Tax-free dividend and 'passive' interest income earned by an individual
Partial exemption on rental income tax as well
Tax-free dividend and 'passive' interest income earned by an individual
Partial exemption on rental income tax as well
The case
The introduction of the non-domiciled (non-dom) tax resident status in the Cyprus tax system in July 2015 gave the opportunity to businessmen (and individuals) to enjoy a favourable personal tax system in addition to the already established favourable tax regime for corporations.
The law concerns physical persons that choose Cyprus as their tax seat.
Special Defence Contribution (SDC) before the introduction of the non-dom status
Dividend, interest and rental income earned by a non-dom Cyprus tax resident individual were taxed under Special Defence Contribution (SDC) tax in Cyprus, with the exception of rental income that was taxed under Income Tax as well. Prior to the amendment, a tax resident non-dom individual would pay the following taxes:
- Dividend income tax at 17%;
- 'Passive' interest income tax at 30%;
- Rental income tax at 3% SDC with a 25% allowance i.e. 3% calculated on the 75% of the gross rental income giving an effective tax rate of 2.25%. In addition, rental income is taxed under Income Tax at the normal rates (following a 20% allowance).
The SDC law also included provisions for the deemed distribution of the 70% of the profits of Cypriot tax resident companies. The deemed dividend distributed to non-dom tax resident individuals bore tax at 17%.
Special Defence Contribution (SDC) with the non-dom status
For tax purposes, non-dom individuals who become Cyprus tax residents will now be completely exempt from SDC tax. Therefore, the individual enjoys tax-free dividend and ‘passive’ interest income. SDC on rental income is exempt as well, but rental income continues to be subject to Income Tax at the normal rates (following a 20% allowance).
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 above exception.
Definition of non-dom
Definition of domicile:
- Domicile of origin: the domicile received at birth (generally dependent on the father side), or
- Domicile of choice: the domicile acquired by establishing physical presence in a particular place and by demonstrating sufficient intention to make it the place of permanent residence.
Irrespective of the domicile of origin or choice, individuals who have been tax resident in Cyprus for at least 17 out of the last 20 years prior to the tax year in question will be deemed to be domiciled in Cyprus for the purposes of the SDC tax law.
In the case of persons who have their domicile of origin in Cyprus, they will nevertheless be considered as non-dom in the following cases:
- If they have acquired and maintain a domicile of choice outside Cyprus, provided that they were not tax residents in Cyprus for any continuous period of at least 20 consecutive years prior to the tax year in question; or
- If they were not tax resident in Cyprus for a period of at least 20 consecutive years immediately prior to the entry into force of the non-domicile provisions (i.e. between the years 1995 and 2014 inclusive).
Terminology
Domicile
Domicile of Origin
It is defined as the place of birth and as a rule this is the same as the domicile of the father at the time of birth and in exceptional cases of the mother.
Domicile of Choice
Non-Dom person
It is a person who lives in a country where he is not legally domiciled in.
Tax residency
The case
The introduction of the non-domiciled (non-dom) tax resident status in the Cyprus tax system in July 2015 gave the opportunity to businessmen (and individuals) to enjoy a favourable personal tax system in addition to the already established favourable tax regime for corporations.
The law concerns physical persons that choose Cyprus as their tax seat.
Special Defence Contribution (SDC) before the introduction of the non-dom status
Dividend, interest and rental income earned by a non-dom Cyprus tax resident individual were taxed under Special Defence Contribution (SDC) tax in Cyprus, with the exception of rental income that was taxed under Income Tax as well. Prior to the amendment, a tax resident non-dom individual would pay the following taxes:
- Dividend income tax at 17%;
- 'Passive' interest income tax at 30%;
- Rental income tax at 3% SDC with a 25% allowance i.e. 3% calculated on the 75% of the gross rental income giving an effective tax rate of 2.25%. In addition, rental income is taxed under Income Tax at the normal rates (following a 20% allowance).
The SDC law also included provisions for the deemed distribution of the 70% of the profits of Cypriot tax resident
companies. The deemed dividend distributed to non-dom tax resident individuals bore tax at 17%.
Special Defence Contribution (SDC) with the non-dom status
For tax purposes, non-dom individuals who become Cyprus tax residents will now be completely exempt from SDC tax. Therefore, the individual enjoys tax-free dividend and ‘passive’ interest income. SDC on rental income is exempt as well, but rental income continues to be subject to Income Tax at the normal rates (following a 20% allowance).
Foreigners who decide to move their personal tax residency in Cyprus will be considered as non-dom
in Cyprus for maximum 17 out of the 20 years following the day of registration as non-dom i.e. the
individual may leave Cyprus and return to claim the non-dom status for a total period of three years.
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 above exception.
Definition of non-dom
Definition of domicile:
- Domicile of origin: the domicile received at birth (generally dependent on the father side), or
- Domicile of choice: the domicile acquired by establishing physical presence in a particular place and
- by demonstrating sufficient intention to make it the place of permanent residence.
Irrespective of the domicile of origin or choice, individuals who have been tax resident in Cyprus for at least 17 out of the last 20 years prior to the tax year in question will be deemed to be domiciled in Cyprus for the purposes of the SDC tax law.
In the case of persons who have their domicile of origin in Cyprus, they will nevertheless be considered as non-dom in the following cases:
Terminology
- If they have acquired and maintain a domicile of choice outside Cyprus, provided that they were not tax residents in Cyprus for any continuous period of at least 20 consecutive years prior to the tax year in question; or
- If they were not tax resident in Cyprus for a period of at least 20 consecutive years immediately prior to the entry into force of the non-domicile provisions (i.e. between the years 1995 and 2014 inclusive).
Domicile
It is defined as the place of someone’s permanent residency and where he/she intends to live
permanently.
Domicile of Origin
It is defined as the place of birth and as a rule this is the same as the domicile of the father at the time of birth and in exceptional cases of the mother.
Domicile of Choice
It is defined as the place that has been chosen by an individual (adult), to have as his permanent
residency with the intention to permanently live there.
Non-Dom person
It is a person who lives in a country where he is not legally domiciled in.
Tax residency
Until now an individual was considered to be a tax resident of Cyprus if the individual was present in Cyprus for at least 183 days in a year i.e. for more days than in any other jurisdiction. In an effort to
provide incentives to foreigners to come to work in Cyprus, the Cyprus House of Representatives
voted into law an amendment to the above.