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Introduction of “Non-Dom” Rules

The new non domiciled rules were introduced to further entice corporate executives and high net worth individuals (currently entitled to a 50 per cent tax exemption of personal income tax for a five-year period where income exceeds €100.000) to take up residency in Cyprus.

The Special Contribution for Defense Law (the SDC Law) imposes tax on income (dividends, interest, rental income) received from within or outside of Cyprus by individuals who are considered to be tax residents of Cyprus. An individual is considered to be a tax resident of Cyprus if he/she physically spends at least 184 days in Cyprus during the tax year.

The SDC Law has now been amended to incorporate the non domiciled rules exempting the income (whether actual or deemed) of persons who are not considered to be domiciled in Cyprus from payment of special contribution for defense tax, even if they are considered to be tax residents of Cyprus.

An individual can be considered as domiciled in Cyprus either:

  • by domicile of origin; or
  • by domicile of choice. In order to understand the concept of “domiciled in Cyprus” one must look to the Wills and Succession Law Cap. 195.
    In accordance with the Wills and Succession Law:
  • A person at any time can have either the domicile which he/she acquired at birth (domicile or origin) or the domicile which he/she acquired or maintained as a result of actions taken by him/her (domicile of choice).
  • For a legitimate child, which was born when the father was alive, the domicile of origin of the child is the domicile of origin of the father, at the time the child was born.
  • For a legitimate child, which was born after the father died or in the case of an illegitimate child, the domicile of origin in the domicile of origin of the mother, at the time the child was born.
  • A person may acquire a domicile of choice with his establishment in any country outside Cyprus with the intention of the permanent or indefinite residence in such a country.
  • A domicile of choice is maintained until abandoned in which case a new domicile of choice is acquired or the domicile of origin is reinstated.

For the purposes of the SDC Law only, an individual who has a domicile of origin in Cyprus as described above may still be considered not to be domiciled in Cyprus if:

  • He/she had the domicile of origin in Cyprus on the basis of the Wills and Succession Law but has obtained a domicile of choice in another country, provided he was not a tax resident of Cyprus for at least 20 years before the tax year in which he became a tax resident of Cyprus.
  • He/she has not been a tax resident of Cyprus for a period of 20 years prior to the introduction of the amendment to the SDC Law.

Notwithstanding the above, an individual who has been a tax resident of Cyprus for at least 17 years out of the last 20 years prior to the tax year will be considered to be “domiciled in Cyprus” and as such will be subject to special contribution for defence from the 18th year.

With the introduction of “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. It is noted that no tax is imposed on individuals under the Income Tax Law in respect of interest and dividend income.

The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-dom” rules.

The non-dom rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus. The non-dom rules are effective as of the date of publication in the Official Gazette of the Republic (this being the 17th July 2015).