1 Connection Factors
1.1 To what extent is domicile or habitual residence relevant in determining liability to taxation in your jurisdiction?
Domicile is relevant to determining an individual's liability to Special Defence Contribution, commonly known as SDC tax, which is payable on dividends, interest (other than interest received as a business activity) and rents receivable. In order to be liable for SDC tax an individual must be both resident and domiciled in Cyprus for the tax year concerned. Individuals who are resident but not domiciled in Cyprus are exempt from SDC tax.
Domicile is also the determining factor as to whether Cyprus succession law applies in a particular case (see section 7).
1.2 If domicile or habitual residence is relevant, how is it defined for taxation purposes?
Domicile is a general legal concept and is distinct from nationality or residence. Generally, a person's domicile is the place that he or she regards as his or her permanent home. As in many areas, Cyprus follows English common law in determining domicile.
For the purpose of determining liability to SDC tax, an individual will be deemed to be domiciled in Cyprus if he or she has been a tax resident for 17 or more of the 20 tax years immediately preceding the year of assessment.
1.3 To what extent is residence relevant in determining liability to taxation in your jurisdiction?
Residence is the principal factor determining liability to taxation in Cyprus. An individual is liable to taxation if he or she is resident in Cyprus for the tax year concerned.
1.4 If residence is relevant, how is it defined for taxation purposes?
The traditional determinant of residence for individuals is physical presence, with individuals being considered to be resident if they are present in Cyprus for more than 183 days in the relevant year. Days of departure and arrival are treated as follows:
- The day of departure from Cyprus counts as a day of residence outside Cyprus.
- The day of arrival in Cyprus counts as a day of residence in Cyprus.
- Arrival in and departure from Cyprus on the same day counts as one day of residence in Cyprus.
- Departure from and return to Cyprus on the same day counts as one day of residence outside Cyprus.
Law 119(I) of 2017 introduced an alternative residence qualification for 2017 and later tax years. An individual will be deemed to be resident in Cyprus if during the tax year concerned he or she maintained a permanent residence in Cyprus, undertook any business or employment in Cyprus which continued to exist at the end of the tax year and was present in Cyprus for at least 60 days. All three conditions must be satisfied and the individual concerned must not be a tax resident of any other country (for example, by reason of a physical presence there for 183 days) for the tax year in question.
1.5 To what extent is nationality relevant in determining liability to taxation in your jurisdiction?
Nationality is not relevant in any way in determining liability to taxation in Cyprus.
1.6 If nationality is relevant, how is it defined for taxation purposes?
This is not applicable in Cyprus.
1.7 What other connecting factors (if any) are relevant in determining a person's liability to tax in your jurisdiction?
There are none.
2 General Taxation Regime
2.1 What gift or estate taxes apply that are relevant to persons becoming established in your jurisdiction?
There are no succession taxes in Cyprus, and no taxes on lifetime transfers.
2.2 How and to what extent are persons who become established in your jurisdiction liable to income and capital gains tax?
An individual who is resident in Cyprus for a particular tax year is liable to income tax on worldwide income, whether that income is remitted to Cyprus or not. Non-residents are subject to income tax on income accruing or arising from sources in Cyprus. However, there is no income tax on dividend and interest income, so if the individual is not domiciled in Cyprus and liable to SDC tax (see question 1.1), these categories of income are entirely free of Cyprus taxation.
Capital gains tax
Gains on disposal of any kind of asset, apart from gains derived from immovable property located in Cyprus, are entirely free of capital gains tax.
The only gains subject to capital gains tax, which is charged at 20 per cent, are gains from the disposal of immovable property in Cyprus and shares in companies (but not companies listed on a recognised stock exchange) directly or indirectly owning immovable property in Cyprus, to the extent that the gain is derived from an appreciation in value of the immovable property.
2.3 What other direct taxes (if any) apply to persons who become established in your jurisdiction?
There are no direct taxes apart from income tax, SDC tax and capital gains tax.
2.4 What indirect taxes (sales taxes/VAT and customs & excise duties) apply to persons becoming established in your jurisdiction?
Cyprus is a member of the EU (and of the Eurozone) and applies the same VAT and customs regime as the rest of the EU.
2.5 Are there any anti-avoidance taxation provisions that apply to the offshore arrangements of persons who have become established in your jurisdiction?
There are anti-abuse provisions targeting artificial transfers of assets to obtain the benefit of the "non-domiciled" exemption from SDC tax (see section 1).
2.6 Is there any general anti-avoidance or anti-abuse rule to counteract tax advantages?
Article 33 of the Income Tax Law gives the tax authorities power to adjust reported outcomes of transactions between related parties to what they would be on an arm's length basis.
Cyprus is currently in the process of implementing the EU Anti- Tax Avoidance Directive and the implementing legislation, which is expected to be enacted before the end of 2018, includes the general anti-abuse rule contained in the directive.
2.7 Are there any arrangements in place in your jurisdiction for the disclosure of aggressive tax planning schemes?
Like other EU members, Cyprus is required to transpose Council
Directive 2018/822/EU of 25 May 2018 introducing mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements into its national laws by 31 December 2019. The first reportable cross-border arrangements will be those where the first implementation step occurs between 25 June 2018 and 1 July 2020. The relevant information will have to be filed with the tax department by 31 August 2020 and should be communicated among EU Member States by 31 October 2020.
3 Pre-entry Tax Planning
3.1 In your jurisdiction, what pre-entry estate and gift tax planning can be undertaken?
The Cyprus International Trust, established under the International Trusts Laws of 1992 to 2013, is a very valuable and effective tool for asset protection, succession planning and tax planning. In order to establish a Cyprus International Trust, the settlor must not have been a resident of Cyprus for the calendar year prior to the creation of the trust. It is therefore prudent to establish any Cyprus International Trust prior to arrival in Cyprus.
As the Cyprus tax system is flexible and taxpayer-friendly, any other pre-entry planning that might usefully be undertaken would generally relate to overseas taxes.
3.2 In your jurisdiction, what pre-entry income and capital gains tax planning can be undertaken?
Please see question 3.1.
3.3 In your jurisdiction, can pre-entry planning be undertaken for any other taxes?
Please see question 3.1.
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Originally published in ICLG
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.