Cyprus Tax Incentives

For Individuals

Presents Attractive Non-Domiciled Status

An individual who obtains a tax residency status in Cyprus is eligible to 100% tax exemptions on any dividend, interest and rental income.

The Cyprus House of Representatives voted on numerous important changes concerning the tax legislation, enhancing the Cyprus tax system’s attractiveness even more. One of the most important amendments the House of Representatives voted for was the implementation of a non-domiciled resident concept.

Up until recently, a Cyprus tax resident was subject to income tax as well as tax on other forms of income. This tax was known as the Special Contribution for Defence (SDC). The SDC rates were the following:

  • 30% Passive Interest Income
  • 17% Dividend Income
  • 3% on the 75% Rental Income

With the introduction of “non-domicile” rules, an individual who is a Cyprus tax resident and is not domiciled in Cyprus will effectively not be subject to SDC in Cyprus on any dividends interest and rent income regardless of whether such income is derived from sources within Cyprus and regardless of whether such income is remitted to a bank account in Cyprus. It should be noted that no other tax is imposed on individuals under any other tax Law in Cyprus in respect to such income.

The term “domiciled in Cyprus” is defined under the Cyprus Will and Succession Law as an individual who has Cypriot domicile of origin but it does not include:

  • an individual who has obtained and maintained a domiciled of choice outside Cyprus, provided that such an individual has not been a tax resident in Cyprus for a period of 20 consecutive years preceding the tax year; or
  • an individual who has not been a tax resident of Cyprus for a period of 20 consecutive years prior to the implementation of the law.

An individual who during at least 17 out of the last 20 years has been a tax resident of Cyprus (applies in the case of individuals both domiciled and non-domiciled in Cyprus) will be considered as domiciled in Cyprus and become liable to SDC as from the 18th year onwards.

In brief, an individual whose domicile of origin is in a country other than Cyprus and becomes tax resident of Cyprus, is eligible to 100% exemption from SDC tax, which means no tax on dividend, interest and rental income.

It is anticipated that the introduction of the non-domicile regulations will further enhance corporate executives as well as High-Net-Individuals to relocate and establish their residence in Cyprus.

 

For Corporate Entities

Presents Notional Interest Deduction

Notional Interest Deduction (NID) is considered a useful tool for both domestic and international businesses. The NID helps businesses reduce leverage and achieve a tax efficient return regarding new equity. The return is obtained by deducting a notional interest expense from the business’ taxable income.

Purpose of NID

The Reasons NID was introduced in Cyprus Legislation:

  • To align the tax treatment of debt finance to equity finance. Before the NID was implemented, equity financing was not tax deductible whereas debt financing was tax deductible.
  • To enhance Cyprus capital investments. Due to the implementation of the NID, international corporations and groups are able to use Cyprus companies as factoring, financing and procurement centres.
  • To support and boost small and medium-sized companies.

Who Benefits from the Introduction of NID?

  • Cyprus Tax Resident Companies
  • Non-Cyprus Tax Resident Companies with permanent establishments in Cyprus
General – The NID

A reduction in tax is permitted after the NID rate is applied to the amount of New Equity inserted to both a Cyprus company and/or a permanent establishment of a non-Cyprus tax resident company.

The NID is reduced similarly to the manner actual interest expense is deducted, that is, only when it was used to fund the majority assets of a business.

The NID is deducted after the taxable profit of a company is determined. The deduction cannot be more than 80% of the company’s or permanent establishment’s taxable profit.

Since the NID is considered a notional deduction, no exchange of funds or booked expense must take place to apply the NID.

What is New Equity

New equity is defined as the equity (share premium or share capital) inserted from the 1st January 2015 onwards, in either cash or in kind. In case where the new equity is contributed in assets, the amount should not be more than the market value of the asset. Any reserves that existed on the 31st December 2014 may be viewed as New Equity only when used to fund new business operations and activities.

The NID Rate

Basically, the NID rate is the return on the 10-year state bonds, as it appeared on the 31st December before the tax year the NID is applied, of the jurisdiction where the funds are inserted within a business plus a premium rate of 3%.

Example:

In the example below, it is supposed that New Equity amounts to EUR 100.000 & that the NID rate is 8%.

Without NID With NID
Profit Before Tax 10.000 10.000
Notional Interest Deduction (NID) 8.000
Taxable Profit 10.000 2.000
Tax 1.250 250
Effective Tax Rate 12,5% 2,5%

 

The Advantages of NID:

  • The NID can apply to numerous incentives included in the Cyprus Legislation like, the Intellectual Property Regime.
  • The NID provides similar advantages as debt financing.
  • A company can benefit from tax while simultaneously strengthen financially.