The introduction of the non-domiciled (non-dom) tax resident status in the Cyprus tax system in 2015 paved the way for tremendous opportunities to businessmen that want to achieve optimum tax planning and savings.
The change affects physical persons that consider to use Cyprus as their tax seat and gain from the favourable tax regime both in a corporate and personal level.
The whole reform has to do with a change in a tax known as Special Defence Contribution tax (SDC).
In a nutshell the effect of the amendment is that a Cyprus tax resident , non-dom individual will not pay any tax on his income (besides income tax).
The change in question is effective as from the 16th of July 2015.
To understand the change we need to outline the applicable SDC tax rates to Cyprus resident non-dom prior to 16 July 2015?
SDC Tax Rates Prior to the Amendment.
Prior to the amendment a tax resident non-dom individual would pay the following taxes:
- Dividend income at 17%
- Interest income at 30%
- Rental income at 3% (on 75% of the income i.e. effective rate of 2.25%)
The SDC law also included provisions for the deemed distribution of profits of Cypriot tax resident companies where the shareholders (beneficiaries) of such companies are Cyprus tax resident individuals.
What change is it introduced by the amendment of the SDC law?
Following the amendment to the SDC law, Cyprus resident non-dom individuals will no longer be subject to SDC.
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.
Effectively this means that if a non tax resident non-dom individual becomes tax resident in Cyprus this year he will not be liable to pay SDC tax for the next 17 years.
How is the domiciled status determined?
The SDC law defines the term domicile with reference to the Will and Succession Law of Cyprus.
An individual is considered to have a domicile in Cyprus either:
- by domicile-of-origin; or
- by domicile-of-choice
The Wills and Succession Law provides that:
- When a child is born, while the child’s father is alive, the child’s domicile is the same of that of the father at the moment of birth.
- When a child is born out of wedlock, or after the death of the father, the child’s domicile is the same of that of the mother at the moment of birth.
- A person can obtain domicile-of-choice by setting up their home anywhere within Cyprus with the intention to reside there permanently or indefinitely.
- The domicile-of-origin prevails and is maintained until a domicile-of-choice is obtained.
- The domicile-of-choice is maintained until a new domicile-of-choice is obtained or the domicile-of-origin is reclaimed.
Let us suppose that Mr. Smith from the UK who is sole shareholder and employee in a Cypriot financial services company becomes Cyprus tax resident , non-dom.
Mr. Smith has 3 sources of income:
- He receives salary €150,000 per year from his employment in his company.
- He receives dividends from his company and several other companies €300,000 per year
- He receives interest income from savings €50,000 per year.
So his total earnings are €500,000 per year.
How much tax will he pay?
Mr. Smith will only be liable to pay €20,000 income tax on the 150,000 euro salary and nothing else!
In fact he is also eligible to 50% tax exception from income tax as an employee. The exemption applies for a period of ten years starting from the first year of employment provided that the employment income of the employee exceeds €100,000 per annum.
So, he pays no tax on dividend income and no tax or interest income.
Prior to the change in the SDC law he would pay an extra €66,000 as tax.
For more information on Cyprus tax residency and non-dom please contact our law firm at email@example.com