- November 1, 2017
- Posted by: Panos
- Category: Accounting & Finance, Taxation
International, tax exemptions on worldwide income
The introduction of the non-domiciled (non-dom) tax resident status in the Cyprus tax system in 2015 gives additional incentives to high-net-individuals to relocate to Cyprus or to continue carrying out their business operations or investment from the Republic of Cyprus. The non-domiciled status provides tremendous opportunities to businessmen that want to achieve optimum tax planning and savings.
In a nutshell the effect of the amendment is that a Cyprus tax resident, non-dom individual will be exempted from Special Defence Contribution tax (SDC) and in consequence not pay any tax on his income (besides income tax).
What is the concept of domicile?
The introduction of the non-domicile rules (voted on the 9th of July 2015, among other tax reforms) came into force on the 17th of July 2015.
Previously, a distinction was made between non tax residents and tax residents:
- Non tax residentswere entitled to most of the tax advantages the Cyprus tax regime had to offer.
- However, tax residentshad to pay taxes on all of their worldwide income, including Special Defence Contribution Tax (17% on their dividends, 30% on the interest they earned and 3% on 75% of their rental income), in Cyprus.
As a result an individual may be resident, but not domiciled in Cyprus.
Please note that tax residents that are not domiciled in Cyprus are exempted from the Special Defence Contribution Tax.
The concept of “domicile” pre-existed in the Cypriot legislation, in the Wills and Succession Law, where it was used to determine which jurisdiction should govern the succession of a deceased person.
- The concept of domicile is distinct from the concept of residence, nationality or citizenship.
- A person must have one (and only one) domicile at any given time.
In the law a distinction is made between “domicile of origin” and “domicile of choice”.
- Domicile of origin is acquired at birth.
- Domicile of choice is retained by the individual who intends to live permanently and/or indefinitely in one particular place.
According to the relevant law, a person is deemed domiciled in Cyprus
- by virtue of having been tax resident in Cyprus for 17 of the last 20 years prior to the relevant tax year independently of his/her domicile of origin.
- by virtue of the fact that his/her domicile of origin is in Cyprus, unless:
- the person has acquired domicile of choice in another country, provided that he/she has not been tax resident in Cyprus for a period of 20 consecutive years prior to the relevant tax year.
- the person has not been tax resident in Cyprus for a period of 20 consecutive years prior to the introduction of the law, which came into force on the 17th of July 2015.
What are the Benefits from the amendment of the SDC law?
SDC exemption: Following the amendment to the SDC law, a non tax resident non-dom individual becomes tax resident in Cyprus this year he will not be liable to pay SDC tax for the next 17 years.
Prior to the amendment a tax resident non-dom individual would pay the following taxes:
- Dividend income at 17%, Interest income at 30%, Rental income at 3% (on 75% of the income i.e. effective rate of 2.25%)
The SDC law also included provisions for the deemed distribution of profits of Cypriot tax resident companies where the shareholders (beneficiaries) of such companies are Cyprus tax resident individuals.
However an individual who is a tax resident of Cyprus for a period of at least 17 out of the last 20 years prior to the tax year of assessment cannot benefit from the exception of SDC.
Employment income exemption for employment exercised in Cyprus. In fact he is also eligible to 50% tax exception from income tax on remuneration from employment in Cyprus. The exemption applies for a period of ten years starting from the first year of employment provided that the employment income of the employee exceeds €100,000 per annum.
Employment income exemption for employments exercised outside Cyprus. This exempts from Cyprus income tax income from employment exercised outside Cyprus for more than 90 days in aggregate in the tax year for a non-Cyprus tax resident employer/ foreign permanent establishment of a Cyprus tax resident employer.
Summing up, he pays no tax on dividend income and no tax or interest income but only 50% on remuneration earned in Cyprus of income over €100.000 p/a.
How can you determine what your tax residency and domicile status is?
The major criteria in determining your residency or domiciliation status is:
- In total, how many days have you spent during a particular calendar year in Cyprus? (Please note that the day of arrival is counted in the residency days and the day of departure is counted in the non-residency period)
- If the number is equal to 183 days or more, then you are tax resident in Cyprus.
- What is your domicile of origin (acquired at birth)?
- Have you acquired domicile of choice in Cyprus?
- Have you been tax resident in the Republic for 17 of the last 20 tax years prior to the relevant tax year?
If your answer to all three questions is no, then you are not domiciled in Cyprus.
In order to determine your tax residency and domicile status for a particular tax year, please contact us.