Cyprus is considered an alluring tax destination both for individuals and companies and is widely chosen by foreign entrepreneurs seeking to move their personal tax residency under the non-domicile status.
With an aim to improve and simplify the tax system in Cyprus and maintain its status as an international business and financial hub, in July 2015, the Cyprus Government introduced the ‘non- domicile’ concept for individuals and hereinafter various favorable amendments to legislation, providing foreigners with choice and an incentive to relocate to Cyprus.
Legal Framework:
When is an individual considered a Cyprus tax resident?
Article 2 of the Income Tax Law of 2002 (118(I)/2002), as amended from time to time, defines “Resident of the Republic”, when applied in the case of an individual, as a person who remains in the Republic for one or more periods exceeding a total of 183 days in the tax year. It follows that where an individual remains in Cyprus for less than 183 days, they will be classed as’ non-resident’ for Cyprus tax purposes.
The 60 days rule
From January 2017, the concept of tax residency has expanded to provide that where a person does not remain in any other jurisdiction for one or more periods exceeding one hundred and eighty-three (183) days in the same tax year and who is not a tax resident in any other jurisdiction for the same tax year, will be considered a tax resident in Cyprus in that tax year, provided that the following conditions are met:
- the individual stays in the Republic for at least sixty (60) days in the tax year,
- carries on any business in the Republic and / or is employed in the Republic and / or holds a position with a Cyprus tax resident Company at any time during the tax year;
- maintains a permanent residence in the Republic owned or rented by the individual:
It is further understood that, for the purposes of the above determination, a person who meets the above conditions, will not be treated as a Cyprus Tax resident, if during that year, the operation of any business in the Republic and / or his employment in Cyprus and / or the holding of an office with a tax resident person in Cyprus, is terminated.
For the purposes of calculating the days of stay in the Republic of Cyprus-
- the day of departure from the Republic is deemed a day outside the Republic;
- the day of arrival in the Republic is considered a day in the Republic;
- the arrival in the Republic and departure from the Republic on the same day shall be deemed to be a day in the Republic; and
- departure from the Republic and return to the Republic on the same day shall be deemed to be a day outside the Republic.
How is domicile defined?
Special Contribution for Defence Tax Law 2002 (117(I)/2002), as amended, (“SDC”) define ‘domicile’ in accordance with the provisions of the Wills and Succession Law, Cap.195.
Article 6 of the Wills and Succession Law, Cap.195, as amended, provides that there are two kinds of domicile:
- Domicile of origin; the domicile received by an individual at birth; or
- Domicile of choice; the domicile acquired by an individual by establishing a home with the intention of a permanent or indefinite stay.
Where an individual has his/her domicile of origin in Cyprus, they will be treated as domiciled in Cyprus for tax purposes expect in instances where:
- the domicile of choice has been acquired and maintained by the individual outside Cyprus, provided that this individual was not a Cyprus tax resident for any continuous period of at least 20 consecutive years prior to the tax year in question; or
- If the individual was not a Cyprus tax resident for a period of at least 20 consecutive years immediately prior to the entry into force of the non-domicile provisions (such as, between the years 1995 and 2014 inclusive).
Notwithstanding the domicile of origin or choice, an individual who has been Cyprus tax resident for at least 17 out of the last 20 years prior to the tax year in question, will be considered as domiciled in Cyprus for the purposes of the SDC Law.
Tax Exemptions for Cyprus tax residents who meet the requirements under the Non-domicile Tax Regime in Cyprus:
In accordance with the provisions of the SDC Law, dividends and interest earned by Cyprus tax resident and domiciled individuals is subject to SDC tax at the rate of 17% and 30% respectively, irrespective of the source of income (such as, from Cyprus or from abroad).
Ιt follows that non-domiciled Cyprus tax resident individuals are completely exempt from SDC in respect of dividend and interest income.
This exemption applies even where income is derived from sources within Cyprus or where income is remitted to Cyprus.
Based on the above, any individual can apply for the Non-Domiciled Tax Residency either under the new 60 day rule or the previous 183 day rule. A Cypriot non-domiciled tax resident under the 60 or 183 day rule is subject to tax in Cyprus on their worldwide income but will be able to enjoy the exemption awarded under the SDC, being taxed at a zero rate on dividend and interest income for a period of 17 years.
Other Tax Advantages for Individuals:
- Income tax reduction for New residents in Cyprus:
- 50% tax exemption for remuneration from employment exercised in Cyprus by persons who were resident outside Cyprus before commencement of their employment. The exemption applies for 10 years commencing from the year of employment, if such income exceeds €100,000 per year.
- 20% tax exemption is granted or €8,550- whichever is lower, for income lower than €100,000 and for employment commencing between the years 2012 and 2025, the exemption applies for a period of 5 years starting from the tax year following the year of employment.
- Low Tax Rate: Foreign Pensions
- Pension received in respect of past employment outside Cyprus is taxed in Cyprus at the flat rate of 5% for amounts in excess of €3,420.
- No inheritance tax, no wealth tax, no gift taxation, no immovable property taxes.
- Profit from the sale of securities is exempt from capital gains tax.
- Profit from the sale of immovable property situated outside Cyprus or sale of shares is exempt from capital gains tax, provided that the underlying assets do not include immovable property located in Cyprus.
Conclusion:
It is undeniable, that been able to qualify for the non-domicile status in Cyprus, while simultaneously being a Cyprus tax resident affords certain valuable benefits such as the exemption from taxes on both dividend and interest income, regardless of where this income is sourced, capital gains tax exemptions on income from sale of securities and immovable property and tax reductions on employment remuneration. Generally, it can be stated that individuals not born in Cyprus (with domicile of origin outside of Cyprus) or those who have not lived in Cyprus for at least 17 consecutive years (with domicile of choice outside of Cyprus) will be classed as – non-domicile’ for tax purposes under the SDC. It follows, that foreigners who wish to move their personal tax residency to Cyprus and qualify for the non-domicile status will be automatically considered non-domicile for a period of 17 years, enjoying both the exemption under the SDC and the various tax benefits afforded to Cyprus tax residents. For relocation purposes, especially for high net-worth individuals engaged in business activities generating mostly passive income, this is certainly a notable advantage and one that be utilized to effectively structure one’s tax liability.
How can we assist?
It should be noted that moving one’s personal tax residency to another jurisdiction requires careful tax planning. Additionally, there are various filing and preparatory steps that may need to be taken, both in jurisdiction of current residence and the jurisdiction of move. Our professional team at C. PILYUGIN & CO LLC will guide clients through the process, advise clients on the applicable personal tax implications, attributable by virtue of an individual’s business operations and income received and structure the entire move as necessary.
The information provided above by C. Pilyugin & Co LLC is intended for general information purposes only and should not be construed as professional or legal advice in any sense. It is advised that readers should refrain from acting only on the basis of the above information without first obtaining legal or professional advice on the subject.