Management and control in relation to tax residency of Cyprus companies – the rules and case law

A company is considered to be resident in Cyprus if it is managed and controlled in Cyprus.

In general, key elements to establish the place of management and control are the residence of directors, the place of holding of the board meetings and the place where important decisions are taken.

According to the Commentary to the OECD Model Tax Convention “the place of effective management is the place where the key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made. To determine the tax residency of a company, tax authorities would be expected to take into account various factors, including among others where the chief executive officer and other senior executives usually carry on their activities and where the senior day-to-day management of the person is carried on.”

It is worth quoting below the relevant international case law on tax residency:

 De Beers Consolidated Mines Ltd v. Howe (1906)

A company resides where its real business is carried out i.e. where the central management and control actually takes place (and not where the trading operations are taking place).

 Bullock v. Unit Construction Co Ltd (1959)

Corporate residence is related to the central management and control of the business of the company, which is exercised by the directors from the place where they meet (and not to the control of the company itself, which is exercised by its shareholders).

 R v. Dimsey (1999)

Central management and control of the business must be distinguished from (and need not be in the same place as) the place of business, where the actual trading and business operations of the company are conducted. Identify where the decisions of fundamental policy are made as opposed to the place where the day-to-day profit earning activities are undertaken.

 R v. Holden (2005)

Directors must apply their mind and decide at their own discretion, and not simply follow instructions of shareholders or third persons.

 R v. Laerstate (2009)

Central management and control requires to look beyond the board meetings and board resolutions and requires wider examination of company’s ‘course of business and trading’. The board of directors would need to really exercise management and control and would need certain minimum amount of information to make decisions.

In light of the above, in order to make sure that a company is considered to be resident in Cyprus for tax purposes:

- the residency of directors and place of holding of boards meeting should be in Cyprus,
- the place where important decisions are taken should be Cyprus,
- maintenance of accounting records should be in Cyprus,
- specific (and not broad) power of attorney should be granted to non-resident based persons,
- operation of the Company’s bank accounts should be made in Cyprus,
- the important decisions taken and so as the contracts of the Company should be properly documented.