Cyprus strategic geographical location, its warm climate and its favourable tax system has made the island the ideal location for business and trade. Cyprus has been an EU state member since 2004 and a member of the Eurozone since 2008.
Cyprus has a very modern, transparent and efficient tax system that is fully aligned with EU and international regulations.
Below is an analysis on the principles of Cyprus tax residency for individuals, a breakdown of the Non-Domicile concept and a list of a few advantages for Cyprus tax resident individuals.
Rules on Cyprus Tax Residency and how it is calculated:
Below are two rules that can be used in order to distinguish and understand when an individual qualifies as a Cyprus tax resident for a specific year:
- The 183 days rule:
If an individual resides in Cyprus for more than 183 days during a tax year, then this individual will qualify as a Cyprus tax resident for that tax year.
- The 60 days rule:
On 01 January 2017 the above rule was amended, in order for individuals who meet the below conditions to also be considered as a Cyprus Tax Resident, under the ’60 day rule’. Conditions:
- An individual does not spend more than 183 days, either continuously or in total, of that tax year in another country and is not a tax resident in another country for that year;
- An individual spends at least 60 days in Cyprus during that year;
- The individuals carries out a business and/or is working in Cyprus, and/or holds an office with a Cyprus tax resident company any time during that year;
- The individual either owns or rents a permanent residence in Cyprus.
How to calculate days spent in Cyprus:
- The day of departure is counted as a day outside of Cyprus.
- The day of arrival is counted as a day inside Cyprus.
- Arrival and departure from Cyprus on the same day is counted as a day in Cyprus.
- Departure and arrival in Cyprus on the same day is counted as a day outside of Cyprus
In addition to the tax residency rules, on the 16th of July 2015, the republic of Cyprus introduced the “Domicile” concept, through an amendment that was made to the already establish Special Defence Contribution (SDC) laws.
Definition of domicile:
According to the provisions of the Wills and Succession Law, domicile can be obtained in two different ways:
- Domicile by Origin – domicile has been given at birth, normally on the father’s side.
- Domicile by Choice –an individual has acquired domicile by forming a permanent residence and has the intention to reside in Cyprus permanently.
Prior to the amendment and according to the already established SDC law, all Cyprus tax resident individuals were subject to SDC on the following income:
- 17% on dividends received in Cyprus or from abroad;
- 30% on passive interest received in Cyprus or from abroad;
- 3% on 75% of gross rental income
The amendment has made a distinction between domiciled tax resident individuals and non-domiciled tax resident individuals.
Domiciled tax resident individuals will continue to be taxed the normal SDC tax rates as stated above on dividend, interest and rental income. Non-domiciled tax resident individuals will be fully exempt from SDC.
In accordance with the SDC law, a Cyprus Domicile individual who has received its status by origin/birth, is considered as a non-domiciled if any of the below are conditions are met:
- Individual has retained a domicile of choice outside of Cyprus, provided that they were not tax residents in Cyprus for any period of at least 20 continuous years prior to the tax year in assessment.
- An individual has not been a Cyprus Tax Resident for at least 20 continuous years prior to the release of the amended SDC law.
It must be noted that when assessing whether an individual is a domicile Cyprus tax resident or not for a specific year, we need to consider the number of years this individual has been a Cyprus tax resident. If an individual has been a Cyprus tax resident for at least 17 out of the last 20 years prior to the tax year under review, then irrespectively from the individual’s origin, this individual will be taxed as a Cyprus domiciled individual for SDC purposes. SDC will be payable from the 18th year of individuals reside in Cyprus.
A few other advantages of a Non-Domiciled Cyprus Tax Individual:
- As stated above, a non-domiciled Cyprus tax resident is exempt from any SDC on dividend and interest income. According to Income Tax Law, dividend and interest income is exempt unconditionally. Therefore for any dividend and interest income the individual will have, no tax will be paid in Cyprus.
- Deemed distribution rules on Cyprus tax resident companies do not apply on Non-domiciled individuals.
- If an individual commences employment in Cyprus and was not a Cyprus tax resident during the year before the start of employment, then this individual may be entitled to one of the below exemptions:
- The 50% exemption rule: Any individual commencing work in Cyprus and earning more than €100,000 annually will be exempt from 50% of their taxable income for a period of 10 years. The calculation of the period of 10 years commences from the first year of employment. This exemption will not apply to any individual that was a Cyprus tax resident 3 out of 5 years preceding the year of commencement of employment.
- The 20% exemption rule: Any individual commencing employment in Cyprus is eligible for an exemption of 20% of their taxable income or €8,550 (whichever is lower). Exemption under this rule is for a period of 5 years. Starting period date is the 1st of January following the year of commencement of employment and can be applied up to/including 2020. Following 2020 this exemption will expire.
- There is the option for overseas pension to not be taxed normally in Cyprus but be taxed under a special mode of taxation in which pensions are exempt from tax up to €3,420 and any amount above that is taxed at a flat rate of 5%.