On 24 July 2017, the Cyprus Tax Department issued Interpretative Circular 2017/4 in relation to income tax exemptions, sections 8(21) and 8(23) of the Income Tax Law 118 (I)/02.
The specific criteria of sections 8(21) and 8(23) are listed below:
Exemption of section 8 (21):
Employees are exempt from income tax on 20% of their remuneration or €8,550 (whichever amount is lower) for employment exercised in Cyprus. This exemption is applicable to individuals who were not Cyprus tax residents during the year preceding the year of commencing employment in the Republic.
The exemption is applicable from the 1st of January of the year which follows the year in which the employment commenced. It should be noted that:
- For employment which began during any year until 2011, the exemption is granted only for 3 years;
- For employment which began from 2012 onwards, it is granted for 5 years.
The exemption can be claimed until 2020 when the scheme will expire.
Example: An individual who was not tax resident during 2018 and began his employment during 2019 shall be entitled to the application of the exemption only for the year 2020.
Exemption of section 8 (23):
The second exemption has been in effect since 1 January 2012 (updated in 2015) and relates to a 50% exemption of the remuneration from any employment exercised in Cyprus if such remuneration exceeds €100,000 annually. The exemption is applicable irrespective of whether during one year the income dips below €100,000 provided that at the commencement of working in Cyprus, the income from employment in the Republic exceeded the €100,000 threshold and the Commissioner is satisfied that the fluctuations in the salary are not artificially engineered for the purpose of obtaining the relevant tax exemption.
The exemption has certain restrictions; individuals who were tax residents in Cyprus during any 3 out of 5 years preceding the year of employment (not applicable for individuals with a commencement of employment between 2012 to 2014) as well as during the year preceding the year of employment will not be granted the exemption.
The exemption can be claimed for 10 years.
An individual was tax resident in Cyprus during the years 2009-2013 but left Cyprus during the years 2014-2015. He returned to the Republic in March 2018 and was employed. The five years preceding the year of employment are 2013-2017 and he was a tax resident for 1 year (2013). Therefore, the individual shall be entitled to the exemption.
The following has been clarified in the Circular published:
- Exemption is applicable to any of the 10 years during which the annual remuneration exceeds €100,000. If during any of these 10 years the income does not exceed €100,000 then the taxable person can claim the first exemption if the 5 year period has not expired.
- Exemption is granted if actual income within one year of assessment does not exceed €100,000 due to commencement or termination of contract in the course of the year but the income from employment exceeds €100,000 on an annual basis.
- The maximum period the exemption applies for is 10 years including the year of commencement of employment.
- Bonuses and any other remuneration taxable according to the Income Tax Law should be considered for the purposes of calculating the annual income of €100,000.
- The remuneration for the provision of services outside the Republic for which the 90 day rule deduction is granted, is not taken into account for the calculation of annual income threshold of €100.000 since this does not relate to income exercised in the Republic.
- Exemption is also granted if a person is employed by two or more employers in Cyprus, with the total remuneration exceeding €100,000 calculated on an annual basis.
An individual who was not a tax resident in Cyprus in 2011, came to Cyprus and was employed on 15 June2012 with a monthly salary of €8,500. For 2012 he is entitled to the 50% exemption because even though in 2012 his income was €55,250, calculated on an annual basis the income exceeds €100,000.
Clarifications for both exemptions:
- For fiscal years up to and including 2014, an individual had to choose between the two exemptions available as these cannot be granted simultaneously. From the year 2015 and onwards it is specifically clarified that in the case where the exemption under section 8(23) is claimed then then exemption under section 8(21) cannot be claimed.
- For each tax year a different exemption may be granted.
- Exemption may be granted to individuals who are either tax or not tax residents in Cyprus during their employment in the Republic.
- Exemption may be granted to individuals whose commencement of employment begins later in the year of assessment, when they have already completed more than 183 days in Cyprus, provided that they were not tax residents during the previous year of assessment.
- The exemptions are applicable irrespective of whether the individual carries out the employment in Cyprus with the same employer in which he was employed abroad or not.
- The exemptions may be granted in the case of graduates who complete their studies abroad and return to work in Cyprus, provided that during the previous fiscal year they were residents outside the Republic.
- Exemption may be granted simultaneously with the deduction which relates to the remuneration for the provision of salaried services outside the Republic for a total period of more than 90 days in a tax year.
- Exemption is also granted to a person who is employed in a company established by the same individual (i.e. a director or a shareholder of the company).
It is important to note that any cases not covered by the circular issued shall be forwarded to the Commissioner for a decision.
Our team of professionals can advise you in determining whether you are eligible for these tax exemptions and assist you in calculating your tax exempt income.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.