Elena Christodoulou of Elias Neocleous & Co provides an overview of how Cyprus tax resident individuals are taxed in Cyprus.
Cyprus tax resident individuals are subject to tax in Cyprus on their worldwide income, whether or not it is remitted to Cyprus. A double tax relief is granted on any tax paid abroad on any taxable income.
Tests for obtaining tax residency
'183 day' test
If an individual is physically resident in Cyprus for more than 183 days within the same tax year then the individual will automatically be deemed to be a Cyprus tax resident and his/her worldwide income will be subject to taxation in Cyprus regardless of whether an application for a tax residency certificate is submitted.
'60 day' test
According to the '60 day' test, which is applicable as from January 1 2017, an individual will be considered as a Cyprus tax resident if:
- He/she maintains a permanent residence in Cyprus (i.e. either owning a permanent residence or leasing out a permanent residence); and
- Undertakes a business in Cyprus (i.e. self-employed) or is employed by (or maintains an office with) a Cyprus company for all the relevant period concerned; and
- Is physically present in Cyprus for a minimum of 60 days in the tax year concerned.
All three conditions must be satisfied and in addition the individual concerned:
- Must not be a tax resident of any other country; and
- Must not have stayed in any other country for more than 183 days in the tax year in question.
Personal income tax rates
Certain types of income are exempted pursuant to relevant provisions of the Income Tax Law. The most common ones are as follows:
- All dividend income;
- Gains arising from the disposal of securities;
- The whole amount of remuneration from rendering salaried services outside the republic to a non-resident employer or to a permanent establishment outside the republic of a resident employer for a total period in the year of assessment of more than 90 days;
- Foreign exchange (FX) gains with the exception of FX gains arising from trading in foreign currencies and related derivatives; and
- Lump sum repayment from life insurance schemes or from approved provident funds.
Income band Tax rate Below €19,500 0 €19,501 to €28,000 20% €28,001 to €36,300 25% €36,301 to €60,000 30% €60,001 and above 35%
Cyprus non-dom rules applicable from July 16 2015
All Cyprus domiciled residents are subject to special defence contribution (SDC) on the following types of income:
- Dividend income at 17%;
- Interest passive income at 30%; and
- Rental income at 3% (on 75% of the income i.e. effective rate of 2.25%).
Cyprus tax resident non-domiciled individuals are no longer subject to SDC and therefore they are exempted from dividend income, interest passive income and rental income (note: rental income is subject to income tax) until they complete 17 years of tax residency in Cyprus (provided that they become Cyprus tax residents for the first time).
Available deductions linked to employment earned
If an employer–employee relationship exists there are two key forms of expatriate relief that can be used as a deduction for income tax purposes.
50% relief conditions
- Not a Cyprus tax resident in the previous tax year;
- Not a Cyprus tax resident for any three of the past five tax years prior to commencement of employment in Cyprus;
- Earn over €100,000 gross;
- It is granted immediately; and
- This deduction applies for 10 years.
20% relief conditions
If an individual earns less than €100,000 annually, they are still eligible for a 20% deduction. It must be noted, however, that there is a ceiling of €8,550 per annum (lower of 20% or €8,550). Applications for the 20% deduction were meant to close at the end of 2020 but this has been prolonged for an additional five years.
- It does not commence immediately. Rather it commences from January 1 following the year of employment commencement; and
- This deduction applies for five years.
Further key tax incentives are in the pipeline for the first quarter of 2022 following the government's latest action plan announced on October 15 2021. These include tax benefits for different categories of new employees, extension of 50% tax deduction (as above) for investing in certified innovative companies to corporate investors as well as to natural persons, and the granting of an increased level of tax-deductible expenses for eligible research and development projects.
From a Cyprus tax perspective there are inherent local tax advantages linked to proper functions in Cyprus at an entity level, an overall payroll level (as contributions in Cyprus are generally capped to a maximum insurable amount) and towards those individuals that may be relocated to Cyprus (personal tax benefits linked to becoming new Cyprus tax residents let alone the boost of the economic and operational profile of the employer company which is of essence for both local and global tax protection).
Originally published by International Financial Law Review.
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.