1.In General

As from 01.01.2003 Cyprus applies a residence-based taxation regime. “Residents” are taxed on their worldwide income irrespective of whether it is earned or derived from sources within or outside the Republic of Cyprus. “Non-Residents” are taxed only on the income that is brought in or derived from within the Republic of Cyprus. For Individuals,staying in Cyprus for a period exceeding 183 days in the year of assessment. For Companies, means a Company whose management and control is exercised within the Republic of Cyprus. There is no statutory definition of management and control. Mere registration of a Company in Cyprus does not necessarily constitute the legal entity a Cyprus tax resident.

Further to the above, numerous jurisdictions are currently in the process of challenging tax structures especially where they have evidence that the operational management (i.e. the day-to-day management of the business) which usually deals with the day-today administrative tasks (i.e. day-to-day decisions, management of bank accounts, contract negotiation, staff matters etc) is in fact carried out in a country other than the country of registration of the company (i.e. not in Cyprus).

Although "Management and Control" is not a term defined in the Cyprus Tax Legislation, to achieve tax residency and substance, the Cyprus Tax authorities take into consideration the following factors:

• The composition of the Board of Directors.
• Where the Board Meetings take place and whether major decisions are properly taken during these meetings.
• The place where the discussion and approval of the Financial Statements takes place.The Board of Directors must have control over the bank account which must be situated in Cyprus.
• The place where the seal of the company is authorized to be used.

2. The Courts approach:

Where doubts arise about a particular company's residence status, the answers to the following questions are critical :

• Do the directors really, in fact exercise effective management and control of the Company?
• If they do, where do they actually exercise it?
• If the directors do not exercise such control, it must establish who does and where they do it.

2.1 The answer to the first question is one of fact. What the Court looks at, in determining the reality of the situation, is the nature of the business transacted and whether:

• The directors concerned have the right type of experience and qualifications to enable them to make the decisions;
• That they have sufficient information to enable them to make those decisions;
• That they in fact did make those decisions.

If such a case ends up to the Court and either (a) or (b) is not satisfied, then Tax Authorities could argue that the directors in question could not in reality have been in a position to make the decisions and were merely "rubber stamping" decisions made by a third party.

In this respect, documentary evidence e.g. board minutes, can be vitally important. If a decision is actually made at a board meeting, then the minutes should evidence that full and proper consideration was given at that meeting to all relevant facts effecting the decision. This can help to demonstrate that the decision was actually taken at the meeting. If a decision did not in reality take place at a board meeting, then any documentary evidence will again be an important indicator, of who made the decision and where it was made. If for example a major contract is initiated and negotiated in Cyprus by Cypriot resident persons and there is little documentary evidence to support the fact that the Cypriot resident directors, were fully and properly involved, in the more important aspects of the decision making process, then there is severe danger that foreign tax authorities would use this as evidence, to show that the Cypriot company, is in fact centrally managed and controlled in the country, where the foreign directors of the Cypriot Company, or the person who actually take such important decisions, reside.

2.2 Turning to the second question; documentary evidence is obviously a very important indicator of, where central management and control is exercised. It is important toremember, that if board meetings constitute the medium, through which central management and control is exercised, then such meetings, should all take place in Cyprus.

The constitution of the board of directors of the Cyprus Company is very important. You have to secure that the majority of the members of the Board of directors, are Cyprus resident directors.

2.3 Where the directors are not actually running the company, but are merely "rubber-stamping" the decisions made by a third party residing overseas, then there is a risk that the authorities of the country of the resident of the third party, would deem that person to have effective management and control. In such circumstances it will be the residence of that person that will be relevant in determining whether management and control does in reality take place outside Cyprus.

2.4 Finally, one should always bear in mind that in tests of the company residence, it is a pure conclusion of the facts that is important, legal formalities do not in any way alter the character of those facts. For example, explicit terms of the Articles of Association, or other agreements, as to where and by whom central management and control is to be exercised will be ignored in determining the facts.

3. Management and Control:

3.1 A Company's residence status is determined according to the facts of the case and not on the basis of the constitution and bye-laws governing it. The latter may however provide useful guidance in achieving residence status, and helpful secondary evidence of intention.

3.2 The registered office, register of members, company seal etc., should be located in Cyprus, and statutory functions related to corporate status should be carried out there.

3.3 The constitution should vest all power of management in the board of directors.

3.4 The constitution should require that all board meetings be held in Cyprus.

3.5 The constitution should preclude the granting to a non Cypriot resident person of any powers analogous to those which may, under Cypriot law, be delegated to a managing director.

3.6 The constitution should fix a quorum for board meetings such that a majority of those present must be Cyprus residents.

4. The Directors:

4.1 A majority of the company directors should be Cyprus residents.

4.2 At least one director from Cyprus, should hold an executive position with the company and if possible be given the position and power equivalent to those of a Cypriot managing director.

4.3 The directors must be or include persons with sufficient knowledge and competence to manage the company's business independently and must receive remuneration, commensurate with their duties and the scale of the business. If not, they should seek (preferably independent), expert help.

4.4 Cyprus resident directors must have sufficient information to enable them to make decisions.

4.5 In particular, no Cypriot resident directors should be able to exert a dominant influence over the non Cypriot resident directors. In addition, the non-Cypriot directors must not inadvertently exercise central management and control actively or tacitly through oversight.

4.6 No individual director (particularly the non Cypriot resident director’s residents) should be allowed to make unilateral decisions on significant matters. These should be made, and be seen to be made, by the board within Cyprus.

5. Conduct of the Company's Business:

5.1 All major decisions should be made, negotiations carried out and contracts signed by the directors at board meetings. Concise, but accurate Minutes should be kept of such meetings, and full documentation supporting the Minutes should be kept on file, to put it beyond dispute that the meetings are the sole forum for arriving at relevant decisions, and are demonstrably not held merely to ratify decisions already taken elsewhere.

5.2 Anydecisions not made at board meetings should be supported by documentary evidence that the directors were fully and properly involved in Cyprus in the more important aspects of the decision making process.

5.3 Board meetings should be held regularly and at frequent intervals, to establish that the board is operating effectively to manage and control the business.

5.4 Board meetings should be held in Cyprus and preferably not at airports or hotels, but if possible at permanent premises of the company.

5.5 The board should be provided with such accounts and other information as is reasonably necessary for it, to control the company's activities, and such accounts and information should be discussed in board meetings and the discussions minuted.

5.6 If functions of central management and control are delegated by the board, e.g. to a committee of directors, the same guidelines must be adopted by the committee as would be adopted in relation to the full board (e.g. all meetings of the committee should be held in Cyprus.

5.7 Books and records of the company should be kept in Cyprus.

5.8 It is important that all communications relating to the Cypriot Company should be in terms of giving information about, rather than asking approval for, decisions relating to the Cypriot company and should be in terms of general advice or guidance, rather than of specific instructions or orders, on the conduct of the company.

5.9 Decisions not made at board meetings should be supported by documentary evidence that the directors were fully and properly involved in Cyprus, in the more important aspects of the decision making process (if this were the case).

5.10 The company must not use any foreign address or telephone number in any of its business.