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RELOCATING TO CYPRUS – OBTAINING CYPRUS TAX RESIDENCY

March 2016 - Tax & Private Client. Legal Developments by Stelios Americanos & Co.

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Introduction

Cyprus’ recent tax law amendments has made the island even more attractive destination for someone to relocate to. Cyprus’ location, European Union Membership, culture, network of double tax treaties and advanced infrastructure were already known, but with the recent tax amendments it is possible to relocate to Cyprus and minimise if not nullify tax on your income.

This coupled with the low corporate tax rate of 12.5% for Cyprus tax resident companies, makes Cyprus an ideal place to move.

An individual, choosing to relocate to Cyprus, with some careful tax planning, can minimise his tax exposure or even eliminate it and enjoy completely tax free income in Cyprus. The recent introduction of the domicile term in the Special Defence Contribution law allows an individual relocating to Cyprus to have dividends and interest completely tax exempt. This in addition with the tax exemption on the profit from sale of company shares and other titles and the reduced income tax on salaries earned have made Cyprus an even more attractive destination.

Cyprus Taxation and Contributions – a brief guide

Corporate entities and Individuals are subject to mainly Income tax, Special Defence Contribution, Social Insurance Contribution.

Corporate Income Tax

At company level the corporate tax rate is 12.5%. This is provided the company is tax resident in Cyprus which on turn depends on the company’s management and control taking place in Cyprus.

Some of the advantages of the corporate tax law in Cyprus are:

·12.5% tax on worldwide income, one of the lowest in the European Union

·Tax credit on any tax paid abroad on the same income, irrespective of the existence of a double tax treaty or not

·Profit from sale of company shares and titles is exempt at both corporate and personal tax level

·Payments of dividends and interest to non-domiciled (Cyprus tax resident or non-tax resident) is exempt from any withholding tax

·Interest paid on loans to acquire 100% subsidiaries is tax allowed

·Double tax treaties with over 50 countries

·Implementation of European Union Directive

·Notional Interest deduction on new capital introduced to companies

Individuals Income Tax

The tax is imposed on a yearly basis on taxable individuals. Those defined as Cyprus Tax residents are liable on their worldwide income.  Non Cyprus Tax Residents are liable on their Cyprus source income only. An individual is considered as tax resident if the aggregate number of days in Cyprus is exceeding 183 in the year of assessment.

An individual is taxed according to the types of income he earns and can be categorised as follows:

The types of income a tax resident individual may have can be distinguished in the following categories:

·Business Income resulting for example from  from trading, consulting or other services or earned by an individual.

·Income from salaried services or holding an office.

·Dividends

·Interest

·Rent

·Royalties

·Trading goodwill

·Pensions and annuities

·Profit from sale of shares and other company titles

Dividends, interest and profit from sale of shares are exempt from Income Tax. Dividends and Interest are subject to Special defence Contribution (SDC) provided the individual that earns them is both tax resident and domiciled in Cyprus (see below).

Personal Income Tax is calculated based on tax bands and for 2016 are:

EURO                                                         %

0-19500                                                     0%

19501-28000                                            20%

28001-36300                                            25%

36.301 -60000                                         30%

60001 and over                                       35%

Exemptions apply.

Special Incentive applies for persons which were not tax resident in Cyprus previously and their earnings exceed €100,000 per year. 50% of the income will be exempt from tax for the next 10 years. Another similar incentive is the 20% or €8550 (whichever is smaller) exemption, for 3 years, of the income of a person that was not tax resident of Cyprus before and starts employment in Cyprus.

Pensions received from overseas by a tax resident individual that exceed the amount of €3420 euro are taxed at 5%. The taxpayer may opt to be taxed in the normal way where the taxation of the pension is higher with this special tax exemption

Special Defense Contribution (SDC)

Interest and Dividends received by an individual are subject to SDC. Interest received by Cyprus tax resident and domiciled person is taxed at 30% SDC and Dividends received at 17%.  Furthermore rent received is also subject to SDC of 3% after a 25% deduction. In order for the SDC to apply a person has to be in Cyprus tax resident-and also have a Cyprus domicile.

A person is considered having his domicile of origin in Cyprus if he has his regular place of abode in Cyprus as per the Wills and Succession Law except where:

a) The person has a domicile outside of Cyprus as per the Wills and Succession Law and has not been a tax resident in Cyprus for a period of 20 consecutive years preceding the tax year.

b) The person has not been a Cyprus tax resident for a period of 20 consecutive years prior to the introduction of the law.

If the person was a tax resident of Cyprus for at least 17 years out of the last 20 consecutive years, will be considered as domiciled in Cyprus.

So a person relocating to Cyprus from abroad will be exempt from SDC as he will not be Cyprus domiciled even though he will Cyprus tax resident.

Individuals not resident and not domiciled in Cyprus are exempt from SDC.

Social Insurance Contribution for employees and self-employed individuals working in Cyprus.

Employers are obliged to contribute for Social Insurance for the benefit of their employees and also are obliged to deduct and pay to the government the contribution attributable to the employee.

The contribution are as follows:

¨Employees Social Insurance Contributions are 7.8%. 

¨The employer also contributes on the employee’s salary at a rate of 11.5%.

¨Self-employed contributions 12.6%.

Minimum and maximum limits exist.

Special Contribution for employees, self employed

Special contribution is levied for the period from 1 January 2014 to 31 December 2016 on salaries, income of the self-employed and pensions in the private sector at the following rates:

Emoluments Contribution rate

€                                           %

0-1.500                                              0

1.500-2.500                                      2,5 (min €10)

2.500-3.500                                      3

over 3.500                                        3,5

In case of employees the contribution is shared equally between the employee and the employer.

Real Estate Incentives

The Cyprus government has introduced a capital gains tax exemption for any immovable property purchased from 16/7/2015 to 31/12/2016, regardless on when the property will be sold. Profit from sale of immovable property in Cyprus or sale of shares of companies owning directly or indirectly (from 17/12/2015) property in Cyprus is subject to 20% Capital gains Tax.

A 50% exemption from land transfer fees is also introduced for transfers up to 31st December 2016.

Value Added TaX (VAT)

Generally VAT is imposed on the supply of goods and services and is borne by the end user or consumer. Business to Business transactions are vat neutral as on business will charge vat on its income and pay vat to the state and the other will claim it back. Standard Vat rate is 19%, with reduced rate of 9%, 5% and 0% applying on certain products and services. There are reduced rate incentives for residential properties as well as special vat regimes for yacht and private airplanes.

Obtaining Cyprus Citizenship

With the introduction of the revised set of criteria for Citizenship in March 2014,   Cyprus has become more attractive destination for individual who seek for alternative citizenship. The main benefits are:

Key Benefits

·Free Movement of People: over 150 countries including EU without needing a VISA

·All family can obtain Cyprus citizenship, ie spouse of applicant, children under 18 additional years, and adult dependent children (over 18 years and up on 28 years), with no additional financial criteria.

·No requirement to physically reside in Cyprus

Either before the application or after obtaining the citizenship

·3 month fast track procedure

·Dual citizenship permitted

·An investment of minimum 2.5 million euro through a collective investment scheme  is required that needs to be retained for 3 years and after it can be realized

·Individual schemes have a minimum contribution of 5 million euro which can be any combination of Cyprus government bonds, bank deposits, real estate in Cyprus, shares in Cyprus companies

·Impaired Deposits in the Bank of Cyprus and/or in the Popular Bank – the applicant has impair deposits amounting to a minimum of €3 mln, in case the applicant has incurred an impairment under €3 mln can proceed to make additional investments for the balance under one of the above criteria.

Please contact a member of our staff for further information and/or clarifications.