A Permanent Establishment (PE) in Cyprus refers to a fixed place of business through which the business of a non-resident company (foreign entity) is wholly or partly carried out in Cyprus. Understanding the concept of PE is crucial for determining the tax obligations of foreign companies operating in Cyprus. The determination of a PE in Cyprus is governed by both domestic tax laws and international tax treaties based on the OECD Model Tax Convention.

Key Aspects of Permanent Establishment in Cyprus:

1. Definition of Permanent Establishment:
   • A PE typically includes a fixed place of business, such as an office, branch, factory, workshop, or other types of installations where business activities are carried out.
   • The presence of a PE in Cyprus means that the foreign company will be subject to Cyprus corporate income tax on the profits attributable to the PE.
2. Criteria for Establishing a PE:
   • Fixed Place of Business: The location must have a degree of permanence, and business activities must be carried out regularly. Temporary or incidental activities may not necessarily constitute a PE.
   • Dependent Agent: A PE can also be established if a person, other than an independent agent, is acting on behalf of the foreign company and has the authority to conclude contracts in Cyprus. If this agent habitually exercises this authority, it may create a PE for the foreign entity.
   • Construction PE: A building site, construction, or installation project constitutes a PE if it lasts more than a specified period (usually 12 months) as defined by relevant double taxation agreements (DTAs).
3. Activities Exempt from Creating a PE: Certain activities are considered preparatory or auxiliary in nature and do not constitute a PE, such as:
   • Using facilities solely for the purpose of storing, displaying, or delivering goods.
   • Maintaining a stock of goods solely for the purpose of storage, display, or delivery.
   • Purchasing goods or collecting information for the enterprise.
   • Activities conducted by a fixed place of business that are purely of a preparatory or auxiliary nature.
4. Attribution of Profits:
   • Profits attributable to the PE in Cyprus are subject to the standard corporate income tax rate, which is currently 12.5%.
   • Only the profits directly related to the PE’s activities in Cyprus are taxed. This includes income from the sale of goods, provision of services, or any other business conducted through the PE.
   • The PE is expected to maintain appropriate accounting records that clearly identify income and expenses related to the Cyprus operations.
5. Double Taxation Agreements (DTAs):
   • Cyprus has an extensive network of DTAs that may modify the standard definition of PE and the attribution of profits. These treaties often contain specific provisions that override domestic tax law to prevent double taxation.
   • Under these treaties, Cyprus may only tax the profits attributable to the PE, while the remainder of the profits is taxed in the foreign company's home country.
6. Tax Compliance Requirements:
   • A foreign company with a PE in Cyprus must register with the Cyprus tax authorities and file annual tax returns.
   • The company must also comply with VAT requirements if its activities exceed the registration threshold or are subject to VAT.
   • Transfer pricing rules may apply, requiring the foreign company to ensure that transactions between the PE and other parts of the company (or related entities) are conducted at arm's length.
7. Examples of Potential PE Situations:
   • A foreign company opens a branch office in Cyprus to manage local sales.
   • A non-resident construction company undertakes a long-term project in Cyprus.
   • A representative office that has a dependent agent concluding contracts on behalf of the foreign company.
8. Anti-Avoidance Measures:
   • Cyprus tax law includes anti-avoidance measures to prevent the artificial avoidance of PE status. These measures are designed to ensure that entities cannot structure their activities in Cyprus in a way that unfairly avoids taxation.
   • The OECD's Base Erosion and Profit Shifting (BEPS) Action Plan has influenced Cyprus's approach to PE, particularly regarding the artificial avoidance of PE through commissionaire arrangements or fragmenting activities to fit within preparatory or auxiliary exceptions.

Summary:

In Cyprus, the concept of a Permanent Establishment is essential for determining whether a foreign company is subject to Cyprus taxation on its business activities conducted within the country. Establishing a PE can lead to significant tax obligations, including corporate income tax on profits attributed to the PE. Foreign companies must carefully assess their activities in Cyprus to ensure compliance with local tax laws and international treaties, particularly regarding the correct identification of a PE and the accurate attribution of profits to it.