Cyprus tax residency rules for individuals
As per Income Tax Law, a person physically residing in Cyprus for more than 183 days in any calendar year is a tax resident in Cyprus for that given year, without any other conditions. This is known as the “183-day rule”.
In 2017, the Cyprus Income Tax Law has been amended, and an individual is considered as a tax resident of Cyprus, if he/she satisfies either the “183-day rule” or the “60-day rule” for the tax year, effective from 1 January 2017.
An individual will be considered as tax resident of Cyprus under the “60-day rule” if the following criteria are being cumulatively satisfied in any one calendar year:
- Not living in any other country more than 183 days,
- Not being tax resident in any other country,
- Stays in Cyprus for at least 60 days,
- Carries on any business in Cyprus and/or is employed in Cyprus and/or holds an office (director) in a company tax resident in Cyprus at any time in the tax year,
- Maintains a permanent house in Cyprus which is either owned or rented by the individual.
Tax residency considerations during the COVID-19 pandemic
As a result of the Covid-19 pandemic, special measures have been taken at a global level, including restrictions on traveling, working from home and the suspension of employment. Such measures restrict the physical presence of individuals at their place of work. It is within this context that the Cyprus Tax Authorities issued on 27th of October 2020, a tax circular (“Circular”) that relates to the implementation of the provisions on tax residency.
The Circular defines the period 21 March 2020 to 9 June 2020 (“freezed period”) as one during which there were objective restrictions in movement as a result of Covid-19, and as such should not be taken into consideration for the application of tax residency rules.
In case an individual was physically present in Cyprus due to COVID-19 restrictions but would otherwise be present in another country, the “freezed period”, will not be taken into account for the purpose of calculating the number of days in Cyprus.
In case an individual was physically present abroad due to COVID-19 restrictions but would otherwise be present in Cyprus, the “freezed period”, will be taken into account as a period in Cyprus for the purpose of calculating the number of days in Cyprus.
In case the “freezed period” is to be extended before 21 March 2020 or after 9 June 2020, depending on the case at hand, the taxpayer is obliged to provide relevant supporting evidence which proves the objective restriction to travel by reason of Covid-19 pandemic.
Non-domicile rules for individuals
In an effort to enhance the competitiveness and attractiveness of the Cyprus Tax System, the Cyprus Government, during 2015, has introduced the concept of non-domicile status for individuals.
Specifically, according to the provisions of the Cyprus tax laws, an individual who is a tax resident of Cyprus under the provisions of the Income Tax Law (either under the “183-day rule” or the “60-day rule”) but is non-domiciled in the Republic of Cyprus, will be exempt from Special Defence Contribution (SDC).
SDC is imposed on dividends and interest income earned by individuals who are tax residents and domiciled in Cyprus, at the rates of 17% and 30% respectively. Rental Income is also subject to SDC at the rate of 3% on 75% of the gross rental income.
An individual who is a Cyprus tax resident under the provisions of the Income Tax Law with non-domicile status is exempt from SDC on dividend, interest, and rental income from sources within and outside Cyprus.
As per SDC Law, domicile is defined in accordance with the Wills and Succession Law as:
- Domicile of Origin (i.e. received at birth)
- Domicile of Choice (i.e. domicile acquired by establishing a physical presence in a particular place/country and by demonstrating sufficient intention to make it the place/country of permanent residence).
Additionally, an individual who has a domicile of origin in Cyprus will be treated as a domiciled resident for the purposes of SDC with the exception of:
- An individual who has obtained and maintained a domicile of choice out of the Republic provided that this individual was not a tax resident In the Republic for a period of at least 20 consecutive years prior to the tax year in question; or
- An individual who was not a Cyprus Tax resident for a period of at least 20 consecutive years immediately prior to the entry into force of the introduced provisions (i.e. prior to 16th of July 2015).
Irrespective of the domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled for SDC purposes.
Other Cyprus tax advantages for individuals
- The first €19,500 of taxable income is tax exempt. Any taxable income in excess of this amount is taxed at progressive rates ranging from 20% to 35%.
- Profit from the sale of shares and other qualifying titles is specifically exempt from Cyprus taxation, provided that the underlying assets do not include immovable property located in Cyprus.
- 50% exemption for remuneration from employment exercised in Cyprus by individuals who were residents outside Cyprus before the 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% exemption or EUR8.550 (whichever is lower) is granted, in case of remuneration from employment exercised in Cyprus which is less than €100,000, for a period of 5 years commencing from the 1st January of the year following the year of employment, and until the year 2025.
- 100% exemption on remuneration for salaried services rendered outside Cyprus for more than 90 days in a tax year to a non-Cyprus resident employer.
- 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.
- 100% exemption on lump sum repayments from life insurance schemes (under certain conditions) or from approved provident funds.
- No Capital Gains Tax on the sale of immovable property located outside Cyprus.
- No inheritance tax, no wealth tax, no gift taxation.
Cyprus tax residency rules for companies
Corporate residency test
As per Income Tax Law, a company is a tax resident in Cyprus if its management and control are exercised in Cyprus.
Even though there is no specific definition in the Income Tax Law or in any other Cyprus Law as to what constitutes “management and control”, it is understood that the definition per the Organisation for Economic Co-operation and Development (OECD) model convention in relation to “place of effective management” is the one to be followed by the Cyprus Tax Authorities.
According to the OECD guideline, the “place of effective management” is the place where:
- Key management and commercial decisions that are necessary for the conduct of the company’s business are in substance made,
- The board of directors makes its decisions,
- The actions to be taken by the company as a whole are determined.
Tax residency considerations during the COVID-19 pandemic
In line with the Circular, a company that is not tax resident in Cyprus, will not be deemed as establishing tax residency in the Republic by reason of the presence/ stay in its territory of staff, directors, representatives or employees under a contract of service, when the reasons of their stay in the Republic are Covid-19 pandemic related.
Furthermore, the Circular clarifies that the tax residency status of a company in the Republic will not be affected by reason of a director not being able to travel to the Republic and attend a meeting of the Board of Directors when the reasons are exclusively Covid-19 pandemic related.
Proposed amendments to the corporate residency test
The Cypriot Ministry of Finance submitted to Parliament a bill for amending the Income Tax law (effective as from 1 July 2021), stating that the corporate residency test (currently the “place of effective management” test) is expanded with the introduction of a test based on incorporation in Cyprus, for companies that do not have a tax residency anywhere else in the world.
Key features of the Cyprus Corporate Tax System
- Simple, transparent and EU harmonized Tax system following recommended OECD practices.
- Enjoys the tax benefits of EU Directives (e.g. Parent-Subsidiary Directive, Merger Directive, Interest and Royalties Directive).
- Extensive Tax Treaty network with 65 countries.
- Cyprus possesses one of the lowest corporate tax rates within the EU; currently set at 12.5%.
- Profit from the disposal of qualifying “titles” is tax exempt. “Titles” are defined as shares, bonds, debentures, founders’ securities and other securities of legal entities incorporated in Cyprus or abroad, including options thereon.
- Dividends from abroad are not taxable (subject to conditions).
- Foreign permanent establishment (PE) profits are exempt from corporate tax (subject to conditions).
- New IP box scheme in line with nexus approach. Up to 80% deduction may be allowed on qualifying profits from qualifying IP.
- Availability of Notional Interest Deduction (NID) for new equity introduced. NID may be allowed up to 80% on the taxable income associated with the new equity.
- Capital gains from the disposal of immovable property situated outside of Cyprus are tax exempt.
- Tax losses can be carried forward for the next 5 years against future taxable profits.
- Group relief provisions (75% of direct or indirect equity relationship between group companies)
- Unilateral credit relief for foreign taxes.
- Profits of shipping companies are exempt from corporate tax and are subject to an attractive Tonnage Tax regime.
