1.1 Tax Regimes
Before examining the tax regimes that apply to individual clients in Cyprus, it is important to draw a distinction between residents and non-residents in Cyprus, as well as between persons who are domiciled in the Republic and those who are not. Each of these categories will be described separately below.
Cyprus tax residents will be taxed in Cyprus on their worldwide income. Income tax is payable at the following rates:
|Taxable Income (EUR)||Tax Rate %|
|0 – 19,500||0|
|19,501 – 28,000||20|
|28,001 – 36,000||25|
|36,001 – 60,000||30|
Any dividend or interest income and any gains from the disposal of securities or arising from an approved corporate restructuring are fully exempted from taxation at the above rates, although some such income remains subject to the Special Defence Contribution, which will be analysed below. There are also various exemptions for income from remuneration of persons who were not residents in Cyprus prior to their employment.
When calculating a person's taxable income, certain expenses incurred wholly and exclusively for the production of income are deductible, such as the expenses for letting buildings or the interest relating to the acquisition of fixed assets.
Persons who are not tax residents in Cyprus will only be taxed on income accruing or arising from sources within the Republic.
Special Defence Contribution
The Special Defence Contribution will only apply to individuals who are both tax resident and domiciled in Cyprus.
This tax is imposed at a rate of 17% on dividends, 30% on interest income (subject to certain exemptions) and 3% on rental income decreased by 25%, subject to certain exemptions.
Capital Gains Tax
Capital gains tax in Cyprus is closely related to the disposal of immovable property in the Republic and is therefore applicable on any person, whether resident or domiciled in Cyprus. The capital gains tax rate is 20%, and it is imposed on the gains from the disposal of immovable property or shares in a company owning immovable property situated in Cyprus. Individuals are allowed certain deductions when the abovementioned gains are calculated.
Cyprus law provides that certain disposals of immovable property are not subject to capital gains tax, including any transfers of property of a deceased person, gifts between spouses, parents and children and relatives up to a third degree of kindred, gifts to a company whose shareholders are members of the donor's family, gifts by a family company to its shareholders if the company had also acquired the property in question via donation, and gifts to charitable organisations or the government.
Inheritance Tax/Estate Duty/Gift Tax
No inheritance tax or estate duty is levied in Cyprus. Any acquisitions or transfers by way of gift to family members are also exempted from taxation.
Trusts are not recognised as separate legal entities under Cyprus law and are therefore not taxable as such, but the beneficiaries are taxable through the trustees. The Cyprus International Trusts Law of 1992 provides that the income and gains of an international trust that are acquired or deemed to be acquired from worldwide sources will only be taxed in Cyprus where the beneficiary is resident in Cyprus. In cases where the beneficiary is not resident in Cyprus, only the income and gains of the trust arising from sources within Cyprus will be subject to any taxation in Cyprus.
1.2 Stability of the Estate and Transfer Tax Laws
While Cyprus saw the introduction of new taxation and increased levies during the financial crisis of 2013, many of these have been balanced back or abolished in the last year (eg, immovable property tax was abolished on 1 January 2017), to reflect the island's steady advance towards economic recovery. Cyprus legislators have adopted a stable approach towards estate duty and transfer taxes, and the policy makers do not seem to have an intention to amend the current status, as described above.
1.3 Recent Developments or Forthcoming Regulatory Changes
Cyprus has long been established as a highly attractive jurisdiction for the tax and estate planning of high net worth individuals. In an overall effort to offer an advantageous and simple tax system that would remain compliant with the EU and international regulations and requirements at all times, Cyprus introduced the notion of the 'non-domiciled person' for taxation purposes in 2015. On the basis of this 'non-domiciled' concept, EU and non-EU foreigners who decide to become tax resident in Cyprus (ie, move to Cyprus and comply with the tax residency requirements) will be considered as non-domiciled in Cyprus and therefore completely exempt from Special Defence Contribution tax for a maximum of 17 years, as described above.
In addition, the Cyprus House of Representatives passed new legislation last year amending the requirements of tax residency for individuals. The long-established test for an individual to be considered a Cyprus tax resident continues to be whether he/she stays in the country for more than 183 days in the year of assessment. The new legislation has introduced a second test in accordance with which a person can be considered a Cyprus tax resident if he/she spends more than 60 days in Cyprus in the specific tax year subject to the following conditions:
- he/she does not reside in any other country for a period exceeding 183 days in aggregate;
- he/she is not tax resident in any other country;
- he/she exercises any business in Cyprus and/or is employed in Cyprus and/or holds an office for a person who is tax resident in Cyprus at any time during the year of assessment; and
- he/she maintains a permanent residence in Cyprus, which is owned or rented by him/her.
All of the above developments and amendments to the legislation in Cyprus have increased the island's popularity with the internationally wealthy.
1.4 Income Tax Planning
As the Cyprus tax system offers many exemptions and deductions from taxation over a person's income, income tax planning is considered important for high net worth individuals.
See the publication and practice guide here.
Originally published by Chambers Global Practice Guides.
Originally published 21 January 2019
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.