Cyprus Tax Residency and Non – Dom rules

Cyprus Tax Residency and Non – Dom rules

Cyprus Tax Residency and Non – Dom rules

Cyprus Tax Residency and Non – Dom rules

About Cyprus

Cyprus boasts a rich, complex history spanning over 9000 years. Its strategic location in the eastern Mediterranean at the crossroads of Europe, Asia and Africa played a very important role. Over the centuries various civilizations (Mycenaeans, Assyrians, Persians, and Romans) have inhabited the island, each leaving a lasting mark on its culture and architecture. Its natural resources, particularly copper and its fertile land which supported agriculture both influenced its economic prosperity. All these elements – trade, resource wealth and agriculture and location – collectively influenced Cyprus’s development over the years.

In more recent time and with more than 40 years of experience as an international business centre, the following factors make Cyprus one of the most attractive international business hubs in the world for doing international business activities.

Business factors

  • Business friendly
  • English language is widely used as the main business language but one of the biggest advantages of Cyprus is the legal system which is based to the English law making it very effective and suitable for entrepreneurs and compliant with EU laws and regulations
  • Highly educated workforce
  • EU Member State
  • Low set up and operating costs
  • Efficient business environment accomplished by simple administrative procedures
  • Favorable tax system

Location and Family factors

  • Strategic geographical location. Cyprus is located in the eastern Mediterranean Sea, at the crossroads of three continents, Europe, Asia and Africa
  • Advanced transport and telecommunications network
  • High Standard of Living
  • A beautiful country with a mild climate, no crime rate, hospitable population, a fantastic cuisine and tasty fruits and vegetables

The tax system at a glance

Cyprus today constitutes a world service center. Businesspeople benefit from the country’s simple tax legislative framework with competitive tax rates, also in line with the E.U. acquis and governed by a wide range of double taxation agreements with other countries. Investors seeking an EU compliant, tax efficient and stable tax planning environment will find that the island offers considerable opportunities to minimize tax exposure. One of the reasons Cyprus is so attractive, is its low corporate tax– at just 12.5%. Apart from this, the investor also gains access to some other great tax advantages.

  • Main features of the tax system
  • Taxation is based on residency status (management and control test or incorporation test). The incorporation test only applies only if Cyprus incorporated companies are not tax resident in any jurisdiction.
  • Non-tax residents are only taxed on their income accrued or derived from sources in Cyprus.
  • Full tax group relief (75% holding)
  • Full adoption of the EU-Parent- Subsidiary Directive
  • Rigid appliance of all relevant EU directives
  • Double Taxation Avoidance Agreements fully apply
  • 0% capital gains tax on profits realised on the sale of securities
  • 0% tax on the trading of securities
  • 0% tax on profits from the sale of property or sale of shares situated outside Cyprus
  • 0% withholding tax on dividends, interest and royalties
  • Dividend income is exempt from taxation
  • Notional interest deduction (NID) available for new capital introduced
  • No profits on PEs operating abroad
  • FX Gains are tax exempt except of FX Gains arising from trading in FX Currencies and related derivatives
  • Non-domiciled individuals are exempt from tax on dividend and interest income for a period of 17 years.
  • Foreign sourced dividends are generally exempt from tax when received by Cypriot tax resident companies.
  • A tonnage tax system for qualifying shipping companies
  • Intangible Property (IP) Regime in line with nexus principle. Up to 80% tax exemption for qualifying income and expenditure from the R&D and licensing of qualifying intellectual property. The Cyprus company pays only 2.50% tax on all profits from possession or trading in Intellectual Property rights (patents, trade names, trademarks, music or sports or scientific rights)
  • A network of tax treaties concluded with other countries for the avoidance of double taxation.
  • Tax exempt reorganizations

Tax residency rules for individuals

The 183 days rule

Cyprus tax residents are taxed on all chargeable income accrued or derived from all sources in Cyprus and abroad. Non-tax residents are only taxed on their income accrued or derived from sources in Cyprus.

An individual is tax resident in Cyprus if he spends in Cyprus more than 183 days in any one year.

The 60 days rule

With effect as from 1 January 2017 the “60 day rule” in addition to the “183 day rule” for tax resident individuals of Cyprus was voted on 14/07/2017. Under this law, an individual will be considered as tax resident in Cyprus if the individual satisfies either the “183 day rule” or the “60 day rule”.  The “60 day rule” applies to individuals who in the relevant tax year  ·                reside in Cyprus for one or more periods which add up to at least 60 days and·                do not reside in any other State for a period exceeding 183 days in aggregate and·                are not tax resident of another state and·                have other defined Cyprus ties. To satisfy this condition the individual must carry out any business in Cyprus and/or be employed in Cyprus and/or hold an office (director) of a company tax resident in Cyprus at any time in the tax year, provided that such is not terminated before the end of the tax year and ·                the individual must maintain in the tax year a permanent residential property in   Cyprus which is either owned or rented by the individual

Days in and out of Cyprus are calculated as follows:

  • (a) The day of departure from Cyprus counts as a day of residence outside Cyprus.
  • (b) The day of arrival in Cyprus counts as a day of residence in Cyprus.
  • (c) Arrival and departure from Cyprus in the same day counts as one day of residence in Cyprus.
  • (d) Departure and arrival in Cyprus in the same day counts as one day of residence outside Cyprus.

Non – domicile rules for individuals

According to the provisions of the Cyprus income tax law, an individual who is a tax resident of Cyprus under the provisions of the Income Tax Law (either under the 183 days rule or the 60 days rule) but is regarded as “non domiciled” in the Republic of Cyprus, will be exempt from the provisions of the Special Defence Contribution (SDC) Law.

As per the SDC Law, dividends and interest income earned by individuals who are tax residents and domiciled in Cyprus, are both subject to tax at the rate of 17%, regardless of the country of origin of the income (i.e. from Cyprus or from abroad). Rental income is subject to tax at the rate of 3% on 75% of the gross amount. Therefore, tax residents but non-domiciled individuals will enjoy dividend, interest and rental income free from SDC tax in Cyprus.

The new provisions define domicile in accordance with the rules of the Wills and Succession Law:

  1. A domicile of origin (i.e. the domicile received by an individual at birth); and
  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).

A person who has a domicile of origin in Cyprus will be treated as “domiciled in Cyprus” for SDC purposes with the exception of; a) an individual who has obtained and maintained a domicile of choice outside Cyprus under the provisions of the Wills and Succession Law, provided that this individual was not a Cyprus tax resident for a period of at least 20 consecutive years prior to the tax year in question; or b) an individual who was not a Cyprus tax resident for a period of at least 20 consecutive years immediately prior to the entry into force of the introduced provisions (i.e. prior to 16 July 2015).

Irrespective of a domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled in Cyprus for SDC purposes.

Domiciled tax resident individuals

Type of income Income Tax SDC
Dividends Exempt Taxable
Interest Exempt Taxable
Rental income Taxable Taxable

Non – Domiciled tax resident individuals

Type of income Income Tax SDC
Dividends Exempt Exempt
Interest Exempt Exempt
Rental income Taxable Exempt

 Personal Income Tax in Cyprus

Annual earnings of an individual up to EUR 19.500 are not taxable in Cyprus. Earnings over EUR 19.500 are taxed as per the Cyprus Income Tax Law, at a rate of 20 – 35 %, where the highest tax rate of 35 % is applied for the portion of annual earnings over EUR 60.000.

Personal tax rates

Chargeable income Tax rate Accumulated tax
%
0 – 19.500 Nil Nil
19.501 – 28.000 20 1.700
28.001 – 36.300 25 3.775
36.301 – 60.000 30 10.885
over 60.000 35

Exemptions for first employment in Cyprus

50% exemption rule under article 8(23A)

Individuals who take up first employment in Cyprus as from 1 January 2022 onwards, will be eligible to exempt 50% of their employment income, provided the following conditions are satisfied

  1. The individual has not been tax resident in Cyprus for at least 15 consecutive years prior to the commencement of the first employment in Cyprus and the individual commenced the provision of salaried services in the Republic either to an employer resident in the Republic or to an employer non-resident in the Republic
  2. The exemption is available for a maximum period of 17 years (lifetime exemption) or until the repeal of the respective provision of the law (whichever is sooner) starting from the year of the commencement of the first employment in Cyprus
  3. The 50% exemption can be claimed in any year during the lifetime exemption period in which the income from first employment in Cyprus exceeds €55.000, irrespective of whether in any year the annual employment income is reduced below €55.000, provided that in the first or second year of employment in Cyprus the Income exceeded the threshold of €55.000 per annum and the Tax Commissioner is satisfied that the fluctuation in the annual remuneration is not an arrangement put in place for the purposes of obtaining this exemption.
  4. The 50% exemption cannot be claimed in any tax year during which the income from first employment in Cyprus is below €55.000.

Individuals that commenced employment in Cyprus prior to the publication of the law amending Article 8(23A) (ie 30/06/2023) and were eligible for this exemption in accordance with the provisions of the previous version of Article 8(23A), can still continue to benefit the exemption, provided that all relevant conditions previously applicable are still in place.

In this case, the individual will continue to claim the 50% employment income exemption as per the provisions of the previous version of the law for the remaining available years as from the commencement of the first employment in Cyprus. The exemption benefit ceases to apply if there is a change of employer.

Grandfathering provisions

Irrespective of the year of commencement of the first employment in the Republic, the provisions of the new Article 8(23A) apply as from 1 January 2022 and until the completion of the 17 consecutive tax years or until the provision of the law is revoked (whichever is sooner), starting from the tax year in which the first employment in the Republic commenced, for an individual who has continuous employment in the Republic from the year of commencement of employment up and including the tax year 2021 and who for a period of at least 15 consecutive years, immediately preceding the commencement of first employment in the Republic was not a tax resident of the Republic and

  1. Benefited from the exemption provided in the Article 8(23) or
  2. Whose first employment in the Republic commenced between the years 2016 and 2021 with remuneration that exceeded €55.000 per annum or
  3. Whose first employment in the Republic commenced between the years 2016 and 2021 with remuneration that did not exceed €55.000 per annum and within a time period of 6 months from the date of publication in the Official Gazette of the Republic of the Income Tax (Amending) (No. 6) Law of 2022 (26/07/2022), the remuneration exceeds €55.000.

20% exemption rule under article 8(23A)

20% of the remuneration of employees, whose first employment in Cyprus commenced from 26 July 2022 onwards and up to year 2027, is exempt from income tax for a period of seven years, provided the employees, immediately before the commencement of their employment in Cyprus, were employed for a period of at least three consecutive tax years outside Cyprus by a non-resident employer. The exemption will be first granted in the tax year following the tax year of commencement of employment. The law does not require the individual to become a Cyprus tax resident to benefit from the new 20% exemption, nor the employer to be a Cyprus tax resident employer. Individuals will not be granted this exemption, if they are granted the 50% exemption mentioned below.

Other exemptions

  1. The whole amount of the remuneration from salaried services rendered outside Cyprus for more than 90 days in a tax year to a non-Cyprus resident employer or to a foreign permanent establishment of a Cyprus resident employer.

The period the individual is abroad does not need to be continuous

There must be an employer / employee relationship

The individual should be a Cyprus tax resident

  1. Lump sum received by way of retiring gratuity, commutation of pension or compensation for death or injuries.
  2. Overseas pensions are exempt from tax up to the amount of €3.420 and taxed at the rate of 5% thereafter. The taxpayer may opt to be taxed in the normal way, where this special mode of taxation of income results in a higher tax liability (this election can be made from year to year).
  3. Certain employees and executives of Cyprus investment fund management companies or internally managed investment funds may opt for a different mode of personal taxation.

Subject to conditions, their variable employment remuneration which is effectively connected to the carried interest of the fund managing entity may, through an annual election, be separately subject to Cyprus tax at the flat rate of 8%, with a minimum tax liability of €10.000 per annum. The special mode of taxation is available for a period of 10 years.

  1. Capital gains

Capital gains tax is only imposed on the disposal of immovable property situated in Cyprus, as well as on the transfer of shares directly or indirectly held in companies (other than listed shares) in which the underlying asset is immovable property situated in Cyprus and at least 50% of the fair market value of the shares is derived from the immovable property.

The sale of immovable property situated outside Cyprus is exempt from capital gains tax.

The Cyprus Social Insurance and National Health Insurance Systems at a glance

Any person who is undertaking employment activities in Cyprus is subject to social insurance contributions in Cyprus.

  • The social insurance contributions for 2024 are capped to monthly earnings of €5.239 and annual earnings of €62.868. The social insurance contribution rate is 8,8% for the employee and 8,8% for the employer (for a total of 17,6%). The employer is also liable for a contribution of 1,2% to the Redundancy Fund, 0,5% to the Training and Development Fund and 2% to the Social Cohesion Fund. The cap mentioned above does not apply to the Social Cohesion Fund contributions. Instead, the Social Cohesion Fund contributions are applied on the gross remuneration received.
  • Foreign nationals will be liable for social insurance contributions to the Cyprus Social Insurance System, if they are physically exercising their employment activities in Cyprus.
  • An EU national may be eligible to remain insured in the Social Insurance System of the Member State (MS) of his/her employer for a period up to 24 months subject to conditions.
  2024
Employee contributions %
• Social insurance*** 8,8
Other employer’s contributions  
• Social insurance 8,8
• Social cohesion fund * 2,0
• Redundancy fund ** 1,2
• Industrial training fund ** 0,5
• Holiday fund (if is not exempt) ** 8,0

 

  • The SIC rate will increase by 0.50% every five years until it reaches 10,70% as from 01/01/2039.
* Social cohesion fund is calculated on total emoluments and has no maximum level
** Restricted to the maximum level as with the social insurance contributions

 

  • The contributions of self-employed persons are 16,60 (2019-2023: 15,6) per cent of income. The rate will increase by 1% every five years until it reaches 20,40% as from 01/01/2039.

The National Health System Law of 2001 as amended (89(I)2017) states the Contribution rates to the GHS which started on 01/03/2019 and increased in 2021. Contributions are to be applied to a maximum level of income (including interest, dividends, rental income) of €180.000 per annum.

 

Category Applied on As from 1/6/2020 Current
Employees Own emoluments 2,65%
Employers Employees emoluments 2,90%
Self employed Own income 4,00%
Pensioners Pension 2,65%
Physical persons earning income e.g. rent, dividends, interest and other income

 

rent, dividends, interest and other income 2,65%
Any person that holds or exercise an office Officers’ remuneration 2,65%
The Government or Natural / Legal person responsible for the remuneration of persons holding an office

 

Officers’ remuneration 2,90%
The consolidated fund of the Republic

 

On the emoluments / pensions 4,70%

Apserou Shiaka & co will be happy to consult and assist you with the set-up of your Cyprus Company’s operative place of business.
Maria Shiaka
Apserou Shiaka & co ltd

November 2024

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