Tax framework for newly established tax residentsTAX FRAMEWORK FOR NEWLY ESTABLISHED TAX RESIDENTS AND NON – DOM INDIVIDUALS SITUATED IN CYPRUS
Personal taxes and contributions
The main types of direct taxes applicable to an individual in Cyprus are:
- Income tax
- Special defence contribution on dividend, interest and rental income
- Capital gains tax on gains from the sale of real estate situated in Cyprus
An individual working in Cyprus is also subject to social insurance and other contributions.
An individual is subject to income tax and/ or special defence contribution depending on his/her tax residency and domicile status, a concept introduced in the Cyprus tax law in July 2015.
An individual who spends more than 183 days in Cyprus is considered as a tax resident of Cyprus.
As from 1 January 2017 an individual can be a tax resident of Cyprus even if he/she spends less than or equal to 183 days in Cyprus provided that he/she satisfies all of the following conditions within the same tax year (1 January – 31 December):
- Does not spend more than 183 days in any other country
- Is not a tax resident of any other country
- Spends at least 60 days in Cyprus
- Maintains a permanent home in Cyprus that is either owned or rented
- Carries on a business in Cyprus, is employed in Cyprus or holds an office in a Cyprus tax resident person at any time during the tax year.
If the employment/business or holding of an office is terminated during the year, then the individual would cease to be considered a Cyprus tax resident for that tax year.
An individual’s domicile is that of his/ her father’s domicile (at birth) or that of his/her choice. Therefore, an individual born to a non-Cypriot domiciled father, is considered to be non-domiciled in Cyprus.
However, a non-domiciled individual may be deemed as domiciled in Cyprus if he/ she has been a Cypriot tax resident for at least 17 out of the last 20 years prior to the relevant tax year. An individual born to a Cypriot domiciled father may also qualify as non-domiciled in Cyprus subject to certain conditions.
A Cypriot tax resident individual, irrespective of his/her domicile status, is subject to income tax on his/her worldwide income subject to exemptions.
A tax resident individual who is non-domiciled in Cyprus is exempt from tax on dividend and interest income.
Personal income tax rates
Taxable income up to €19.500 is effectively exempt from income tax. Taxable income exceeding this amount is subject to progressive income tax rates ranging from 20% to 35% (for income exceeding €60.000).
Key tax benefits for expatriate individuals
1. Income tax exemptions for taking up employment in Cyprus
An expatriate individual relocating to Cyprus (irrespective of his/her tax residency or domicile status) is eligible to one of the following income tax exemptions on employment income:
- 50% of the remuneration from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his/her employment in Cyprus. The exemption applies for a period of ten years starting from the first year of employment provided that the employment income of the employee exceeds €100.000 per annum. The 50% tax exemption would not be granted to an individual who has been a Cypriot tax resident for at least three out of the last five years immediately prior to the year of commencement of employment or to an individual who has been a Cypriot tax resident in the tax year immediately prior to the year of commencement of employment.
- 20% of the remuneration or €8.550 (whichever is the lower) from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his/her employment in Cyprus. The exemption applies for a period of five years from 1 January following the year of commencement of the employment and applies for tax years up to 2020.
2. Income tax exemption for overseas employment (90 days rule)
Remuneration from rendering services outside Cyprus to a non-resident employer or to an overseas permanent establishment of a resident employer for more than 90 days in a tax year is exempt from income tax.
3. No tax on dividend and interest income
A non-domiciled individual, irrespective of his/her tax residency status, is exempt from tax on dividend and interest income.
4. No tax on gains arising from the disposal of securities
Any gains arising from the disposal of shares, bonds and other similar financial instruments (including options and rights thereon) are exempt from income tax.
5. Exemption from capital gains tax (CGT)
Gains on sale of immovable properties (situated outside the Republic) are exempt from CGT.
NB: the foreign property may be subject to tax in the jurisdiction where it is located.
6. Advantages available to expatriate pensioners on pension income
A Cyprus tax resident receiving a pension from abroad can choose one of the following two options to be taxed on the pension income, the choice being available every year:
- The pension can be taxed under the progressive income tax rates with the first €19.500 of net taxable income being tax free, or
- The first €3.420 of the foreign pension being tax free, with the remaining balance being taxed at a flat rate of 5%.
Any lump sum received as a retirement gratuity is exempt from tax.
7. Wealth tax, gift tax and inheritance tax
There is no wealth tax, gift tax or inheritance tax in Cyprus.
Matters for consideration
The tax benefits offered to non-domicile persons who choose to become Cyprus tax residents as well as the other mentioned Cyprus tax advantages provide ample room for tax planning. Such planning is strongly recommended to be performed prior to the foreign person becoming a Cyprus tax resident.
In case of individuals who are directors or senior management in Cypriot entities, the relocation of such individuals to Cyprus could significantly enhance the much-needed corporate business substance as it would reinforce its effective Cyprus management and control.
Furthermore, each person who considers moving his personal tax residency to Cyprus should separately ensure that, depending on the laws and practices of his current tax jurisdiction, he shall stop being a tax resident in that other country.
Summary – Taxation of Main Sources of Income of Cyprus Tax Resident and Non-Domiciled Individuals
SOURCE OF INCOME
INCOME TAX LAW
SPECIAL CONTRIBUTION FOR DEFENCE LAW
|Employment income||Taxable in Cyprus but exemptions could apply|
|Rents||Taxable in Cyprus (20% allowance on gross rent available)|
|Royalties||Taxable in Cyprus (80% exemption may apply under conditions)|
|Foreign pensions||Taxed at normal rates or optionally at 5% (reduced by €3.420)|