The last few years have been tough for the UK economy, which has faced unprecedented shocks from the legacy of the COVID-19 pandemic, an energy price spike driven by the war in Ukraine, and globally high inflation.
Consequently, the UK government has announced a series of measures including the abolition of the non-dom regime from 6 April 2025. The current rules for the taxation of non-UK domiciled individuals will come to an end. As a result, the concept of domicile as a relevant connecting factor in the UK tax system will be replaced by a system based on tax residence.
From 6 April 2025, all UK residents will be taxed on the arising basis of assessment. A new regime for foreign income and gains (FIG) will be available to individuals for their first four years of UK tax residence after a period of 10 years non-residence. Individuals who make a claim to use the new four- year FIG regime will not pay tax on FIG arising in those four years. From the fifth year of UK tax residence onwards, an individual will need to settle UK income tax and capital gains tax on a worldwide basis.
To claim the four-year FIG regime, individuals will need to quantify the amount of income and gains for which relief is being claimed under the regime. If amounts of FIG are not quantified and included in the return, then individuals will remain chargeable and subject to tax at their usual rates.
Should UK resident non-domiciled individuals consider Cyprus as an alternative option?
UK resident non-domiciled individuals might search for other jurisdictions to safeguard their overseas earnings from taxation. Cyprus non-dom tax regime is automatically applicable to foreign persons becoming tax resident in Cyprus. The non-dom tax regime effectively applies for a maximum of 17 years.
In order for an individual to be considered as a Cyprus tax resident, the following criteria need to be met:
(i) 183 days rule: The individual should reside in Cyprus for more than 183 days (in one calendar year);
OR
(ii) 60 days rule: The individual should reside in Cyprus for at least 60 days (in one calendar year) and the following conditions are fulfilled:
- The individual carries on a business in Cyprus (i.e. as a self-employed, or be 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 they are not considered a Cyprus tax resident for the specific year;
- The individual does not spend more than 183 days in any other country;
- The individual keeps a property-residence in Cyprus (either owned or rented);
- The individual must not be a tax resident in any other country.
The concept of domicile in Cyprus law originates from the Wills and Succession Law (Cap 195), and the Law provides that every person has a domicile of origin or a domicile of choice. Specifically, an individual's domicile of origin is that of their father's domicile (at birth). On the other hand, a person acquires a domicile of choice by establishing their home at any place with the intention of permanent or indefinite residence therein. Importantly, the domicile of origin prevails and is retained until a domicile of choice is in fact acquired.
The criteria of being a tax resident of Non-Dom status are as follows:
- A) The individual does not have their domicile of origin in Cyprus:
(i) A domicile of origin (i.e. the domicile received by an individual at birth); and,
(ii) 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).
What are the non-dom benefits?
According to the provisions of the Cyprus tax laws, the combined application of Cyprus' tax laws (i.e the Income Tax Law and the Special Contribution for Defence Law) allows Cyprus tax resident individuals who are not domiciled in Cyprus to be exempt on their worldwide dividends and interest, whether generated in Cyprus or not. It is important to consider that the exemption applies even if the dividends and interest derive from Cyprus. In addition, there is also an exemption from the special defence contribution tax for rental income, however, income tax is payable.
Consequently, non-UK domiciled high-net-worth individuals benefit significantly from these particular tax exemptions, as the majority of their income is usually generated from dividends, interest and rental income.
Cyprus tax system offers a number of benefits for tax residents in general, whether domiciled or not. For instance, under Cyprus' Capital Gains Tax Law, capital gains tax is only imposed on the sale of immovable property situated in Cyprus, and for the sale of shares in companies, when referring to immovable property situated in Cyprus. There is no capital gains tax in Cyprus for any other disposals; the disposal of any other securities (shares, bonds, tradable contracts etc.) are not subject to tax in Cyprus.
In addition, there is also a special tax regime for foreign pension income, which is exempt from tax up to €3,420 per year and taxed at only 5% above that threshold. Moreover, Cyprus does not have any inheritance tax or gift tax.
Relocation to Cyprus for UK non-doms wishing to be employed in Cyprus is considered a very attractive option as another important tax exemption available to all Cyprus tax residents (whether domiciled or not) is the exemption on income from services rendered outside of Cyprus for more than 90 days in a tax year. The services must be rendered to a non-Cypriot tax resident employer.
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.
