In accordance with the Cyprus income tax legislation, a company is considered to be tax resident in Cyprus if it is managed and controlled in Cyprus. Even though most European Union Members base the tax residency of a company on their place of registration, Cyprus follows the ‘management and control’ test which focuses on the actual place of management and decision-making of the companies.
Although there are no clear guidelines in the income tax law or in any other Cyprus law as to what constitutes ‘management and control’, it is understood that ‘management and control’ is considered to be exercised where the Board of directors meet and take decisions. In order to facilitate this, it is suggested that all directors (or at least the majority) are Cyprus residents. In relation to the issuance of Cyprus tax residency certificates, the current practice of the Cyprus tax authorities is to issue such residency certificates provided the directors of the company sign and submit a declaration confirming that the company is managed and controlled from Cyprus.
The Cyprus tax residency of a company claiming to be tax resident in Cyprus is not expected to be challenged by the Cyprus tax authorities on their own initiative. It could, however, be the case that a foreign tax jurisdiction challenges the tax residency of a Cyprus company. In such a case the Cyprus company would need to demonstrate to such foreign jurisdiction that the company is indeed tax resident in Cyprus. Thus, the issue of what the foreign tax jurisdiction would require, would need to be addressed from the perspective of the relevant country that may be challenging for residence (always in conjunction with the relevant provisions of the applicable double tax agreement between the two countries).
With regards to the issuance of General Power of Attorney, due to changes in the laws requiring the Compliance Officer and the Director to know the business structure of the company by monitoring the transactions of the company, Cyprus companies are not recommended (however, not prohibited) to issue general powers of attorney, as the company may be not recognized as Cyprus tax resident and may consequently be unable to obtain a tax residency certificate.
As a result of the above and as a matter of policy, our firm no longer issues such General Powers of Attorney. What we require is a special power of attorney for each separate transaction (e.g. one only for bank accounts, one only for signing of specific agreements etc.). The reason for this is for the Company not to jeopardize its Cyprus tax residency since the very test for a Cyprus tax residency is for the management and control of the company to take place in Cyprus. If the holders of the Powers of Attorney transact the general business of the company (i.e. to conclude any agreement etc), there is a risk that the company will not be treated as Cyprus Tax Resident (tax residency will be the place of residence of the beneficiary/holder of the PoA).
The problem with General Powers of Attorney is that they empower the attorney with the maximum number of powers, including negotiations, conclusion and signing of contracts and other documents, opening and operating corporate bank accounts etc. Such Powers of Attorney actually allow managing the company’s affairs abroad.
However, if a client insists to be provided with a General Powers of Attorney, certain limitations shall apply: (a) the duration should be limited to 6 months, (b) the respective Board Resolution must be drafted and approved prior to execution, and also (c) the POA must be drafted in such a way so as to leave discretion to the Board of Directors of deciding on their own and (d) the attorney providing the board with copies of all agreements and documents signed under the POA.