Cyprus tax incentives – Cyprus non Domiciled

Cyprus has changed its tax legislation mainly to attract more foreign investments and to improve further the competitiveness of Cyprus as an international business center. Cyprus companies are already widely used due to tax and other benefits, but the current tax reform aims to render Cyprus companies even more attractive. The term Cyprus non Domiciled has been introduced to increase the benefits for investors to locate in Cyprus. In addition more tax benefits has been given for first employment in Cyprus for high earning employees and more tax deductions for new funds introduced to Cyprus.

The main changes are as follows:

Cyprus Non Domiciled

Abolition of Defence tax for non Cyprus domiciled individuals

Under the current law Defence Tax is payable only by tax residents of Cyprus on dividends, interest and rental income. Tax resident of Cyprus is any individual who spends more than 183 days in Cyprus every year.  Under the new tax law, the term “Domiciled” in Cyprus is introduced and those individuals who are not Domiciled in Cyprus would not be subject to defence tax on dividends, interest and rental income.

Domiciled in Cyprus is anyone domiciled by origin or domiciled by choice under the Wills and Succession Law of Cyprus. An individual who during at least 17 years out of the last 20 years is tax resident in Cyprus, will be considered as domiciled in Cyprus.

The above measure excludes owners of companies that are not Cypriots from any defence tax in case they want to re-locate to Cyprus to run their business from Cyprus. Therefore, such individuals will not pay any taxes on dividends or interest income.

First Employment in Cyprus

Exemptions of income from first employment in Cyprus

Under Cyprus tax law 20% of the income from employment in Cyprus of a person who was not a tax resident of Cyprus during the previous year is exempt from taxation for a period of 3 years with a maximum of €8.550 per annum. Now the period is extended to 5 years however the exemption will apply up to year 2020.

Under the current law, 50% of the income from employment in Cyprus of a person who was not a tax resident of Cyprus during the previous year is exempt from taxation for a period of 5 years provided the income from employment in Cyprus exceeds €100.000. Under the new law the period of 5 years is extended to 10 years.

The individual will only be able to claim one of the two exemptions as described above.

The above  measure will significantly reduce the tax charge on high earning employees (such as managers, directors etc) in order to make it easier for companies to re-locate their headquarters and other business activities in Cyprus.

Tax Deductions

1. Notional interest tax deduction on new capital

On any new funds introduced into a Cyprus tax resident company as “equity” a notional interest deduction will be allowed and will decrease the tax charge. The interest will be calculated based on the 10 year government bond rate of the country where the funds are invested plus 3%, however the minimum rate is the interest earned on 10 year bond of Cyprus plus 3%. New equity is any cash or assets transferred to Cyprus using market values. The notional interest deduction cannot exceed 80% of the taxable income before the deduction.

The above measure reduces significantly the tax charge of 12,5% up to an effective interest rate of 2,5%, for those companies that will elect to invest in Cyprus.

2. Increased annual allowance on Property, Plant and Equipment

The annual allowance will increase from 10% to 20% on Plant and Equipment and from 4% to 7% on new industrial buildings and hotels. The increased annual allowance rates will be granted for investments made in years 2015 and 2016.

Conclusions

All the above measures, significantly reduces the tax burden on companies that are run from Cyprus through notional interest charges on capital introduced in Cyprus (a measure that can reduce the effective tax rate to 2,5%!) and through reduction of tax liabilities of non-Cypriot managers, directors and owners by granting tax exemptions on employment income and eliminating taxes on dividend and interest income. The 0% tax on dividends and interest income is a significant tax incentive for any individual to relocate to Cyprus and enjoy the sunshine for at least 340 days a year!