Cyprus Tax Residency for Individuals – Non-Domicile Status

A Cyprus tax resident is taxed on income accruing or arising from sources both within and outside the Republic of Cyprus, whereas a non-tax resident of Cyprus is only taxed on income accruing or arising from sources within the Republic of Cyprus.

Cyprus taxation scheme is based on the principle of residence and there are two main rules someone can choose to become a Cyprus tax resident: the 183 days rule and the 60 days rule.

183 days rule

Physical presence in Cyprus exceeding 183 days in a tax year (1st January to 31st December) will constitute tax residency for individuals. Therefore, if an individual is physically present in Cyprus for more than 183 days in a tax year, s/he will be considered a tax resident of Cyprus in that tax year. Consequently, if the individual is physically present in Cyprus for less than 183 days in a tax year, s/he will be considered to be a non-Cyprus tax resident in that tax year.

60 days rule

Tax residency in Cyprus can also be achieved if an individual resides at least 60 days in a tax year in Cyprus (1st January to 31st December), and if all of the following conditions are satisfied:

1. Not spend more than 183 days in any other country during a tax year;
2. Not be a tax resident of any other country;
3. Need to spend at least 60 days in Cyprus during a tax year;
4. Maintain a permanent home in Cyprus that is either owned or rented;
5. Carry on a business in Cyprus, be employed in Cyprus or hold an office in a Cyprus tax resident person at any time during the tax year. If the employment/business or holding of an office is terminated during the year, then the individual will cease to be considered a Cyprus tax resident for that tax year.

If an individual decides to incorporate a Cyprus company and become its shareholder and obtains a special tax residency under the 60 days rule or becomes a normal tax resident under the 183 days rule, even though the corporate tax of the Cyprus company will be 12.5%, the shareholder will be exempted from the 17% defence tax on the dividends of the Cyprus company.

A tax resident individual who is non-domiciled in Cyprus is exempt from tax on dividend and interest income except for certain General Health System (“GeSY”) contributions. Since 1 March 2019, dividend income is subject to GeSY contributions, at the rate of 1.7% from 1 March 2019 until the 29 February 2020, then increased to 2.65% from 1 March 2020, restricted to a cap of EUR 180,000 income annually.

Calculation of days

For the purposes of both the 183 days rule and the 60 days rule, days spent in and out of Cyprus are calculated as follows:

• The day of arrival in Cyprus is deemed to be a day in the Republic
• The day of departure from Cyprus is deemed to be a day outside of the Republic
• The arrival into the Republic and departure from the Republic on the same day is considered as a day in the Republic
• The departure from the Republic and the arrival in the Republic on the same day is considered as a day out of the Republic

If an individual chooses to stay only 60 days per year in Cyprus, his/her Cyprus company will need to have actual substance in the Republic of Cyprus. Moreover, for a Cyprus company to be considered as tax resident of Cyprus, one of the main things the tax authorites look into is whether the majority of the board of directors reside in Cyprus. If not, it is almost certain that the Cyprus company will not be considered as tax resident of Cyprus.

Please click here where we elaborate further about how a Cyprus company can achieve substance in Cyprus.

Definition of Non-Domiciled Persons

In accordance with the provisions of the Cyprus Wills and Succession Law, there are two kinds of domicile:

• Domicile of origin, which is the domicile received by an individual at birth; and
• Domicile of choice, which is the domicile acquired by an individual by establishing physical presence in a particular place with the intention to make it the place of permanent residence.

Foreigners who decide to move their personal tax residency in Cyprus, will automatically be considered as non-domiciled in Cyprus for a maximum of 17 years. For tax purposes, non-domicile persons who become Cyprus tax residents will now be completely exempt from Special Defence Contribution tax (“SDC”).

Irrespective of the domicile of origin or choice, individuals who have been tax resident in Cyprus for at least 17 out of the last 20 years prior to the tax year in question, will be deemed to be domiciled in Cyprus for the purposes of the SDC Law.

In the case of persons who have their domicile of origin in Cyprus, they will nevertheless be considered as non-domicile in the following cases:

• If they have acquired and maintain a domicile of choice outside Cyprus, provided that they were not tax residents in Cyprus for any continuous period of at least 20 consecutive years prior to the tax year in question; or
• If they were not tax resident in Cyprus for a period of at least 20 consecutive years immediately prior to the entry into force of the non-domicile provisions (i.e. between the years 1995 and 2014 inclusive).

Tax benefits of Non-Domiciled persons

• 100% Tax-Free Dividends (only General Health System contributions will be payable)
• 100% Tax-Free Passive Interest Income
• No Special Defence Contribution Tax on Rental Income

As per the provisions of the SDC Law, dividends and passive interest income (that is not earned in the ordinary course of business) earned by domiciled individuals who are tax residents in Cyprus are subject to SDC tax at the rate of 17% and 30% respectively, regardless of the source of the income (i.e. from Cyprus or from abroad). Interest received as a result of the carrying on of a business activity, including interest closely connected to the ordinary activities of the business, is not considered interest for the purposes of SDC. Interest from approved provident funds, Government Savings Certificates, Government Bonds and deposits with the Housing Finance Corporation, as well as interest earned by approved provident funds, is subject to defence contribution at 3%.

Rental income is also subject to SDC tax at the rate of 3% on 75% of the gross amount.

Therefore, non-domiciled tax residents will enjoy dividend, interest and rental income free from SDC tax in Cyprus. SDC tax applies only for individuals who are both Cyprus tax resident and domiciled in Cyprus.

Taking the above into consideration, non-domiciled tax residents will have dividend, interest and rental income completely free from SDC tax in Cyprus, except for certain GeSY contributions. Since 1 March 2019, dividend income is subject to GeSY contributions, at the rate of 1.7% from 1 March 2019 until the 29 February 2020, then increased to 2.65% from 1 March 2020, restricted to a cap of EUR 180,000 income annually.

Other Cyprus tax advantages for individuals

• Interest and dividends are exempt from Cyprus income tax (with the exception of certain GeSY contributions) for non-domicile tax residences and subject only to SDC in the case of domiciled tax residents.
• Profit from sale of shares and other qualifying titles is specifically exempt from Cyprus taxation, provided that the underlying assets do not include immovable property located in Cyprus.
• First €19,500 of taxable income is tax exempt. Any taxable income in excess of this amount is taxed at progressive rates ranging from 20% to 35% (for taxable incomes over €60,000).
• 50% exemption for remuneration from employment exercised in Cyprus by persons who were tax resident outside Cyprus for at least 15 consecutive years before commencement of their employment in Cyprus. The exemption applies for a maximum period of 17 years commencing from the year of employment, if such income exceeds €55,000 per year.
• In case of Cyprus remuneration which is less than €55,000, a 20% exemption is granted, up to a maximum of €8,550 – whichever is lower – for a maximum period of 7 years commencing from the 1st January of the year following the year of employment.  
• 100% exemption on remuneration for salaried services rendered outside Cyprus for more than 90 days in a tax year to a non-Cyprus resident employer.
• In case of Cyprus immovable property acquired up to 31st December 2016, profit from subsequent future disposal of such property will be exempt from the 20% Capital Gains Tax.
• Pension received in respect of past employment outside Cyprus is taxed in Cyprus at the flat rate of 5% for amounts in excess of €3,420 per year.
• 100% exemption on lump sum repayments from life insurance schemes or from approved provident funds.
• No Capital Gains Tax on the sale of immovable property located outside Cyprus.
• No inheritance tax, no wealth tax, no gift taxation.
• In case of non-domiciled resident individuals who are beneficiaries to a Trust, such individuals would be exempt from tax in Cyprus, to the extent that the income at the level of the Trust or distribution from the Trust effectively derives from interest or dividends.

Please feel free to contact us if you have any question and to help you assess your current Tax Residency status and assist you in obtaining the right Tax Residency.

DISCLAIMER:

PARIS MAVRONICHIS & CO LLC accept no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

The material contained herein is provided for informational purposes only and does not constitute legal advice nor is it a substitute for obtaining legal advice from an advocate.  Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced advocate. PARIS MAVRONICHIS & CO LLC will be glad to assist you in this respect.