Cyprus: Living In Cyprus: A ScrumpTAXious Proposition

Cyprus has always been an attractive tourist destination, as well as a great place to relocate and call home. Being family and business friendly, it has so far won over the hearts of over 180.000 foreign nationals who live and work on the island, making up 22% of the country's total population.

Now, Cyprus has further reinforced another aspect of its allure: that of personal taxation.

Having recently adopted highly attractive domicile provisions, the island aspires to also become an ideal country for private domiciliation.

Below is an analysis of the reasons why.

1. TAX RESIDENCY AND DOMICILE

The key to understanding personal taxation in Cyprus lies with the important concepts of 'tax residency' and 'domicile'.

a) Tax Residency

A Cyprus tax resident physical person is any person who is physically present in Cyprus for more than 183 days in a calendar year. It does not matter the purpose of being in Cyprus, nor is it a condition that a Cyprus tax resident person owns or rents accommodation in Cyprus. It is literally based on the number of days without any further conditions.

b) Domicile

According to the domicile concept under the tax legislation, every person has at any given time either:

  1. the domicile received by him/her at birth ('domicile of origin'), or
  2. the domicile (not being the same as the domicile of origin) acquired or retained by him/her by his/her own act ('domicile of choice').

Under (i) above, the domicile of origin of a legitimate child is that of the father's, or in the case of an illegitimate child, that of the mother's.

Under (ii) above, a person may acquire a domicile of choice by establishing his/her home at any place in Cyprus with the intention of permanent or indefinite residence.

For tax purposes however, a non-domiciled individual will be deemed as domiciled in Cyprus if he/she has been a Cypriot tax resident for at least 17 out of the last 20 years prior to the relevant tax year (deemed domicile rule).

An individual who has a domicile of origin in Cyprus, may still qualify as non-domiciled subject to certain conditions, namely to have not been a Cyprus tax resident for a consecutive period of 20 years.

2. TAXABLE INCOME

A tax resident individual, irrespective of his/her domicile status, is subject to income tax on his/her worldwide income, although there are a number of favourable deductions and exemptions in the legislation as explained below.

A non-tax resident individual is subject to income tax on income accruing or arising only from sources within Cyprus and is exempt from any Cyprus tax on dividend and interest income.

However, where a person is non-domiciled in Cyprus, but is a Cyprus tax resident, the following main benefits exist, for a period of at least 17 years, i.e. until the person is deemed domiciled in Cyprus (see above):

  • no Cyprus tax is payable on receipt of any dividend income from anywhere in the world (although on foreign dividends, the source country may withhold taxes);
  • the provisions whereby a Cyprus tax-resident company must declare at least 70% of its after-tax accounting profits within two years (known as the 'deemed distribution rules'), do not apply to that proportion of shareholding beneficially owned by a non-Cyprus domiciled individual;
  • no Cyprus tax is payable on receipt of interest income from anywhere in the world (although on foreign interest, the source country may withhold taxes).

3. INCOME TAX RATES

Taxable income, i.e. gross income less exemptions less deductions, up to €19.500 is exempt from income tax. The taxable income exceeding this amount is subject to progressive tax rates ranging from 20% to 35% (the higher rate being for taxable income exceeding €60.000).

4. EXEMPTIONS

The following exemptions are available for individuals moving to Cyprus to commence employment:

  • 20% of the employment income, up to a maximum of €8.550 annually

    This exemption applies until the 2020 tax year inclusive, but cannot be granted for a total period exceeding five years. Previously, the exemption was only available for a total period of three years. The exemption applies from the start of the year following the year of employment.
  • 50% of the employment income

    A 50% exemption applies to salary income of a non-tax resident individual, who takes up residence in Cyprus to work for an employer in Cyprus. The exemption applies for a period of 10 years starting from the first year of employment provided that the annual income of the employee exceeds €100.000 per annum; and

    • the exemption will not be available where the individual was a Cyprus tax resident in any three of the previous five tax years preceding the commencement of employment in Cyprus, although this only applies to employments that commence on or after 1 January 2015; and
    • the exemption will not be available where the individual was a Cyprus tax resident in the year preceding the year of commencement of employment in Cyprus, although this only applies to employments that commence on or after 1 January 2015; and
    • the exemption will be granted for any tax year in which the annual total gross emoluments from the employment exceed €100.000, regardless if in a specific tax year, these were less than €100.000. This is subject to the total emoluments exceeding €100.000 at the start of the employment and the Commissioner of Taxation being satisfied that the fluctuation in the total gross emoluments is not solely to obtain the exemption.
    It is noted that where an individual is benefiting from the 50% exemption, this individual cannot benefit at the same time from the 20% exemption, as stated above.

4.1 Income tax exemption for overseas employment

Where an employee is Cyprus tax resident, then salaries 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 are exempt from income tax.

In order for the 90 day rule to apply there must be an employee/employer relationship.

4.2 Exemptions on gains arising from the disposal of securities

Any gains arising from the disposal of shares, bonds and other similar equity financial instruments are exempt from income tax.

Any income from a buy-back or redemption of units in funds is also exempt from income tax.

4.3 Exemption from capital gains tax on sale of real estate

Profit arising from the disposal of immovable property situated outside Cyprus is exempt from any taxation (including capital gains tax) in Cyprus, although the foreign property may be subject to tax in the jurisdiction where it is located.

Furthermore, a specific capital gains tax exemption is introduced on profits relating to the disposal of an immovable property located in Cyprus, if this property is acquired within the period 16 July 2015 and 31 December 2016. The date of the future disposal is irrelevant.

5. ADVANTAGES AVAILABLE TO PENSIONER EXPATRIATES ON PENSION INCOME

A Cyprus tax resident receiving a pension from abroad can choose one of the following two options to be taxed on the pension income, the choice being available every year:

  • the pension can be taxed under the progressive income tax rates with the first €19.500 of net taxable income being tax-free; or
  • the first €3.420 of the foreign pension being tax free, with the remaining balance being taxed at a flat rate of 5%.

Any lump sum received as a retirement gratuity is exempt from tax.

6. DEDUCTIONS

In general, the below deductions are available for Cyprus tax resident individuals:

  • donations to charities that have been approved by the Department of Taxation ;
  • payments relating to special contribution;
  • payments relating to contributions to the Social Insurance Fund and similar contributions, even when paid abroad;
  • payment relating to premiums for life insurance (limited to 7% on the insured capital amount) and contributions to pension plans.
  • there is an overall limit on personal allowance deductions (i.e. deductions for life-insurance premiums and contributions to funds including pension and social insurance) of 1/6 of the taxable income before these deductions.
  • payments relating to premiums paid to approved medical funds are tax deductible, provided that they do not exceed 1,5% of the gross salary income.

7. WEALTH, GIFT, INHERITANCE, ENDOWMENT AND EXIT TAXES

Cyprus generally does not impose wealth, gift, inheritance, endowment or exit taxes.

8. HOW DOES IT WORK? PRACTICAL EXAMPLES

a) Example 1 - Dividend and Interest Income

A non-Cyprus domiciled individual relocates to Cyprus in December 2015. During 2016, while being a Cyprus tax resident, she received €150.000 dividends from Cyprus companies and €750.000 from foreign companies.

She also received €15.000 interest income from her Cypriot personal savings account and €25.000 interest income from a notice account held with a foreign bank. No foreign tax was withheld on the interest income received from the foreign banks.

The individual did not have any other income.

The total interest and dividends income received will be exempt from Cyprus tax.

Description
Dividend Income – Cyprus sourced 150.000
Dividend Income – Overseas sourced +750.000
Total Dividend Income 900.000
Interest Income – Cyprus sourced 15.000
Interest Income – Overseas sourced +25.000
Total Interest Income 40.000
Total Income 940.000
Total income which is exempt from taxation (both income tax and special contribution for defence) in Cyprus 940.000
Total Tax payable in Cyprus on dividend and interest income 0

b) Example 2 - Remuneration

Mr. Ivanov relocated to Cyprus in December 2014 and started working in Welcome-To-Cyprus Ltd from 1/1/2015 as a Senior Regional Manager earning an annual gross salary of €110.000. His annual salary of €110.000 relates to employment services rendered within Cyprus. Mr. Ivanov also travelled to Dubai, of the UAE, to work for Welcome-To-Cyprus Ltd's Dubai permanent establishment for an aggregate period of 4 months. During the period of the overseas work in Dubai, Mr. Ivanov received an extra salary of €25.000 and an overseas special allowance of €7.500.

Calculation of Mr. Ivanov' 2015 income subject to tax in Cyprus is as follows:

Description
Basic salary relating to Cyprus employment 110.000
Salary relating to UAE employment 25.000
Overseas special allowance relating to UAE employment 7.500
Total income 142.500
Exemptions
50% of the Cyprus sourced remuneration (55.000)
Exempt overseas remuneration – 90 days rule (25.000)
Overseas special allowance (7.500) (87.500)
Less:
Social Insurance Contributions (7.8%x€54.396*) (4.243)
Special contribution (1.520) (5.763)
Total Taxable Income 49.237
Personal Income Tax Calculation
From €0 up to €19.500 0% 0
From €19.501 up to €28.000 20% 1700
From €28.001 up to €36.300 25% 2075
From €36.301 up to €60.000 30% 3.881
From €60.001 and over 35% -
Income Tax 7.656
Special Contribution 1.520
Social Insurance 4.243
Total Income Tax, special contribution and social insurance 13.419

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.

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