Cyprus has had a modernised and stable tax system for decades. The latest tax reform was back in 2002, over two decades ago. Nonetheless, a tax reform is underway to improve the tax equality, provide additional incentives and bridge the gap between society and the business community. The expected tax changes are currently under deliberation, before heading to the Cyprus parliament for voting.
As per the current tax regime, Cyprus has a straightforward set of tax residency rules.
Presently, any individual can be considered as a Cyprus tax resident, either through the 183-days rule or the 60-days rule.
The 183-days rule
According to the 183-days rule, the individual should be residing in Cyprus for more than 183 days in one calendar year.
The 60-days rule
On the other hand, the 60-days' rule offers an alternative solution to individuals who are constantly on the move. To comply with this rule, the individual should be residing in Cyprus for at least 60 days in one calendar year, and in addition, the following conditions must be met cumulatively:
- The individual carries on a business in Cyprus (i.e. either as a self-employed person, or employed or hold an office with a Cyprus tax resident person – for example, a Director of a Cyprus company). If the business (or employment or self-employment) stops during the year, then the person is not considered a Cyprus tax resident for the specific year; and
- The individual does not spend more than 183 days in any other country; and
- The individual keeps a property-residence in Cyprus (either owned or rented); and
- The individual is not a tax resident in any other country.
A set of documents is submitted to the Tax Office to evidence the applicant's identity and the Cyprus tax residency status of an individual (e.g. passport copy, immigration permit, rental agreement or title deed of residential property, recent utility bills in Cyprus, bank statement showing local purchasing activity, tax returns if applicable, certificate of shareholders, emoluments certificate from the Social Insurance Department, etc).
Non-Dom
The criteria of being a tax resident of Non-Dom status are the following:
- A) The individual does not have its domicile of origin in Cyprus:
A.1.) A domicile of origin (i.e. the domicile received by an individual at birth); and,
A.2) A domicile of choice (i.e. the domicile acquired by an individual by establishing a home with the intention of a permanent or indefinite stay)
- B) The individual was not a Cyprus tax resident for any period of at least 20 consecutive years preceding the tax year in question
- C) The individual has not been a tax resident of Cyprus per the Income Tax Law for a period of 20 consecutive years prior to the introduction of the law (i.e. prior to 16 July 2015).
An individual who is tax resident in Cyprus under the Non-Dom status is exempted from any tax on dividends and interest received either in Cyprus or abroad (Special Defence Contribution Tax) for the period of 17 years following his/her registration as tax resident in Cyprus.
The tax reforms, which have been prepared and suggested by the Economics Research Centre of the University of Cyprus, suggest that the 183-days rule shall remain intact, while the tax residency tests shall be further enhanced. The definition of a tax resident is suggested to be expanded by an additional tax residency test so as to cover persons having Cyprus as their centre of business interests no matter their physical presence, as per the French model. In the case of persons with a dual tax residency, their tax residency will be determined based on a double tax treaty. The 60-days rule is also expected to be enhanced and strengthened.
Special Defence Contribution (SDC)
As per the suggested changes, the existing SDC on rental income might be abolished, while the SDC rate on dividends might be reduced to 5% from 17% for tax residents domiciled in Cyprus. The exemption from SDC for non-dom tax residents is expected to remain intact. The current applicable period of 17 years of non-domicile status for individuals is not expected to be altered but an annual fee might be imposed for extending this period.
Personal Income Tax
Significant changes are expected in terms of personal income tax as well. Such changes are well regarded by the business community and the society at large, as these will increase the tax regime's fairness and support societal groups. The annual tax-free amount of EUR 19,500 is expected to be increased to EUR 20,500. While the higher tax rate of 35% which currently applies to amounts exceeding EUR 60,000 is expected to apply to amounts exceeding EUR 80,000.
In addition to these tax rates reforms, tax discounts are expected to be introduced to households with children or students (EUR 1,000 per child/student) and to households with residential loans for the first property (EUR 1,500) and for household's upgrades (EUR 1,000) for up to five years for energy upgrade.
Following the presentation of the suggested reforms by the Economics Research Centre of the University of Cyprus, a public consultation will be carried out by business associations, political parties and other relevant bodies. Once the reforms are finalised, the bill will be prepared by the Ministry of Finance, and will be submitted to the Cyprus Parliament for voting.
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.
