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The new non domiciled rules in Cyprus

The new non domiciled rules in Cyprus

26 January 2016 Tax Law

In July 2015, in an effort to enhance the competiveness, fairness and simplicity of the Cyprus Tax system and make it more attractive to foreign investors, the Cyprus Government passed among others the introduction of “Domicile” concept through an amendment to the Special Contribution for the Defence of the Republic of Cyprus Law of 2002 as amended (hereinafter referred to as the ‘SDC Law’).

The SDC Law imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.

An individual is considered to be a resident for tax purposes of Cyprus if he/she is physically present in Cyprus for a period or periods exceeding in aggregate 183 days during the calendar year. The SDC law is amended so that an individual will now be subject to SDC if he/she is both a resident for tax purposes of Cyprus and is also considered to be domiciled in Cyprus.

Hence , in accordance with the amended Special Contribution for the Defense of the Republic Law, any person who was considered to be a resident of Cyprus for tax purposes was previously liable to pay a special contribution for defense tax on rent, dividends and interest. The abovementioned law has now been amended so that a distinction is drawn between tax residence of Cyprus who are domiciled in Cyprus and those who are not. The new “non-dom” rules provide that individuals who are not domiciled in Cyprus, as per the requirements set out in the relevant legislation, would be exempted from payment of the special defense tax on dividends, interest and rental income, despite the fact that they may be Cypriot tax residents. This exemption will apply to income even if derived from sources within Cyprus and regardless of whether such income is used in Cyprus.

Advantages for the 'Non-Dom' Individuals:
a) A non-dom earning dividend income, from foreign as well as local investments will not be subject to SDC in the amount of 17% as of 16 July 2015. In addition, dividend income is unconditionally exempt from Income Tax. Therefore the tax payable by a Cyprus resident non-dom on dividend income will be zero.
b) Interest : A non-dom earning interest income, from foreign as well as local sources, will not be subject to SDC in the amount of 30% as of 16 July 2015. In addition, interest income is also exempt from Income Tax. Therefore the tax payable by a Cyprus resident non-dom on interest income will be zero.
c) Rental income: A non-dom earning rental income, from properties in Cyprus or abroad, will not be subject to SDC in the amount of 3% as of 16 July 2015. Rental income will only be subject to Income Tax at the normal rates (following a 20% allowance).

Definition of Non-Dom

The term “domiciled in Cyprus” is defined by the law as a person who has either his/her domicile of origin (given at birth) in Cyprus or domicile of choice (establishing a home with the intention to reside in Cyprus permanently or indefinitely).

It is noted that the determination of domicile is a distinct concept from citizenship or residence. For the purposes of SDC, the following are exempted from the above definition (i.e. labelled Non-Doms):

a)     An individual who has obtained and maintained a domicile of choice outside Cyprus, provided that this person was not a Cyprus tax resident for any period of at least 20 consecutive years preceding the tax year in question;

or

b)     An individual who has not been a tax resident of Cyprus per the Income Tax Law (hereinafter referred to as the ‘ITL’) for a period of 20 consecutive years prior to the introduction of the law (i.e. prior to 16 July 2015),

Introduction of non-dom rules for individuals

Introduction of Non-Dom

With the introduction of “non-domicile” or “non-dom” rules, a Cyprus tax resident individual who is not domiciled in Cyprus will effectively not be subject to SDC in Cyprus on any interest, rents or dividends (whether actual or deemed) regardless of whether such income is derived from sources within Cyprus and regardless of whether such income is remitted to a bank account or economically used in Cyprus.

How to declare non-dom status

Application for a declaration for exemption of an individual from the Deduction of Special Defence Contribution

As underlined above, the SDC Law imposes tax on certain categories of income including interest.

Individuals may apply for Exemption from the Deduction of Special Defence Contribution on Interest by submitting to the relevant Bank the declaration for exemption which is provided in the official website of the Tax Department of the Ministry of Finance. 

In the case of joint accounts, a Declaration must be completed and submitted by each account holder separately.

Kindly note, that the Declaration must be completed and submitted to the selected Bank every year by the 15th of December, concerning the referenced year.