Living in Cyprus: A scrumpTAXious Proposition
Costas Tsielepis & Co Ltd, Chartered Accountants
07 January, 2016
Cyprus has always been an attractive tourist destination, as well as a great place to live and work and call home.
A 'jewel' of the Mediterranean and the mythical birthplace of Aphrodite, the island of Cyprus combines a rich cultural, historical and archaeological heritage with great natural beauty and a friendly, inviting population. Renowned for its gorgeous weather and beaches, amazing food, breath-taking sceneries and an abundance of quality housing, the island has so far won over the hearts of over 180.000 foreign nationals who live and work here, making up 22% of the country's total population.
Now, Cyprus has further reinforced another aspect of its allure: That of personal taxation.
To move or not to move?
When considering a move to another country there are many things to think about apart from the initial thoughts of 'am I doing the right thing?'
Depending on your reasons for moving to Cyprus, whether it is for business purposes, for a new start with your whole family, to retire or whether you wish to find a career opportunity, this publication aspires to offer a detailed rundown of the tax aspects of such a move.
What's in it for me?
Cyprus' incentives for personal tax residency are profound. With its ideal geographical location, EU membership, reliable legal system, extensive double-tax treaty network, one of the lowest corporate tax rates of 12,5%, with favourable personal tax advantages through the non-domicile rules, its well-cultured and developed workforce and business-friendly environment, Cyprus is an ideal country for private domiciliation.
With regard to personal taxes, Cyprus has one of the lowest top statutory personal income tax rate of 35% for amounts exceeding €60.000 annually and no tax on income of up to €19.500. At the same time, it also offers a number of very attractive personal tax incentives, through tax exemptions and deductions, in order to attract high wealth individuals.
Below is an analysis of the main provisions of Cyprus' personal income tax regime as well as the key tax incentives provided to individuals who wish to relocate to Cyprus.
1. TAX RESIDENCY AND DOMICILE
The key to understanding personal taxation in Cyprus lies with the important concepts of 'tax residency' and 'domicile'.
A Cyprus tax resident physical person is any person who is physically present in Cyprus for more than 183 days in a calendar year. It does not matter the purpose of being in Cyprus, nor is it a condition that a Cyprus tax resident person owns or rents accommodation in Cyprus. It is literally based on the number of days without any further conditions.
In calculating the days:
• the day of departure is considered a day outside of Cyprus
• the day of arrival is considered a day in Cyprus
• arriving in Cyprus and departing on the same day is considered a day in Cyprus, and
• departing from Cyprus and arriving on the same day is considered a day outside of Cyprus.
According to the domicile concept under the tax legislation, every person has at any given time either:
- the domicile received by him/her at birth ('domicile of origin'), or
- the domicile (not being the same as the domicile of origin) acquired or retained by him/her by his/her own act ('domicile of choice').
Under (i) above, the domicile of origin of a legitimate child is that of the father's, or in the case of an illegitimate child, that of the mother's.
Under (ii) above, a person may acquire a domicile of choice by establishing his/her home at any place in Cyprus with the intention of permanent or indefinite residence.
For tax purposes however, a non-domiciled individual will be deemed as domiciled in Cyprus if he/she has been a Cypriot tax resident for at least 17 out of the last 20 years prior to the relevant tax year (deemed domicile rule).
An individual who has a domicile of origin in Cyprus, may still qualify as non-domiciled subject to certain conditions, namely to have not been a Cyprus tax resident for a consecutive period of 20-years.
2. TAXABLE INCOME
A tax resident individual, irrespective of his/her domicile status (you may refer to paragraph 4 below for more information relating to domiciliation), is subject to income tax on his/her worldwide income, although there are a number of favourable deductions and exemptions in the legislation as explained below.
A non-tax resident individual is subject to income tax on income accruing or arising only from sources within Cyprus and is exempt from any Cyprus tax on dividend and interest income.
However, where a person is non-domiciled in Cyprus, but is a Cyprus tax resident, the following main benefits exist, for a period of at least 17 years, i.e. until the person is deemed domiciled (see above):
- no Cyprus tax is payable on receipt of any dividend income from anywhere in the world (although on foreign dividends, the source country may apply withhold taxes);
- the provisions whereby a Cyprus tax-resident company must declare at least 70% of its after-tax accounting profits within two years (known as the 'deemed distribution rules'), do not apply to that proportion of shareholding beneficially owned by a non-Cyprus domiciled individual;
- no Cyprus tax is payable on receipt of interest income from anywhere in the world (although on foreign interest, the source country may apply withhold taxes);
3. INCOME TAX RATES
Taxable income, i.e. gross income less exemptions less deductions, up to €19.500 is exempt from income tax. The taxable income exceeding this amount is subject to progressive tax rates ranging from 20% to 35% (the higher rate being for taxable income exceeding €60.000).
The following exemptions are available for individuals moving to Cyprus to commence employment:
20% of the employment income, up to a maximum of €8.550 annually
This exemption applies until the 2020 tax year inclusive, but cannot be granted for a total period exceeding five years. Previously, the exemption was only available for a total period of three years. The exemption applies from the start of the year following the year of employment.
50% of the employment income
A 50% exemption applies to salary income of a non-tax resident individual, who takes up residence in Cyprus to work for an employer in Cyprus. The exemption applies for a period of 10 years starting from the first year of employment provided that the annual income of the employee exceeds €100.000 per annum; and
- the exemption will not be available where the individual was a Cyprus tax resident in any three of the previous five tax years preceding the commencement of employment in Cyprus, although this only applies to employments that commence on or after 1 January 2015; and
- the exemption will not be available where the individual was a Cyprus tax resident in the year preceding the year of commencement of employment in Cyprus, although this only applies to employments that commence on or after 1 January 2015; and
- the exemption will be granted for any tax year in which the annual total gross emoluments from the employment exceed €100.000, regardless if in a specific tax year, these were less than €100.000. This is subject to the total emoluments exceeding €100.000 at the start of the employment and the Commissioner of Taxation being satisfied that the fluctuation in the total gross emoluments is not solely to obtain the exemption.
It is noted that where an individual is benefiting from the 50% exemption, this individual cannot benefit at the same time from the 20% exemption, with a maximum of €8.550, as stated above.
- The pension can be taxed under the progressive income tax rates; or
- The first €3.420 of the foreign pension will be tax free, with the remaining balance being taxed at a flat rate of 5%.
- donations to charities that have been approved by the Department of Taxation ;
- payments relating to special contribution;
- payments relating to contributions to the Social Insurance Fund and similar contributions paid abroad;
- payments relating to premiums for life insurance and contributions to pension plans. There is an overall limit of one sixth of taxable income and a specific limit for life insurance of 7% of the insured capital sum.
- payments relating to premiums paid to approved medical funds are tax deductible, provided that they do not exceed 1% of the gross salary income.
- Transfer by reason of death.
- Gifts to relatives within the third degree of kindred.
- Gift to a company of which the shareholders are and continue to be members of the disposer's family for five years after such gift.
- Gift by a company, of which all the shareholders are members of the same family, to any of its shareholders when the property gifted had been acquired by the company as a gift. The property must remain in the hands of the donee for a period of at least three years.
- Gift to the Republic or to a local authority for educational or other charitable purposes or to approved charitable institutions.
4.1 Income tax exemption for overseas employment
Where an employee is Cyprus tax resident, then salaries from rendering services outside Cyprus to a non-resident employer or to an overseas permanent establishment of a resident employer for more than 90 days in a tax year are exempt from income tax.
In order for the 90 day rule to apply there must be an employee/employer relationship.
4.2 Exemptions on gains arising from the disposal of securities
Any gains arising from the disposal of shares, bonds and other similar equity financial instruments are exempt from income tax.
Any income from a buy-back or redemption of units in funds is also exempt from income tax.
4.3 Exemption from capital gains tax on sale of real estate
Profit arising from the disposal of immovable property situated outside Cyprus is exempt from any taxation (including capital gains tax) in Cyprus, although the foreign property may be subject to tax in the jurisdiction where it is located.
Furthermore, a specific capital gains tax exemption is introduced on profits relating to the disposal of an immovable property located in Cyprus, if this property is acquired within the period 16 July 2015 and 31 December 2016. The date of the future disposal is irrelevant.
5. ADVANTAGES AVAILABLE TO PENSIONER EXPATRIATES ON PENSION INCOME
A Cyprus tax resident receiving a pension from abroad can choose one of the following two options to be taxed on the pension income, the choice being available every year:
Any lump sum received as a retirement gratuity is exempt from tax.
6. SOCIAL SECURITY CONTRIBUTIONS
Employees should contribute 7,8% of their salary up to a monthly ceiling of €4.533 (for 2015) to the Social Insurance Fund. No employee contributions are due to the Redundancy Fund and the Training Development Fund.
7. SPECIAL CONTRIBUTION
Private sector employees, self-employed persons and pensioners are obliged to pay a special contribution. The taxable base for the contribution is the gross monthly salary or pension. The rate of the contribution ranges from 0% (on gross monthly salary or pension income up to €1.500) to 3,5% (on gross monthly salary or pension income over €3.500) with a minimum contribution of €10. It is expected that the special contribution will be abolished by 31/12/2016.
In general, the below deductions are available for Cyprus tax resident individuals:
9. WEALTH, GIFT, INHERITANCE, ENDOWMENT AND EXIT TAXES
Cyprus generally does not impose wealth, gift, inheritance, endowment or exit taxes.
9.1 Wealth Tax
There is no net wealth tax in Cyprus.
9.2 Gift Tax
There is no gift tax in Cyprus. The following gifts or donation of real estate property are exempt from Capital Gains Tax:
9.3 Inheritance Tax
There is no inheritance tax in Cyprus. Income received from individuals by way of an inheritance is not subject to any taxation in Cyprus.
9.4 Endowment Tax
There is no endowment tax in Cyprus. The income arising from a scholarship, exhibition or any other educational endowment held by an individual receiving full-time instruction at a university, college, school or other recognized establishment is exempt.
9.5 Exit Tax
Cyprus does not have an exit tax.
10. HOW DOES IT WORK? PRACTICAL EXAMPLES
Example 1 - Dividend and Interest Income
A non-Cyprus domiciled individual relocates to Cyprus in December 2015. During 2016, while being a Cyprus tax resident, she received €150.000 dividends from Cyprus companies and €750.000 from foreign companies.
She also received €15.000 interest income from her Cypriot personal savings account and €25.000 interest income from a notice account held with a foreign bank. No foreign tax was withheld on the interest income received from the foreign banks.
The individual did not have any other income.
The total interest and dividends income received will be exempt from Cyprus tax.
Dividend Income – Cyprus sourced
Dividend Income – Overseas sourced
Total Dividend Income
Interest Income – Cyprus sourced
Interest Income – Overseas sourced
Total Interest Income
Total income which is exempt from taxation (both income tax and special contribution for defence) in Cyprus
Total Tax payable in Cyprus on dividend and interest income
Example 2 - Remuneration
Mr. Ivanovic relocated to Cyprus in December 2014 and started working in Welcome-To-Cyprus Ltd from 1/1/2015 as a Senior Regional Manager earning an annual gross salary of €110.000. His annual salary of €110.000 relates to employment services rendered within Cyprus.
Mr. Ivanovic also travelled to Dubai, of the UAE, to work for Welcome-To-Cyprus Ltd's Dubai permanent establishment for an aggregate period of 4 months. During the period of the overseas work in Dubai, Mr. Ivanovic received an extra salary of €25.000 and an overseas special allowance of €7.500.
Calculation of Mr. Ivanovic' 2015 income subject to tax in Cyprus is as follows:
Basic salary relating to Cyprus employment
Salary relating to UAE employment
Overseas special allowance relating to UAE employment
50% of the Cyprus sourced remuneration
Exempt overseas remuneration – 90 days rule
Social Insurance Contributions (7.8%x€54.396*)
Total Taxable Income
Personal Income Tax Calculation
From €0 up to €19.500
From €19.501 up to €28.000
From €28.001 up to €36.300
From €36.301 up to €60.000
From €60.001 and over
Total Income Tax, special contribution and social insurance
11. SUMMARY – TAXATION OF MAIN SOURCES OF INCOME OF CYPRUS TAX RESIDENT INDIVIDUALS BUT NON-DOMICILED
Source of income
Income Tax Law
Special Contribution for Defence Law
Taxable in Cyprus but exemptions could apply
Taxable in Cyprus (20% allowance on gross rent available)
Taxable in Cyprus – 80% exemption may apply under conditions
Taxable in Cyprus
Taxable in Cyprus, exempt in case of a foreign permanent establishment
Taxed at normal rates or optionally at 5% (reduced by €3.420)
TAXATION DEPARTMENT, COSTAS TSIELEPIS & CO LTD
The Taxation Department of Costas Tsielepis & Co Ltd is comprised of tax professionals with decades of experience in the field in Cyprus and abroad. Their in-depth understanding of tax concepts, the workings of double-tax treaties, their experience and knowledge of the Cyprus local tax legislation and its usages, their detailed comprehension of indirect tax matters in Cyprus and the EU, all position them uniquely to offer comprehensive and authoritative advice to their clients.
The Department's consultants use real-world experience and technical expertise to assess, analyse and then formulate forward-thinking tax effective solutions that preempt potential short and long-term consequences, thus helping clients implement decisions that can deliver long-lasting value to their personal and businesses plans and strategies.
The Taxation Department of Costas Tsielepis & Co Ltd and our network of associates in Cyprus and worldwide are at your disposal for more information and advice on the above and other tax matters.
For more information please contact:
The information in this document is intended as a guide only and every reasonable effort was made to ensure the accuracy and timeliness of the information. In no circumstances shall we be legally bound by any information contained in this document, and shall accept no liability in respect of loss caused by reliance on such information.
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