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Short news and ideas

Cyprus: Zero personal income tax???


Ciprus: 0 személyi jövedelemadó???The tax changes introduced from July 16th, 2015 have revolutionised Cypriot tax laws. This is beneficial primarily to those coming under the “resident, but not domiciled” status and who draw income from capital accumulated earlier or still to be accumulated. The majority of foreigners who move to the island and become resident – and tax resident – fall into this category.

Even before now, Cyprus taxed a significant part of capital income extremely generously. Cyprus was just about the only country in Europe which didn’t even tax the capital gains of its own residents. Based on earlier guidelines issued by the Inland Revenue, the term capital gains was open to extremely broad interpretation. For example, if a Cypriot resident sold shares in some local or foreign company, realising a capital gain, they were not subject to tax on that gain. Even if nominally at least the shares of one offshore company were being bought by another company. The sale of shares in companies owning real estate in Cyprus was an exception. It will, of course, be necessary to remain alert in the future, as, if the only aim of a deal is to acquire tax benefits, then the tax authorities may ignore the transaction. At the same time, dividend tax in Cyprus is extremely high. As the payment of dividends is subject to a special tax, the so-called Special Defence Contribution, Cypriot residents are obliged to pay a 30% tax when they receive dividends.

The regulations adopted on July 16th, 2015, however, draw a distinction from the point of view of taxation, between taxpayers in the “resident and domiciled” category and those enjoying “resident, but not domiciled” status. So, what exactly does the “domiciled” category actually mean? The term is almost completely unknown to those living in continental countries. In English common law countries, however, such as the United Kingdom, or its former colonies Malta and Cyprus, use of this category is widespread and standard in tax law. The “domiciled” status basically refers to the “domiciled by origin” category. Typically, this means the place where the father of the individual concerned habitually resided at the time that the individual was born. In cases where the individual did not have a father, then the mother’s habitual residence defined the place. Changing “domicile” is not easy in English common law jurisdictions. Even if, say, we move from one common law country, such as the UK, to another, such as Cyprus, we can only achieve “domiciled” status in Cyprus from the tax point of view after a considerable length of time (17 to 20 years). According to the terms of the Wills and Succession Law, an individual must have paid tax in Cyprus for at least 17 of the last 20 years in order to qualify for “domiciled” status (domiciled by choice). As a consequence, individuals moving to Cyprus now, almost without exception, fall into the “resident, but not domiciled” category.

If and when they become resident in Cyprus for tax purposes, based on the new regulations they will not be subject to the 30% Special Defence Contribution on dividends. Any interest income they receive will also be exempt from tax.

Based on the above, it can be seen that income from capital gains, dividends and interest received by individuals enjoying “resident, but not domiciled” status in Cyprus is going to be taxed very favourably. The intentions of the legislators are quite clear: they wanted to appeal to those foreigners who have re-located to Cyprus from the tax point of view, and who would already like to enjoy the benefits of the law changes in the 2016 tax year.

In all probability two factors contributed to the amendments to the tax laws. The first was the example of Malta. Malta, another English common law jurisdiction, offered similar tax benefits to individuals with “resident, but not domiciled” status earlier. The two countries are quite close to each other, and the largest Cypriot law firms also have either branches or independent offices in Malta. In this way, it was relatively easy to apply this solution to Cyprus as well. The other factor was the automatic exchange of banking information, which basically means that from 2016 information will be collected and exchanged. At least between the countries which have signed up to the “first round”. As Cypriot tax law has no regulation on Controlled Foreign Companies, a local tax resident can hold their assets in a low-tax company. If and when the individual takes an income from the company in the form of a dividend, in the majority of cases the taxation at personal level will also be very beneficial. Basically, they get the best of both worlds.

The process has begun. More and more people are actually relocating to Cyprus as a result of the attractive tax laws. Although strict checks and controls by the tax authorities and immigration service are not typical in Cyprus, those with serious intentions and plans do not merely move to the island “on paper”. Another reason that Cyprus is ideal for this type of relocation is that the island actually has a tax authority, and all tax residents are required to file a tax return every year. This is in contrast with places like Dubai, where, although local residents are exempt from tax on all types of income, as there is neither a tax authority nor an annual tax return filing requirement, it is not easy to verify even legally obtained income.

Property prices in Cyprus are expected to rise, as one of the first steps in proving resident status is the provision of a real estate rental or purchase agreement. Those seriously considering such a solution need to act relatively quickly for two reasons: firstly, property prices are going up, and secondly, 2016 is going to be upon us very shortly. The banks of countries signed up to the first round of automatic exchange of information enter the system in 2016, and in September 2017 will send their first reports relating to the previous year. The tax year in Cyprus is the same as the calendar year, so those who wish to legally relocate to Cyprus must do so by June 29th, 2016 at the latest.