Why general powers of attorney are unadvisable for Cypriot companies?
The Institute of Certified Public Accountants of Cyprus (ICPAC) has given the following recommendations to Cyprus administrative service providers.
Cyprus companies are not recommended (however, not prohibited) to issue general powers of attorney. Otherwise, the company may be not recognized as Cyprus tax resident and may consequently be unable to obtain a tax residency certificate.
The problem is that the general power of attorney empowers 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. It is convenient, because such power of attorney actually allows managing the company’s affairs and is to be reissued only after its expiry date.
However, in case if a Cypriot company enjoys lower tax rates or tax exemptions provided by double taxation treaties, it should be ready to confirm its tax residency in Cyprus. It is important in the situations where a Cypriot company receives income from sources in a foreign country, while a foreign company does not withhold the tax or withholds it at a lower rate.
Now a company’s resident status may be put in doubt if a company issues general power of attorney in the name of non-resident of Cyprus. It is caused by the fact that “management and control” of the company in this case appear to be exercised outside Cyprus.
The new version of tax residency certificate request and questionnaire for legal entities used by the tax department of Cyprus contains a question: “Has the company issued any General Powers of Attorney?” If the answer is “yes”, the applicant must specify the terms and conditions of such power of attorney. As a result, the Cypriot tax authorities may refuse to issue tax residency certificate for the purposes of double taxation treaty.
In this regard Cypriot companies are recommended to issue powers of attorney only for execution of specific decisions already taken by the board of directors (special powers of attorney). The authorities of the attorney must be defined clearly and accurately. The power of attorney should be issued for a limited duration and should not exceed one year. Due diligence documentation should be obtained on the attorney. Finally, all documentation executed under the power of attorney should be provided to the board of directors and should be maintained at the company’s registered office.
Therefore, Cypriot companies have two options: contracts and other documents may be signed by company’s resident director (directors) or by an attorney acting on the basis of special power of attorney.