i. "183-day rule"
An individual is considered to be tax resident in Cyprus for income tax purposes if he stays in Cyprus for a period or more which in aggregate exceed 183 days in a calendar year.
ii. "60-day rule"
On the 14th of July 2017 a new tax law has been voted by the Cyprus parliament for the purposes of determining Cyprus tax residency for individuals, the “60-day rule”.
The “60-day rule” applies to individuals who in the relevant tax year meet all of the following conditions:
1. Do not stay in any other single state for a period or more which in aggregate exceed 183 days in the particular calendar year.
2. Stay in Cyprus for at least 60 days.
3. Are not tax resident in another country.
4. Maintain a permanent home in Cyprus that is either owned or rented;
5. Carry on a business in Cyprus, are employed in Cyprus or hold an office in a person who is a Cyprus tax resident at any time during the tax year.
Taxable income of Cyprus tax residents and non-tax residents
Individual tax residents in Cyprus are subject to tax on their worldwide income (income accrued or arising from sources within and outside Cyprus).
Individual non-tax residents are subject to tax only on the income accrued or arising from sources within Cyprus.
Income Tax Rates
Income Tax Exemptions
1. Profit from the sale of securities
2. Dividend income (subject to Special Defence Contribution at 17% for individuals who are tax resident and domiciled in Cyprus)
3. Interest income (subject to Special Defence Contribution at 30% for individuals who are tax resident and domiciled in Cyprus)
4. Rent from preserved buildings (subject to certain conditions)
5. Lump sum received as retiring gratuity, death gratuity or as compensation for death or injury
6. Lump sum repayment from life insurance schemes or from approved provident funds
7. Remuneration from salaried services rendered outside Cyprus for more than 90 days in a tax year of assessment to a non-Cypriot tax resident employer or to a foreign permanent establishment of a Cypriot resident employer is exempt from income tax in Cyprus.
8. Income Τax Exemptions - sections 8(21) and 8(23) of the Income Tax Law 118 (I)/02
i. Exemption of section 8 (21)
Employees are exempt from income tax on 20% of their remuneration or €8.550 (whichever amount is the lower) for employment exercised in Cyprus. This exemption is applicable to individuals who were not Cyprus tax residents during the year preceding the year of commencing employment in the Republic.
The exemption is applicable from the 1st of January of the year which follows the year in which the employment commenced. The exemption is applicable for 3 years for any employment commenced during any year until 2011 and for 5 years for any employment commenced from 2012 onwards. The exemption can be claimed until the year 2020.
ii. Exemption of section 8 (23)
The second exemption has been in effect since 1 January 2012 (updated in 2015) and relates to a 50% exemption of the remuneration from any employment exercised in Cyprus if such remuneration exceeds €100,000 annually. The exemption is applicable irrespective of whether during one year the income dips below €100,000 provided that at the commencement of working in Cyprus, the income from employment in the Republic exceeded the €100,000 threshold and the Commissioner is satisfied that the fluctuations in the salary are not artificially engineered for the purpose of obtaining the relevant tax exemption.
The exemption has certain restrictions; individuals who were tax residents in Cyprus during any 3 out of 5 years preceding the year of employment (not applicable for individuals with a commencement of employment between 2012 to 2014) as well as during the year preceding the year of employment will not be granted the exemption. The exemption can be claimed for 10 years.
Income Tax Deductions
An individual can deduct all of his expenses incurred wholly and exclusively for the production of his income, provided they are supported by invoices and receipts. Deductions may include:
1. Annual contributions to the Social Insurance Fund
2. Annual Contributions to an approved Pension Fund
3. Annual Contributions to a Medical Fund and Medical insurance. (The total deduction for medical funds and medical insurance must not exceed the 1,5% of gross income)
4. Life insurance. (The deduction for each life insurance policy cannot exceed 7% of the insured amount)
THE ABOVE-MENTIONED DEDUCTIONS CANNOT EXCEED THE ONE SIXTH (1/6) OF THE NET INCOME OF THE EMPLOYEE.
5. Any donations or contributions made educational, cultural or charitable purposes to the Republic of Cyprus, to a Local Authority in Cyprus or an approved charitable institution in Cyprus.
6. A deduction of 20% of rented buildings (no land or parking lots) from the gross rental income.
7. Trade Union contributions
8. Professional subscriptions
Losses carried forward
Individuals who have an obligation to prepare audited financial statements (i.e. those with turnover in excess of €70.000) may carry forward tax losses incurred during a tax year over the next five years, to be offset against taxable income.
Where a person converts his/her business into a limited liability company, any unutilised tax losses can be transferred to the new company.
Losses of a permanent establishment outside the Republic
Tax losses arising from a permanent establishment maintained outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset.
Tax credit for foreign tax paid
Any foreign tax paid on income subject to income tax in Cyprus is credited against any Cyprus income tax payable on such income, irrespective of the existence of a tax treaty.
The above should be used only as a source of general information and it is not intended to provide, and should not be relied on for tax, legal or accounting advice. It is also subject to Disclaimer. Before engaging in any transaction you should seek for professional advice.
For further details on these issues, please do not hesitate to contact us.