course of Cyprus’s revision of its laws! The new amendments on the additional corporate tax residency test will prompt many companies to ‘pack up and leave’ Cyprus for more favorable jurisdictions. 

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It would be best to rely on our experts in dealing with the corporate tax residency issues. They will hand-pick for you the best strategies, select the most suitable offshore jurisdiction, and walk you step by step to registration in full compliance with the relevant international and national norms, tax laws, and practices in the host jurisdiction.

We continuously analyze our clients’ ambitions, concerns, and possible winning options in a case-by-case manner. Every request deserves our focused attention, non-conventional recommendations, and customized services.  

In today’s world, your business viability depends on your entrepreneurial drive plus security/privacy, freedom to choose the tax residency, and direct access to different markets. Take our professional advice and trust your gut:  look for destinations where these legitimate priorities are respected and encouraged in compliance with the law.

As for Cyprus, unfortunately, many international business owners grow disillusioned with this jurisdiction’s competitive advantages. The public Registers in Cyprus, the growing costs of business registration, the abandoned economic citizenship program, the trade restrictions for multinational companies, the worldwide income tax… All this is enough to drive healthy companies away from Cyprus to other shores, where their new tax residency can be a virtue.

We do not suggest in any way that you should evade taxes or plot gray schemes. Malicious, illegal methods are detrimental and must be unconditionally rejected. It is your valid, lawful right – to make a revision and develop a sustainable structure for your business. We are ready to help you choose the most appropriate strategy, the right jurisdiction, the suitable form of business. You can rely on our extensive experience in your further plans.   

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