Permanent Establishments (PE) and tax residency in times of Covid 19 – Cyprus.

The Cyprus income tax office has recently issued the application Guidance nu 4/2020 dealing with the application of the relevant articles of the law on tax residency and PE considering Covid 19 pandemic.

As per the Guidance the period from 21 March 2020 to 9 June 2020 is determined as the time period were restrictions on travelling in/out of Cyprus applied and as such this period will not be taken into account on application of the relevant articles of the law. In case of a taxpayer had travel restrictions before or after those dates, then the necessary evidence should be provided for supporting the case.

The major provisions of the Guidance are as follows:

  • PE issues
    • Any activities (including remote working and conclusion of contracts) performed by persons living in Cyprus exclusively due to the pandemic will not be considered as activities that are creating a PE in Cyprus.
    • Any activities performed by persons outside Cyprus and where these persons would carry these activities in Cyprus but due to the travel restrictions these activities were performed abroad, then it will be deemed that these persons were carrying the activities in Cyprus.
  • Tax residency issues for companies:
    • A non-Cy tax resident company will not be considered as a Cy tax resident due to the stay in Cyprus of its personnel, directors, managers etc where the reasons of the stay are exclusively due to the pandemic.
    • The tax residency of a Cyprus company is not affected by the inability of a member of a board to travel to Cyprus for board meetings.
  • Tax residency issues for individuals (both under 183 days and 60 days rules):
    • An individual staying in Cyprus exclusively due to the pandemic, the period from 21 March 2020 to 9 June 2020 will not be taken into account for the purpose of determining his tax residency.
    • An individual staying abroad due to the pandemic and under other circumstances he would be resident of Cyprus then the person will be deemed to be resident in Cyprus for that period.
  • Taxation of income (individuals):
    • Persons eligible for the 50% exemption on employment income (income in excess of €100.000) will be still eligible for the 50% exemption if the employment income falls below €100.000 exclusively due to the pandemic (i.e. due to salary reduction), providing the necessary evidence.
    • For persons travelling abroad for the performance of their duties, as per their employment contract, but due to the pandemic they were unable to do so, the way of estimation of their taxable income will not be affected for the purpose of applying the article 36(5) of the law (90 days rule).

It should be noted that the application guidance applies only for Cyprus and does not take into account any different treatments/interpretations from other countries. Further, any case should be examined based on facts/circumstances.

By the Guidance above the Cyprus Tax Authorities are neutralising the effect of Covid 19 on the definition/creation of PE and tax residency for Cyprus tax purposes. Taxpayers should examine the above in conjunction with the relevant guidance of other jurisdictions that affect their tax residency/PE status.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Our tax specialists are at your disposal should you require any further information or clarifications and for further advice on the subject matter.