Permanent Establishments (PE) and Tax Residency

Cyprus: Permanent Establishments (PE) and tax residency in times of COVID-19

Introduction:

All governments worldwide, have implemented strict measures for tackling the Covid-19 pandemic, including amongst others the home self-isolation, working from home arrangements, suspension of contracts of employment etc. These measures place restrictions on the physical presence of individuals in the workplace and consequently raise concerns related to the possible impact on the tax residence status of natural and legal persons / entities, but also on the permanent establishment of companies.

In light of the above, the Organization for Economic Co-operation and Development (OECD) has recently issued general guidelines for the interpretation of any tax issues caused by the COVID-19. Taking that into consideration on 27th  October 2020, the Cyprus Tax Department issued an Implementing Guideline No. 04/2020 to clarify the application of Article 2 of the Income Tax Legislation relating to tax residency and permanent establishment (PE).

The Implementing Guideline 04/2020 clarifies the following:

1.      The period from 21st  March 2020 to 9th  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.

Permanent Establishment:

1.      The activities exercised in Cyprus by individuals who are physically present in Cyprus merely due to COVID-19 restrictions, (whereas under normal circumstances they should have been abroad), will not lead to the creation of a permanent establishment in Cyprus.

2.      The temporary period during which individuals remained abroad due to COVID-19 restrictions, (whereas under normal circumstances they should have been in Cyprus), should not be considered when determining the creation of a permanent establishment in Cyprus.

Tax Residency Issues for companies:

1.      A company that is a non-tax resident in the Republic will not be considered as a tax resident in the Republic due to its stay in the Republic of its personnel, directors, agents or employees when the reasons for their stay in the Republic are exclusively related to COVID-19.

2.      The tax residency of a Cyprus company will not be affected by the inability of a director to travel to the Republic to attend a meeting of the Board of Directors, when the reasons for not being able to travel to the Republic are exclusively related to COVID-19.

Tax residency issues for individuals (both under 183 days and 60 days rules):

  • An individual staying in Cyprus exclusively due to COVID-19, then the period from 21st March 2020 to 9th June 2020 will not be taken into account for the purpose of determining his tax residency.
  • An individual staying abroad due to the COVID-19 (whereas under normal circumstances he should have been in Cyprus), then that person for the purposes of determining his tax residency he will be considered ,according to the legislation, that he was in the Republic for that period (21st March 2020 to 9th June 2020).

Taxation of income (individuals):

  • Individuals will be eligible for the 50% exemption if the employment income falls below €100.000 exclusively due to  COVID-19 (i.e. due to salary reduction), providing the necessary evidence.
  • Individuals travelling abroad for the performance of their duties, as per their employment contract, but due to COVID-19 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).