Cyprus has been a member of the European Union since 2004 and adopted the euro in 2008. The country is known for its well-educated workforce, good business infrastructure and availability of investment opportunities in sectors such as shipping, energy and real estate. All of this, along with the benefits of a great lifestyle, make the country hugely attractive for high-net-worth individuals and top calibre employees to work and settle with their families. Cyprus also offers a number of tax incentives to high-net-worth individuals who want to relocate there.
Cyprus tax residents
Any individual can qualify as a tax resident of Cyprus if they are physically present in the country for over 183 days in total during a calendar year (tax year).
Even if the concerned person spends less than or equal to 183 days in a given year, as of 1 January 2017, they can still qualify as a tax resident under the so-called ’60-day’ rule provided that they fulfil the following conditions in the same tax year:
- they reside in no other country for one or more periods for an aggregate period of more than 183 days;
- they are not an existing tax resident of another country;
- they have a permanent rental or purchased home in Cyprus;
- they reside in Cyprus for one or more periods for at least 60 days; and
- they own a business in Cyprus or are employed by a Cyprus-resident organisation. If the employment contract lapses or the person is terminated from office in a tax year, they will cease to be considered a Cyprus tax resident for that year.
Taxable income of foreign nationals and non-residents
Tax residents in Cyprus are subject to taxes on all chargeable income accrued or derived from all sources in Cyprus and abroad. Special defence contribution is a local tax which does not apply to non-residents and applies to actual and deemed income arising from passive sources (ie, interest, dividends and rental income). Income derived from the sale of Cyprus-based real estate is subject to capital gains tax.
The income of foreign nationals from employment, regardless of whether they are tax resident, is subject to income tax. However, this income must derive from sources in Cyprus. Pensions from such employment are also taxable along with rental income from immovable property in Cyprus. However, foreign nationals are exempt from paying:
- income tax on interest and dividend income; and
- capital gains tax on income from the sale of real estate outside Cyprus.
Main tax benefits
For 10 years starting from the first year of their employment contract, foreign nationals who earn €100,000 per annum from employment in Cyprus are eligible for a 50% tax exemption on their income irrespective of the status of their tax residency or domicile.
This exemption is applicable only where an individual was not:
- resident in Cyprus prior to their employment; and
- a Cyprus tax resident for at least three of the five years preceding the year of employment.
The exemption is not granted if emoluments drop below €100,000.
Individuals who were not resident in Cyprus before the commencement of their employment are allowed a 20% annual reduction in income tax (subject to a maximum deduction of €8,550) on emoluments below €100,000. However, this benefit will end in 2020 and does not commence immediately, but from 1 January of the year following employment. In other words, this deduction will be effective only for 2020 if employment commenced in 2019.
A 90-day rule exemption also exists, whereby remuneration from salaried services rendered outside Cyprus for more than 90 days in a tax year to a non-Cyprus resident employer or a foreign permanent establishment of a Cyprus resident employer are exempt from taxation.
The 90 days need not be consecutive provided that:
- they fall within the same tax year;
- the individual remains a Cyprus tax resident (ie, they must spend between 90 and 183 days abroad); and
- an employer-employee relationship must exist (ie, sole traders and freelancers cannot benefit from this exemption).
Further, any gratuity income on retirement is exempt from taxation. If a foreign national receives foreign pension income, they can elect to have it taxed:
- in the same manner as a Cyprus-sourced pension; or
- separately under a special mode, whereby the first €3,420 are tax free and any balance is taxed at a flat rate of 5%.
Any compensation received for death or injury is also exempt from taxes.
Gains from the disposal of shares, bonds and other such financial instruments are also exempt from tax. Cyprus imposes no estate duty, gift tax, wealth tax or inheritance tax on foreign nationals (for further details please see Estate and gift taxes in Cyprus – planning is needed).
The country is also party to more than 65 tax treaties, which allows it to charge zero or minimal withholding tax rates on incomes such as pensions, royalties, dividends and interest received from overseas.
If an individual is considering relocating to Cyprus, expert advice should be taken from lawyers with respect to the Cypriot and cross-border tax implications arising from relocation. Many sources of income that are exempt from taxation in Cyprus might be subject to contributions to the General Health Care System at different rates.
Author: AGP Law Firm (A.G.Paphitis & Co. LLC)