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.

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