Aiming to increase the overall competitiveness and fairness of the tax system for foreign nationals, the Cyprus government introduced the concepts of ‘domicile’ and ‘non-domicile’ (Non-Dom) through an amendment of the Special Contribution for the Defence of the Republic of Cyprus Law of 2002 (SDC Law) in July of 2015. The Aspen Trust Group explores how the Non-Dom rules of Cyprus are the leading factors contributing to a rise in foreign nationals choosing the low tax jurisdiction as a place of residence, company registration, and even family relocation.
As an EU member country with a straightforward and attractive tax system, Cyprus has already enticed over 110,000 foreign nationals who are currently living on the island, while many more are exploring other options such as company set-up or citizenship-by-investment programs.
The Establishment of Non-Dom Status
In 1799, the Prime Minister of England, William Pitt the Younger introduced the idea of income tax in order to finance English wars around the world. However, Pitt did not want to discourage colonial investment as a result of the wartime tax.
As a solution, Pitt allowed income to remain untaxed in the colonies if it never made its way to England. Manufacturers were still able to produce Caribbean sugar and Indian tea without having profits taxed.
Today, the Non-Dom concept has evolved and its use progressed from its colonial past as many jurisdictions such as the UK, Malta, Ireland and Cyprus use it as an incentive to attract foreign nationals. Establishing the concepts of domicile and resident help determine how a foreigner will be taxed within the country.
Income made in the country is taxed according to tax residency. However, income from abroad is usually taxed if an individual is both a domicile and a resident of the country, although the precise application of the Non-Dom concept as it relates to taxation varies by jurisdiction.
Qualifying for a Tax Residency
An individual is deemed a Cyprus tax resident if they spend at least 183 days of the tax year in the country.
As of 1st January 2017, the Cypriot Parliament introduced this as a secondary test for Cypriot tax residency. Under this, individuals may still qualify for a tax status if they spend less than 183 days on the island, provided that they:
- Do not spend more than 183 days in any other country
- Are not tax residents of any other country
- Spend at least 60 days in Cyprus
- Maintain a permanent home in Cyprus (owned or rented)
- Are engaged in business in Cyprus, are employed in Cyprus or hold an office in a Cyprus tax resident company at any time during the tax year.
The Non-Dom Rules of Cyprus at a Glance
Under the Cypriot Wills and Succession Law, individuals are considered ‘Domiciled’ if they are:
- Domiciled by origin (acquired at birth and generally applied to an individual with a Cypriot-domiciled father), or
- Cyprus tax residents for at least 17 out of the previous 20 years
All other individuals are considered Non-Dom.
Put simply, any non-Cypriot qualifying for a tax residency is automatically given ‘Non-Dom’ status and gets to enjoy a myriad of benefits for 17 years.
The Non-Dom Rules of Cyprus ensure that High Net Worth Individuals and corporates have ample space for tax planning and financial optimization while operating under an improved and simplified tax system that is fully compliant to EU, OECD, and other international organizations’ standards.
At the same time, they get to reap additional benefits such as high-quality healthcare, social security, greater IP protection, and a strategic geopolitical location connecting several international markets and trade blocks.
Tax Advantages with The Non-Dom Rules in Cyprus
The financial advantages of the Non-Dom rules in Cyprus make it one of the most attractive relocation jurisdictions in Europe. The tax advantages enjoyed under the Non-Dom rules in Cyprus consist of the following provisions:
- Tax-free income up to 19,500 Euros; any taxable income exceeding this is subject to progressive taxation ranging from 20% to 35%
- No tax on dividend and interest income. (However, such income is subject to contributions to the General Healthcare System at the rate of 1.7% up to 31st May 2020 / 2.65% from 1 June 2020)*
- No tax on income arising from the disposal of shares, bonds and other similar financial instruments. (However, this is subject to contributions to the General Healthcare System at the rate of 1.7% up to 31st May 2020 / 2.65% from 1 June 2020)*
- Beneficial Double-tax treaties with over 65 countries
- No tax on amounts received as retirement gratuity
- 5% Tax on pensions income from services outside the country for amounts over 3,420 Euros
- No Capital Gains tax on income from the sale of non-Cypriot real estate
- No estate duty, no wealth tax, inheritance tax, gift tax
*The total income ceiling on which contributions to the General Healthcare System are calculated is 180,000 Euros per annum.
The 50% Exemption Rule
Any Non-Dom individuals who were not previously employed in Cyprus, and take up employment in Cyprus with an annual income exceeding 100,000 Euros are eligible for tax exemption by 50% for a 10-year period, to commence during the first year of employment.
Employees who were tax residents in any of the three years out of the five years before employment are not eligible for the exemption. The exemption is also not applicable to employees who resided in Cyprus the year before the start of employment.
Through these financial benefits for Non-Dom individuals, Cyprus aims to attract foreign nationals eager to enhance their global financial status.
Other Non-Dom Countries: A Comparison
Even though the basic concepts of domicile, non-domicile, and residency are similar between the United Kingdom, Malta, Ireland, and Cyprus, each local jurisdiction has their own tax provisions under its specific definitions. The benefits of being a Non-Dom in Cyprus are numerous, but how do other jurisdictions compare?
Malta does not require an individual to declare Non-Dom status on his/her tax return. Declaration of foreign income is only necessary when it is brought into Malta. Moreover, capital gains from abroad can be transferred tax-free. In Cyprus, capital gains tax is not applicable to the sale of non-Cypriot real estate.
Both Malta and Ireland have no time limit on Non-Dom status, whereas in the United Kingdom, there is a large fee required to retain Non-Dom status. In Cyprus, Non-Dom status is applied for up to 17 years.
Over the years, the United Kingdom has tightened its rules on Non-Dom status while Ireland has relaxed theirs in an effort to encourage foreigners across the border. For instance, Ireland allows for investments in London to generate income, and then be transferred and used tax-free in Ireland. The United Kingdom, however, maintains a capital gains tax on income made in Ireland, regardless of if its transferred or used back in Britain.
One thing to consider when comparing jurisdictions is the access to job markets and investment opportunities in each of the countries. As a foreigner, while Malta and Ireland might seem like a promising jurisdiction for Non-Dom status, they may be too limited in what they can offer for foreigners.
In Cyprus, other tax advantages put it ahead of the other jurisdictions. There is no wealth, inheritance, or gift tax and no estate duty. Also, there is no tax on dividend or interest income as well as no tax on gains from the disposal of shares, bonds, and other financial instruments. Both income and pension income is taxed after an initial exemption and the many double treaties signed by Cyprus ensure that individuals are not taxed in multiple jurisdictions.
Cyprus, given its many advantages with Non-Dom status and multiple booming industries, provides more financial growth opportunities for foreigners. The process of qualifying for Non-Dom status and becoming a tax resident is easy and straightforward. Cyprus continues to enact policies that favor the Non-Dom and encourage more foreigners to relocate to the island. Combined with other lifestyle and business components, Cyprus is a welcoming country for foreigners seeking to optimize their wealth.
Financial Planning and Relocation Services
As over 20% of the population in Cyprus are foreign nationals, the Non-Dom rules of Cyprus are influencing the decisions of business owners, HNWIs, and freelance entrepreneurs to seek relocation options in the country. It can be a promising alternative for lowering taxes and better financial planning for companies and individuals.
The consultants at The Aspen Trust Group can help make the challenges of financial planning and relocating hassle-free and financially beneficial for both your company and your family. Contact our team of professionals to get an analysis of your financial needs and options available for relocation services. The Non-Dom rules of Cyprus and The Aspen Trust Group welcome you to a more financially rewarding future.