Tag: ID LAW

Digital nomads, international remote working and tax implications (Part II)

Posted on | by Paschalis Paschali

In the previous part, we briefly touched upon the type of tax issues that digital nomads (and/or their employers) might encounter. In this part, we review the legal position in Cyprus. We also review how some jurisdictions have dealt with some of the tax implications affecting international remote workers for non-resident companies and whether they gave rise to a permanent establishment.

So far, the Cyprus tax authorities have adopted a light touch approach. This is facilitated by the Cypriot legislation’s objective test for tax residency of individuals. As of 2017, an individual is a tax resident of Cyprus if it satisfies either the ‘183-day rule’ or the ‘60-day rule’ for the tax year. The 183-day rule is satisfied for individuals who spend more than 183 days in any one calendar year in Cyprus. The 60-day rule for Cyprus tax residency is satisfied for individuals who, cumulatively, in the relevant tax year do not reside in any other state for a period exceeding 183 days in aggregate, are not considered tax resident by any other state, reside in Cyprus for at least 60 days, and have other defined Cyprus ties.

During the COVID-19 pandemic, the Cyprus tax authorities followed the OECD’s non-binding guidance and as such, the presence of persons within Cyprus (or abroad) due to restrictions related to the pandemic were not taken into account when assessing the existence of a permanent establishment. Similarly, the tax residency of a foreign company or a non-resident individual were not affected by extended stays in Cyprus as a result of the pandemic. However, the provisions of this guidance are no longer relevant after the lifting of all restrictions. Therefore, the 183-day rule and the 60-day rule are to be strictly adhered.

For digital nomads working from their holiday home in Cyprus or from a temporary location, even if they do not meet the test for tax residency, they could still trigger a permanent establishment for their employer/company. For this, an assessment of all the facts needs to be made to determine whether the arrangement has sufficient permanency. Furthermore, Cyprus legislation and any underlying tax treaties between Cyprus and the state of the employer need to be reviewed.

It is useful to keep abreast of how other jurisdictions have dealt with some of the tax issues relating to digital nomads.

In 2022, the Spanish tax authorities issued guidelines and later on a binding ruling to confirm that individuals who stayed at home to work remotely during the COVID-19 pandemic were doing so by an extraordinary event. This was not at the employer’s request. The activity lacked a sufficient degree of permanency or continuity and as such, it did not create a permanent establishment for the employer.

Whether after the termination of the public health measures the home office in Spain would give rise to a permanent establishment in Spain, this depended on whether the home office was at the disposal of the foreign employer (in this case a UK employer).

In assessing this, a number of factors were taken into account, such as whether the activity previously performed by the employee changed after he moved to Spain, whether the move was for a purely personal decision, whether the employer had asked the employee to move to Spain for a specific business reason, whether the employer bore the costs of the move, whether the employer had an office in the UK which could be used by the employee etc.

In 2022, a number of rulings were given by the Danish tax authorities relating to international remote work. One ruling found that a CEO of two Norwegian companies who was working from home three days per week was a permanent establishment. By contrast, in another ruling, it was found that a managing director working from home due to personal reasons was not a permanent establishment. One important factor was that the director was not involved in sales-related activities taking place in Denmark. Similarly, a CFO working from home two days a week for a Swiss employer was not a permanent establishment for similar grounds. Although the CFO was also a member of the board of directors, this was not determinative as his functions primarily related to activities in Switzerland.

The Swedish tax authorities have also updated their guidance on remote working. According to the updated guidance, working from home due to government restrictions or force majeure cases (e.g. the COVID-19 pandemic) will not give rise to the existence of a permanent establishment. Similarly, if an employee works from home for personal reasons and this is not required or imposed by the foreign employer and there is no commercial interest for the foreign employer, then the employee’s home will not be considered to be at the disposal of the foreign employer and as such, will not give rise to a permanent establishment.

More recently, the Dutch tax authorities issued a ruling accepting that a foreign EU company did not have a Dutch permanent establishment as a result of having three employees who worked fully remotely from their home offices in the Netherlands. It was crucial that the home offices were not at the disposal of the employer. It was also important that the employees had no authority to bind the company, the foreign company was subject to tax where it was based and, very importantly, the employer offered an office but the employees preferred to work from home. This appears to be the first ruling involving multiple employees.

Of course, these rulings do not bind the tax authorities of other countries, including Cyprus, but they provide useful guidance. It would appear from some of the rulings issued so far that someone generating sales, or a management team or senior staff could give rise to a permanent establishment in Cyprus for the employer/company. For senior management or employees creating significant value for the employer, it is advisable to obtain a tax ruling from the Cyprus tax authorities before any international remote working arrangement is approved by the employer.

We can help you in this process and protect you and your employee from triggering any unexpected tax liabilities. Of course, given Cyprus’ very competitive tax regime and relatively low tax rates, it might be tax efficient to create a permanent establishment in Cyprus, or even transfer your tax residence. Currently, many incentives are offered by the Cypriot government for relocation to Cyprus, especially for non-domiciled individuals, which might make the change of tax residency a very appealing option. However, the transfer of tax residence, whether by an individual or a company needs to be carefully planned, in order to avoid creating dual tax residency. A relocation before you break your previous tax residency could give rise to double taxation of the employee’s worldwide income.

Our experienced lawyers can help you navigate this complex area whether you prefer to avoid the creation of taxable presence in Cyprus, or whether you wish to transfer your tax residency as an employer or that of your employees in Cyprus. We can assist you with all the technical formalities (e.g. registration as a local employer, maintaining payroll in Cyprus etc.) and we can help you obtain any necessary tax rulings from the tax authorities for a seamless transition.

For more information, please get in touch with us.

Digital nomads, international remote working and tax implications

Posted on | by Paschalis Paschali

Digital nomad arrangements are becoming very popular. Although there is no single definition of a digital nomad, the concept tends to encompass remote workers who regularly travel while working. These could be employees or self-employed people who use digital telecommunications technology to carry out their work. Traditionally, digital nomads were mostly self-employed people but since the start of the COVID-19 pandemic, the number of digital nomads who are employees has increased exponentially.

There is a wide range of digital nomads. Some could live completely nomadic lives with no permanent home base, moving from one jurisdiction to another. Others might only work remotely for short periods of time, or during workcations. The rise of digital nomads means that the workplace is no longer geographically restricted, with flexible location-independent working arrangements on the rise. A working environment with remote work is now the rule rather than the exception. However, complete freedom for international remote work is still rare due to a number of obstacles such as local immigration rules, employment, tax, social security etc.

Although many digital nomads might rely on tourist visas to work from a jurisdiction, working on a tourist visa for extended periods might be against local law. Getting a work permit or work visa each time a nomad goes to a new jurisdiction might also be too cumbersome. In order to cut down on red tape and boost the economy through tourism, many countries now give out digital nomad visas. The conditions of such visas vary and could include a minimum earnings threshold, private health insurance, proof of employment, police background checks etc. Cyprus also has a digital nomad visa scheme and in March 2022 increased the number of available visas from 100 to 500.

Taxation is one of the biggest obstacles to international remote work.

Depending on each country’s tax residency rules, a digital nomad might be found to be tax resident in the jurisdiction they are working from. This could lead to double taxation if the jurisdiction of his employment continues to tax him/her as resident. Sometimes, double taxation is eliminated through tax treaty mechanisms or agreements between tax authorities, but this is not always the case.

Even if the digital nomad is not found to be tax resident in the jurisdiction they are working from, or if they are found tax resident, double taxation is avoided, a travelling employee could trigger taxation for the employer in the form of a permanent establishment. Generally, countries can tax non-resident companies or individuals if they have a permanent establishment in another jurisdiction. Therefore, the foreign employer could be taxable in the jurisdiction where the employee is working from if under local rules, the activities and overall working arrangements of the employee give rise to a permanent establishment.

Although each jurisdiction might have its own rules in determining when a permanent establishment is established, there are several common triggers derived from the OECD Model Tax Convention, which jurisdictions tend to follow. An employee who has an office or fixed place of business in another jurisdiction could trigger a permanent establishment for their employer. This can include a co-working space, hotels, Airbnb spaces, if they are paid and chosen by the employer and especially if they are used repeatedly by the same employee or other employees of the same firm. In some jurisdiction, a home office might also be considered as a giving rise to a permanent establishment.  

A permanent establishment might also be triggered by having someone locally who has the authority to sign contracts on the employer’s behalf, or who has an executive or senior management role, or who provides core business services or undertakes sales activities.

If a permanent establishment is established in the jurisdiction where the remote work is taking place, then profits of the employer/company might be allocated (and taxed) by that jurisdiction. This could have serious cost implications, especially if the remote worker is in a senior management position. Let us not forget that prolonged presence of a director of a company in another jurisdiction could affect that tax residence of the company.

Apart from the taxes that may be due (which could be negligible), an employer who has a permanent establishment abroad might need to register the permanent establishment according to local rules. This can be a significant burden especially for partnerships. The employer might also have to run a local payroll and undertake transfer pricing analyses to show the allocation of profits to the permanent establishment. This is likely to be costly, especially if the employer has no foreign presence elsewhere.

EU nationals who wish to work remotely within the EU obviously do not need a digital nomad visa, as they benefit from the EU’s freedom of establishment and the free movement of workers. Nevertheless, EU nationals face the same tax issues, as far as the possible change of tax residency, or creation of a permanent establishment. It is up to Member States to decide whether a remote worker is tax resident in their jurisdiction, or generates a permanent establishment of their employer. EU law and the fundamental freedoms are not triggered, unless there is discrimination (i.e. different treatment of a foreign remote worker with a resident remote worker).

In order to mitigate the tax risks, companies/employers need to assess and approve requests for travel on a case-by-case basis, as the threshold for triggering a permanent establishment might vary under local rules. So far, tax rulings in this area have gone in all directions. We will be reviewing these and the situation in Cyprus in the next instalment of this newsletter.

New EU Directive on improving the gender balance among directors of listed companies and related measures (EU 2022/238): Women on Boards of Listed Companies

Posted on | by Paschalis Paschali

In the context of the EU Gender Equality Strategy 2020–2025, the EU Parliament has adopted a new directive aiming to close the gender gap on corporate boards of large (the “Directive”), with listed EU companies imposing at the same time the obligation for transparent assessment procedures on the basis of the candidates’ merits, irrespective of their gender.

Pursuant to the said Directive, Member States must set an objective to ensure that at least 40% of non-executive director positions at listed companies are held by members of the underrepresented sex. If Member States choose to apply the new rules to both executive and non-executive directors, the target would be 33% of all director positions.

 Listed companies that are not subject to this latter objective, must set individual quantitative objectives with a view to improving the gender balance among executive directors. Also, Member States must ensure that listed companies which do not achieve the objectives referred to above (40% and 33% respectively), as applicable, adjust the process for selecting candidates for appointment or election to director positions. Hence, if the targets set are not being met, companies will need to explain how they intend to meet these objectives.

To ensure compliance with the requirements of the Directive, listed companies will be obliged to provide information, once a year, regarding their respective boards’ gender representation and measures being undertaken to achieve the applicable quotas. On the basis of the information provided by the listed companies, a list of those companies satisfying either of the Directive’s requirements (executive, non-executive directors, all directors) annually will be published by each Member State.

The Directive exempts from its application SMEs, i.e. companies that employ fewer than 250 persons and have either an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million.

Finally, Member States are required to implement “effective, proportionate and dissuasive” penalties for infringements by listed companies. Τhe Directive further obliges Member States to ensure that in the performance of public contracts and concessions, listed companies comply with applicable obligations relating to social and labour law in accordance with the applicable EU law.

Key dates:

The Member States must adopt and publish the laws, regulations and administrative provisions necessary to comply with the Directive by 28 December 2024.

Listed companies in the EU must meet the targets set above by 30 June 2026.

Comment:

Generally, Cyprus enhanced its position in the gender equality field (there has been an increase in women actively involved in politics) having of course considerable room for improvement while laying solid foundations at a socio-political level. Cyprus has adopted a National Action Plan on Gender Equality 2019 – 2023 setting various measures aiming the promotion of equal participation in decision-making. It remains now to be seen how the Directive’s provisions will be implemented at national level, undoubtedly bringing about a positive effect for the country’s economy and a safeguard of equal labour opportunities especially for women’s employment in the companies concerned.

Court of Justice (EU) ruling on accessing information of beneficial owners (AML Directive)

Posted on | by Paschalis Paschali

On 22 November 2022 the Court of Justice of the European Union (“CJEU”) ruled that the provision of Directive (EU) 2015/849, as amended (“AML (EU) Directive”) providing that Member States must ensure that information on the beneficial ownership of legal entities is accessible in all cases to any member of the general public is invalid.

In addition to granting access to the public on beneficial owner information, the AML (EU) Directive also allows Member States to provide for an exemption to the public’s access on a beneficial owner’s information where the access would expose the beneficial owner to “disproportionate risk, risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation, or where the beneficial owner is a minor or otherwise legally incapable”. This exemption for restricting access “in exceptional cases” and on a “case-by-case basis”, did not prevent the CJEU from ruling that the provision for granting the right to such access is invalid.

The judgement concerned CJEU’s joined Cases C-37/20, Luxembourg Business Registers and C-601/20, Sovim. The two cases were referred to the CJEU following a request for a preliminary ruling from the tribunal d’arrondissement de Luxembourg (Luxembourg District Court) pursuant to Article 267 of the Treaty on the Functioning of the European Union.

The concerned provision

The question referred to the CJEU concerns, inter alia, the provision of Article 30(5)(c) of the AML (EU) Directive which reads as follows:

Member States shall ensure that the information on the beneficial ownership is accessible in all cases to:

(a) […]

(b) […]

(c) any member of the general public.

The persons referred to in point (c) shall be permitted to access at least the name, the month and year of birth and the country of residence and nationality of the beneficial owner as well as the nature and extent of the beneficial interest held.

[…]

Conflict with the EU’s Charter of Fundamental Rights

In declaring invalid the provision permitting the general public’s access to information on beneficial ownership, the CJEU stressed in its decision that the concerned provision constitutes a serious interference with the fundamental rights enshrined in Article 7 (Respect for private and family life) and Article 8 (Protection of personal data) of the EU’s Charter of Fundamental Rights.

Effect on Cyprus AML legislation

The Cyprus AML Law transposing the respective AML (EU) Directive includes a similar provision permitting members of the general public to have access “in all cases” to information on the beneficial owner’s name, the month and year of birth, the nationality, the country of residence and the nature and extent of the beneficial interest held.

The CJEU’s decision is expected to impact the general public’s access “in all cases” on information concerning beneficial owners. It remains to be seen whether the AML (EU) Directive will provide express grounds for the public’s access to such information or whether such grounds will be left to the discretion of each Member State, however, such grounds must be based on a proportionate and balanced approach without violating the Charter’s rights.

In the meantime, the Cyprus AML Law will need to be amended so that access of the public to information on beneficial owners is subject to grounds which are aligned with the EU’s Charter on Fundamental Rights and specifically Article 7 (Respect for private and family life) and Article 8 (Protection of personal data).

As of 23 November 2022, the Cyprus Department of Registrar of Companies and Intellectual Property suspended the access to the register of beneficial owners for the general public, in response to CJEU’s decision. Obliged entities will continue to have access to information maintained in the beneficial owner’s register by submitting a solemn declaration confirming that the information is requested within the context of performing customer due diligence.

Our services

Ioannides Demetriou LLC advises on matters concerning regulatory AML compliance and the protection of fundamental rights such as your right to the protection of personal data and your right for private and family life.

Reach out to our team to ensure that your regulatory obligations are protected in a manner that respect and safeguard your fundamental rights.

You can contact us directly by calling + 357 22 022 999 or by email at [email protected]

The information provided in this article does not and is not intended to constitute legal advice; instead, all information contained in this article is for general informational purposes only. If you require assistance with any legal matter, including a matter referred to in this article, you should contact one of our attorneys to obtain advice tailored to your specific circumstances.

The New Cyprus Commercial Court: An “Internationalisation” of Cyprus Civil Justice?

Posted on | by techlink

On 2nd June 2022 the Cypriot parliament passed law 69(I)/2022 for the establishment of a Commercial Court and an Admiralty Court (“the Law”).

Introduction

Many readers will be aware that Cyprus is an island in the eastern Mediterranean and the eastern most outpost of the European Union. Its geographical location being at the crossroads of Asia, Europe and the Middle East has shaped its history. Previously seen as a strategic location for would be conquerors of which there were many, the location of Cyprus, its Common Law background, large number of Double Tax Treaties, business friendly climate and highly effective and efficient services sector have been key drivers in making Cyprus a favoured business destination for many Europeans especially Dutch, for Canadians, nationals of the states of the former Soviet Union and latterly Chinese and Israeli investors. This has established Cyprus as a major international business hub which has a reach that belies its size.

The growth of Cyprus as a business centre has placed great pressure on its civil courts, resulting in delays that are amongst the worst in the European Union. The reasoning behind the establishment of the Commercial Court is the creation of a specialist Court where the judges will specialise in commercial disputes in the same manner and with the same efficiency as specialist courts such as commercial courts, construction and technology courts operate in other jurisdictions.

Characteristics of the Commercial Court

One unique aspect of the Commercial Court which demonstrates the desire of the legislature to ease the administration of justice in international commercial disputes is the permissibility of using the English language. This mirrors recent initiatives in some EU jurisdictions, most notably Holland which have established similar international commercial courts to cater for the foreign business community that conducts business in or through these jurisdictions.

Jurisdiction of the Commercial Court

The Commercial Court will hear commercial disputes which are defined in the law as disputes relating to:

(a) Business documents or contracts.

(b) Purchase, sale, import and export of goods.

(c) The carriage of goods by land, air or pipeline.

(d) The exploitation of oil, natural gas or other natural resources.

(e) Insurance and reinsurance.

(f) The functioning of markets or the exchange of shares, stock or other monetary credit or investment vehicles or goods (which is clarified to mean every kind of moveable property save for choses in action and money and includes bonds and shares.

(g) The provision of services excluding medical, quasi medical, dentistry services or services that are provided within an employment contract.

(h) Manufacture of vehicles.

(i) Commercial representations.

(j) The application of the provisions of the law relating to Compensation for Breaches of competition law.

(k) Disputes between shareholders in entities that are regulated by any regulatory authority within the Republic of Cyprus.

(l) Matters relating to copyright and related rights within the ambit of the law for the Protection of Copyright and Related Rights law and the Certificates of Inventions law.

(m) Arbitration Issues.

Minimum Monetary Value of Disputes

The Law sets the minimum value of disputes that will be heard by the Commercial Court at €2 million excluding interest claimed. In the event of a dispute as to the value of the dispute, and by extension the jurisdiction of the court the objecting party may apply to the court of a determination.

In the event that the court determines that the value of the commercial dispute is below €2 million the Law allows the Commercial Court to refer the dispute to the District Court.

Geographical Jurisdiction

(a) The cause of action arises in whole or in part in the district where the Court has jurisdiction.

(b) The defendant or any one of the defendants at the time of the filing of the action resides, carries on business, or in the case of a legal person has its registered office in the district where the court has jurisdiction.

(c) The parties jointly agree between themselves by written agreement to refer the commercial dispute to the Commercial Court, in such a case if any one of the parties resides outside Cyprus, or carries on business outside Cyprus, or in the case of a legal person has its registered office outside Cyprus. In such a case the Commercial Court sitting in Nicosia shall have jurisdiction

(d) The jurisdiction of the Commercial Court derives from community law, international treaty or any rule of private international law. In such a case the Commercial Court sitting in Nicosia shall have jurisdiction.

Transfer of Cases from the District Court to the Commercial Court

Any party may apply to either the Commercial Court or to the District Court for a case that is before the District Court to be transferred to the Commercial Court provided that the hearing of the case has not commenced.

Transfer of Cases from the Commercial Court to the District Court

A judge of the Commercial Court may transfer a case to the District Court where:

(a) the Commercial Court lacks jurisdiction, or

(b) where upon the application of any party that it is appropriate for the case to be tried before the District Court.

Sittings of the Commercial Court

The Commercial Court shall sit in the district capitals of each administrative in buildings that will be specifically prescribed and published in the Official Gazette. Given that there are four administrative districts one can assume that two judges will sit in Nicosia one in Limassol, one in the Larnaca-Famagusta District and one in Pafos.

The Commercial Court will have its own separate registry and registrars.

Judges of the Commercial Court

The Commercial Court will be manned by five judges to be appointed by the Supreme Legal Council.

As the Law prescribes that the number of judges shall be five. This number will effectively and for all intents and purposes be limited to five as a change of law is required for the increase in the number of judges.

The judges of the Commercial Court shall have the standing and shall have the same powers as those of a President of the District Court. (Hitherto the highest tier of judges of first instance in the civil justice system of Cyprus).

The powers derive from the Courts of Justice Law and the Civil Procedure Law.

Procedure Before the Commercial Court

The Courts of Justice Law applies to the following extent:

  • Section 29 relating to the law to be applied (the Constitution, Statute law, Common Law and Equity, Vakouf (Turkish Cypriot trusts and immoveable property) law;
  • Part 4 – relating to the powers of the Court;
  • Part 5 – relating to the witnesses and evidence;
  • Part 7 – relating to the transfer of cases from a court to another court having jurisdiction by order signed by the President of the Supreme Court*.

Procedure before the Commercial Court shall be regulated by procedural regulations specially formulated for the requirements of the Commercial Court. For this purpose, the Supreme Court* has power within the Law to issue a procedural order for the better implementation of the Law and for the regulation of any matter capable of regulation by way of procedural rules.

Use of English Language

A judge of the Commercial Court may where the interests of justice demand allow for the hearing of the case and the filing of pleadings to be in the English language following an application of one of the parties. In such a case the court prescribes that the English language as the language in which the procedure shall be carried out and shall issue its judgment in English.

Appeals from the Commercial Court

Each judgment or order of the Commercial Court is subject to appeal before the Supreme Court.

A decision of the Commercial Court for the pre-trial referral of a question to the ECJ or a decision of the Commercial Court dismissing an application for the pre-trial referral of a question to the ECJ shall not be subject to appeal.

As with other courts in Cyprus the Law establishing the Commercial Court does not contain any provisions for leave to appeal or any restrictions as to the grounds of appeal.

In the case of an appeal, the Law states that the Supreme Court* shall not be bound by any findings of fact made by the Commercial Court and shall where the circumstances so demand shall have power to review and re-examine evidence and reach its own conclusions and shall further be entitled examine further evidence and to rehear witnesses and to issue any order of judgment that is justified under the circumstances including an order the rehearing of the case by the Commercial Court or other court having jurisdiction to hear the case.

Conclusions

The establishment of the Commercial Court is a reaction to commercial pressure for a quicker and more specialist trial court for larger commercial disputes many of which run into hundreds of millions and indeed some into billions of Euros.

Specialist commercial judges will in time gain the experience and specialised knowledge so as to be able to deal with complex commercial cases effectively and speedily.

The ability of the court to conduct proceedings in English will expand and enhance cooperation with foreign lawyers and make justice more accessible to a large number of potential litigants who conduct their commercial businesses within and through Cyprus.

The wide jurisdiction given to the Supreme Court* may appear daunting at first. It is however to be seen as an attempt to give finality to the proceedings at the level of the appeal. This should eliminate the need for retrials in all but the most unavoidable circumstances.

On the whole, the legal and commercial community of Cyprus has greeted the creation of the commercial court with an open mind and a cautious optimism. 

Andrew Demetriou

Ioannides Demetriou LLC  

*It should be noted that the current Supreme Court will be re-organised into an Appeals Court and a Constitutional Court. The appeal from the Commercial Court will be to the civil division of the Appeals Court.