Tax residence – PE dangers – Covid-19 – Taxes

Special measures were taken as a result of the Covid-19 pandemic
taken on a global scale, including travel restrictions,
mandatory self-isolation, work from home and suspension from
Employment. Such measures limit the physical presence of
Individuals in their workplace.

In this regard, the Cypriot Tax Department
("TD"), issued October 27, 2020, Circular 4/2020
("Circular"), which deals with the implementation of the
Regulations on tax residence and permanent establishment in
in accordance with Article 2 of the Income Tax Act with the aim of
Guidance to taxpayers on the potential impact of such
Special measures on the tax residence status of individuals and
Company and the status of the permanent establishment of

It should be noted that the Organization for Economic Cooperation and
Development ("OECD") recently issued general guidelines
in tax matters that were triggered as a result of such measures.

The TD pointed out that while such guidelines are not binding,
The TD's intention is to follow the guidelines that are deemed to have been followed
appropriate. It was also found that the provisions of
Circular is applied on condition that the taxpayer chooses
otherwise the provisions of the relevant tax law will apply
apply. It was further clarified that the circular does not
Take into account the possible different tax treatment of the
Matters raised and focused solely on by other jurisdictions
Cypriot tax considerations.

The circular defines the period from March 21, 2020 to June 9, 2020 as
one that had objective movement restrictions as
Result of Covid-19, and as such should not be taken into account
Consideration for the application of the mentioned legislature
Provisions (see analysis below). In the event that the deadline should be
extended before March 21, 2020 or after June 9, 2020, depending on
In the present case, the taxpayer is obliged to provide relevant information
Evidence to prove the objective limitation to
Traveling due to a Covid-19 pandemic.

Detailed discussion

– – Permanent establishment

) related considerations

The constant presence of people in a country other than
those where they normally work or providing distance
Employment services during the Covid-19 pandemic can trigger PE
Risks and thus tax obligations.

In this regard, it was made clear that the Covid-19 pandemic
does not change the way in which a PE is determined. More
in particular the activities carried out in Cyprus by who are
physically in the republic exclusively due to the
special circumstances in connection with the Covid-19 pandemic
are not considered activities creating a PE in Cyprus. Instead,
Such activities are temporary and the result of
undesirable factors.

In addition, the circular makes it clear that the physical
Presence of persons in the republic due to employment
Restrictions that arise from government guidelines and that have been
in the context of combating the Covid-19 pandemic, given their
of a temporary nature, should not create new PEs for their employer.
Likewise, if employees have contracts on behalf of a
Business in a state different from that of their ordinary
They do not do employment due to the Covid-19 pandemic
Contribute to the creation of a PE for the company in this state.
The same applies to representatives.

The circular also covers cases in which people have stayed
abroad due to Covid-19 pandemic restrictions while under
any other circumstances in which they would have been physically present
Cyprus for the provision of its services or for the exercise of
Your tasks. In these cases, the days abroad are not
be taken into account when determining a PE in
Cyprus. Essentially, it is believed that these individuals have exercised
their activities from Cyprus.

The actual circumstances of the individual case should also be taken into account
when assessing the degree of constancy of the relevant activities of
Workers and / or representatives in Cyprus, possibly in
Comparison with the respective circumstances before and / or after
the pandemic crisis.

– – Corporation tax residence

A company that is not resident for tax purposes in Cyprus will not be
is considered to be the establishment of a tax residence in the Republic due to
the presence / stay of employees, directors,
Representative or employee under a service agreement if the
The reasons for their stay in the republic are the Covid-19 pandemic

In addition, the circular clarifies that the tax residence
The status of a company in the republic is not influenced by reason
a director who cannot travel to the republic and attend one
Meeting of the Board of Directors, if only the reasons exist
Covid-19 pandemic related.

The circular states that the actual circumstances of the individual case
should also be considered before making a final decision. All
The necessary evidence should be retained for the present case.

– – Considerations regarding the individual's tax residence (183
Daily rule and 60-day rule)

Where an individual is already in Cyprus and his presence as
as well as his stay are exclusively due to Covid-19 pandemic reasons
and the relevant travel restrictions the period from March 21st
2020 to June 9, 2020 will not be considered for the
Purpose of determining the tax residence of such person and
tax his income.

The circular made it clear that in order to prevent
Abuse of the provisions contained therein, a person who is in the
Republic for a period of more than 183 days and would like to call
The provisions of this circular should provide relevant evidence
to support his claim (e.g. one of a
foreign tax authority).

In addition, in the event that a person stays abroad
Reasons related to the Covid-19 pandemic and other trips
Restrictions, and who would have been in different circumstances
the republic, then for the purpose of determining its tax residence
and tax obligations, such a person is deemed to have been
present in the republic. That is, the days that the individual has
Spent abroad in the period from March 21, 2020 to June 9, 2020
is ignored / not taken into account (such deadline can be
extended depending on the case).

The circular shows that the above principles in the
Case of individuals resident for tax purposes on the basis of 60
Daily rules and provided that they are not tax resident in any
other state. The presence of individuals overseas during the period
March 21, 2020 to June 9, 2020 are ignored for this purpose
It is assumed that such persons have levied taxes
physically in the republic on the assumption that the rest
the conditions set out in Section 2 of the Income Tax Act are met,

– The person is permanently resident in Cyprus

– carries on or employs or holds an office in the

– I have not spent more than 183 days in another country (under
taking into account the above provisions)

The circular states that each case is viewed as different and
is assessed without reference to any other
in relation to his own pattern of facts.

– – Application of Sections 8 (23) and 36 (5) of the income
Tax law

For the purpose of applying the provisions of Section 8 Paragraph 23 of
In the Income Tax Act, the circular clarifies that the relevant
The deduction is made in the event that the person a
Reduction in his labor income (i.e. earnings less than
100,000 euros per year, taking into account any special allowances)
as a result of the special Covid-19 pandemic measures of the
Government and / or employer. The person is considered to be
had an employment income of more than 100,000 euros per year
for the purpose of applying this section on the condition that
there are supporting documents (e.g. remuneration certificate,
monthly pay slips, employer's decision for a holistic or
selective wage reduction).

For the purpose of applying the provisions of Section 36 Paragraph 5 of
The Income Tax Act, the circular makes it clear that if a person
was unable to travel overseas to perform his duties (in
according to his employment contract or taking into account the
normal business practice) during the time of crisis due to
the prevailing circumstances and after taking into account
the actual circumstances as well as the practice in previous years that
The tax position of the individual should not be influenced in any way.
All relevant evidence should be retained for this purpose.


The circular contains 3 examples to demonstrate the above

The first example is for a person who spent in 2020
220 days in the republic, of which 60 days in connection with the
Travel restrictions. Given that the ordinary residence of
The individual is not in Cyprus and if the individual chooses to do so,
These 60 days should not be included in the assessment
his tax residence in the republic under the 183-day rule,
regardless of whether the tax residence is established in another

The second example relates to a person who is in the
Republic for 325 days, of which 60 days due to the
Pandemic and travel restrictions. Assuming the individual has
So already 40 days spent outside of the republic (§ 36 Abs. 5)
The 60 days should be considered along with the 40 days. Such as
the person would have spent 100 days outside of Cyprus for the
Purpose of applying the provisions of Section 36 Paragraph 5 – to the
Assuming the terms and conditions set out in the circular above are

The third example is for a person who has only spent 30 days
in the republic. Is the entire period of restrictive measures
had been spent abroad, then this period could be viewed together
with the 30 days that have already been spent in Cyprus
Establishing a tax residence in the republic on the basis of the 60th
Daily rule. This assumes that the conditions are laid down
Tax residence according to the 60-day rule are met.

The content of this article is intended to provide a general overview
Guide to the subject. Expert advice should be obtained
about your particular circumstances.