Following recent changes to the Cyprus tax legislation we have seen the introduction of the concept of a non-domiciled resident individual.
The introduction of the non-domicile status might be a viable solution for high-earners to optimise their taxes, relocate to Cyprus and use Cyprus as their business centre, thus creating real substance. In the present reality the term ‘substance’ has become a key word. ‘Substance' is a widely known tax concept, often used in cross-border tax situations. Although the word 'substance' does not normally appear in the text of tax treaties, it is a key theme in international structures and tax planning. Various tax authorities and courts around the world are attacking structures which lack ‘substance’.
Up until now, apart from normal income tax, Cypriot tax resident individuals are subject to another form of taxation on certain types of income, called the Special Contribution for Defence (SDC), at the following rates:
- 30% on passive interest income
- 17% on dividend income
- 3% on 75% of rental income
The SDC law also included provisions for the deemed distribution of profits of Cypriot tax resident companies where the shareholders (beneficiaries) of such companies are also Cyprus tax resident individuals.
An individual is considered a Cyprus tax resident if they are physically present in Cyprus for 183 days or more during a calendar year. It is based solely on the number of days spent in the country.
This general rule only applies to an individual if he or she is both a resident for tax purposes in Cyprus and is also domiciled in Cyprus. Therefore non-domiciled resident individuals can benefit from this new status in the following ways.
When domiciled in Cyprus
An individual can be considered as domiciled in Cyprus either (i) by domicile of origin; or (ii) by domicile of choice. In order to understand the concept of ‘domiciled in Cyprus’, one must look to the Wills and Succession Law Cap. 195. in accordance with the Wills and Succession Law:
- A person at any time can have either the domicile which he/she acquired at birth (domicile or origin) or the domicile which he/she acquired or maintained as a result of actions taken by him/her (domicile of choice)
- For a legitimate child, who was born when the father was alive, the domicile of origin of the child is the domicile of origin of the father, at the time the child was born
- A person may acquire a domicile of choice with his establishment in any country outside Cyprus with the intention of permanent or indefinite residence in such a country.
For the purposes of the SDC Law only, an individual who has a domicile of origin in Cyprus as described above may still be considered not to be domiciled in Cyprus if:
- He/she had the domicile of origin in Cyprus on the basis of the Wills and Succession Law but has obtained a domicile of choice in another country, provided he was not a tax resident of Cyprus for at least 20 years before the tax year in which he became a tax resident of Cyprus
- He/she has not been a tax resident of Cyprus for a period of 20 years prior to the introduction of the amendment to the SDC Law (July 17, 2015)
Notwithstanding the above, an individual who has been a tax resident of Cyprus for at least 17 years out of the last 20 years prior to the tax year will be considered to be “domiciled in Cyprus” and as such will be subject to special contribution for defence from the 18th year.
The advantages of being a Non-domiciled Tax Resident
Non-domiciled individuals who become tax residents in Cyprus will not pay any taxes (subject to the double tax treaty in place with the country from which the dividends are paid out of) on:
- Any dividends received from anywhere in the world: no taxes apply on dividends received even if the profits being distributed are out of accumulated profits from previous years; exemption becomes available immediately after declaring your Cyprus tax residency and non-domicile status.
- Any interest income from anywhere in the world: all interest income from bank accounts in Cyprus and abroad is not taxable in Cyprus and may potentially be non-taxable in the country where the bank account is located.
- Any rental income from Cyprus or abroad: rental income from property situated in Cyprus will be exempt from defence tax but is still taxable under income tax for individuals (certain deductions available); rental income from property situated outside Cyprus is tax free in Cyprus.
Exemption to the Personal Income tax
As mentioned, creating real substance has become important while structuring your international investments. Next to the advantages of being a non-domiciled tax resident the personal income tax regulation provides additional exemptions which enhance the advantages even further. One of the most important exemptions from the personal income tax is:
Remuneration from any employment exercised in Cyprus by an individual who was not a resident of Cyprus before the commencement of the employment, exemption applies for a period of 10 years for employment commencing as of 1 January 2012 provided that the annual remuneration exceeds €100,000 (the exemption concerns 50% of the remuneration). For employments commencing as of 1 January 2015, the exemption does not apply in case the said individual was a Cyprus tax resident for 3 (or more) tax years out of the 5 tax years immediately prior to the tax year of commencement of the employment nor in the preceding tax year. In certain cases it is possible to claim the exemption where income falls below €100.000 per annum.
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