Cyprus: An attractive destination for high-net worth individuals

Introduction

During the past years Cyprus has enacted several new tax laws for individual taxpayers, providing in that way incentives for foreigners and high net worth individuals to relocate to Cyprus.

Part I – Tax Residence

The 183-day rule

• Until 2017, an individual was considered as a Cyprus tax resident if he or she had spent more than 183 days in Cyprus during a tax year.
• As a result, if an individual spent less than 183 days in Cyprus during a tax year, the individual would not have been considered as a tax resident.
  

The 60-day rule

• The Tax Law has been amended from 2017, to allow an individual who spends a minimum of 60 days in Cyprus in a tax year to become tax resident for the same year, provided certain conditions are satisfied. This is the “60-day rule”.
• The conditions that must be satisfied are:
  1. Does not stay in another country for one or more periods exceeding 183 days
  2. Is not a tax resident in another country for the same tax year
  3. Carries on a business in Cyprus or is employed in Cyprus or holds an office in a Cyprus tax resident company at any time during the tax year
  4. Maintains a permanent residence in Cyprus, either owned or rented.
  • The Tax Law was further amended to clarify that an individual who fits all the conditions under the ’60-day rule’ would not be considered as a tax resident if their business, employment, or office holding position has been terminated during that year.

Part II – Tax benefits

• Non domicile status

The term “domiciled in Cyprus” is defined by the law as a person who has either his/her domicile of origin (given at birth) in Cyprus or domicile of choice (establishing a home with the intention to reside in Cyprus permanently or indefinitely).

As such a Non – Domicile individual is someone who became a CY Tax resident, but:

• Does not have his domicile of origin in Cyprus.
• Has his domicile of origin in Cyprus, but:

1. He has and maintains his domicile of choice in a country other than Cyprus and was a Non -CY tax resident for any period of at least 20 consecutive years or
2. He was a Non -CY tax resident for all years from 1995 to 2014 inclusive (prior to the commencement of the law in 2015).

Individuals who intend to live in Cyprus and become Cyprus tax residents qualifying as non-domicile, will immediately enjoy the following tax benefits:

1. no Cyprus tax is payable on receipt of dividend income from any company registered anywhere in the world;
2. no Cyprus tax is payable on receipt of interest income from anywhere in the world;

• no SDC (Special Defence Tax) is payable on rental income;

As such, a Cyprus tax resident individual who is not domiciled in Cyprus (non-dom.) will NOT be subject to the SDC in Cyprus on any interest, rents or dividends regardless of the source.

50% of remuneration in Cyprus is exempted from Taxation

• 50% of the remuneration from any employment exercised in Cyprus is exempt for a period of 10 years.
• Employment must commence as from 1 January 2012 onwards.
• The individual was not a tax resident of Cyprus before the commencement of the employment.
• Annual remuneration exceeds €100,000.

Example:  Non-EU tax resident individual moves to Cyprus and His/her annual income will be €200,000.

Tax to be paid

• Only €100,000 out of the €200,000 will be taxed in Cyprus.
• Social Insurance paid and other personal allowances (e.g. life insurance) can be deducted up to 1/5 of income.
• Based on taxable income of €100,000 (without any deductions) the tax to be paid is €24,885 instead of €59,885 if the exemption was not provided.

Point to note

There is the intention from the Cyprus Government to extend the period for the exemption to 17 years and would include annual remuneration from employment that exceeds €55.000.

20% of income within a maximum amount of €8,550 per year

• 20% of the remuneration from any employment exercised in Cyprus is exempt for a period of 5 years up until 2025.
• Employment must commence as from 1 January 2012 onwards.
• The individual was not a tax resident of Cyprus before the commencement of the employment.
• The benefit starts on 1st of January following the year of commencement of the employment
• Maximum benefit is €8,550 per year.

Example:  Non-EU tax resident individual moves to Cyprus and his/hers annual income will be €50,000.

Tax to be paid:

• €8,550 will be deducted from his taxable income (not the 20%).
• Social Insurance benefits paid and other expenses can be deducted.
• Based on taxable income of €41,450 (without any deductions) the tax to be paid is €4,720 instead of €7,285 if the exemption was not provided.
• The exemption will begin in the following tax year.

“90-Day” rule

Where 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.

The 90-Days are not require to be consecutive, provided that:

• The 90-Days fall within the same tax year;
• the individual maintains the Cypriot tax residency (ex. spends no more than 183 days abroad); and
• Employer-Employee relationship must be in place.als to relocate to Cyprus and start enjoying what Cyprus has to offer.

Other incentives

1. Any gratuity income upon retirement is exempt from taxation.
2. Any compensation received for death or injury, is also exempt from taxation.
3. Where a Foreign National receives pension income from abroad, may choose to be taxed:

• in the same manner as a Cyprus-sourced pension; or
• under the special method, where the first €3,420- (Three Thousand Four Hundred and Twenty Euros) are tax free and any balance is taxed at a flat rate of 5%.

4. Earnings deriving from the disposal of shares, bonds and other such financial instruments are also exempt from tax. Cyprus imposes no estate duty, gift tax, wealth tax or inheritance tax on foreign nationals.
5. Cyprus is also subject to more than 65 double tax treaties, which corresponds to zero or minimal withholding tax rates on incomes such as pensions, royalties, dividends and interest received from abroad.

Part III – Epilogue

Following these amendments in the law and tax incentives provided to individuals, Cyprus has become a very attractive destination for high-net worth individuals that want to minimize their tax obligations and at the same time increase their investments. All the above provisions in combination with the already low percentage of corporate taxation, creates the perfect environment for individuals to relocate to Cyprus and start enjoying what Cyprus has to offer.