Recent decisions in the UK are changing the tax treatment of UK tax residents, enjoying the non-dom. status (non-UK domiciled). More specifically, from April 2025 onwards, the tax regime applicable to non-UK domiciled individuals is to be abolished. This has spurred interest amongst High-Net-Worth Individuals (HNWIs) for alternative tax residency options.
Cyprus has a lot to offer to local tax residents. Besides the high- standard of living, the sunny weather, low crime rate and a dynamic business environment, it also offers a beneficial tax regime.
CYPRUS “NON-DOM” STATUS AND NO TAXATION ON DIVIDENDS AND INTEREST
A Cyprus tax resident who is not domiciled in Cyprus (“non-dom.”) is exempt from tax on dividends and passive interest income. So who is a “non-dom”?
An individual’s domicile is defined at birth as being that of his/her father’s, or that of his/her choice. Therefore, a Cyprus tax resident born to a non-Cypriot domiciled father would generally be considered a “non-dom.”, for at least 17 years. Therefore, one can enjoy dividend and interest income tax-free by becoming a “non-dom.” Cyprus tax resident. Taking into consideration that Cyprus tax residents are also exempt from tax on gains arising from the disposal of investments (e.g. shares, bonds and similar financial instruments), then the status of a “non-dom” Cyprus tax resident becomes even more attractive.
TAX RESIDENCY AND TAXING RIGHTS ON WORLDWIDE INCOME
Globally, the single most used criterion for determining an individual’s tax residency is the so- called “183 days test”. That is, an individual who spends more than 183 days in a country would (in most cases) be considered a tax resident of that country. Over the years and with the aim of protecting their tax base, a number of countries have broadened their tax residency criteria, to include other connections between the country and the individual, such us owning a permanent home. The international tax principle provides that the country of tax residency would have taxing rights on the individual’s worldwide income, making the choice of such country crucial, especially for HNWIs.
TAX POSITION FOR FREQUENT TRAVELERS
The lifestyle of certain individuals requires significant travel and, therefore, they may not spend more than 183 days in any one country. One might think that this is ideal, as they may not have a tax residency and thus no country would have taxing rights on their worldwide income. In reality though, it is a complex situation that one may wish to avoid, as it can lead to multiple countries claiming taxing rights on the same income stream, resulting in double taxation.
HOW CAN I BECOME A CYPRUS TAX RESIDENT?
An individual who spends more than 183 days in Cyprus during a calendar year, would be considered as a Cyprus tax resident. However, Cyprus also offers a tax residency option for individuals that have significant travel commitments and are not in a position to spend more than 183 days in any specific country (including Cyprus).
More specifically, an individual can become a Cyprus tax resident by spending at least 60 days (not necessarily consecutive) in Cyprus, provided they meet the following conditions within the same tax year (1/1-31/12):
• do not spend more than 183 days in any other country,
• are not a tax resident of any other country,
• maintain a permanent home in Cyprus (owned or rented), and
• carry on a business in Cyprus, are employed in Cyprus or hold an office in a Cyprus tax resident company, provided that such an activity is not terminated by the end of the year.
It should be highlighted that, upon request (even within a tax year), the Cyprus Tax Authorities can issue a tax residency certificate to qualifying individuals.
DOUBLE TAX TREATY NETWORK AND REDUCED WITHHOLDING TAXES ON DIVIDENDS, INTEREST AND ROYALTIES
Cyprus is party to more than sixty tax treaties, including one with the UK. Cyprus tax residents enjoy protection from double taxation due to these tax treaties, as well as other benefits such as reduced withholding tax rates on dividends, interest and royalties, which is particularly appealing for HNWIs.
OTHER TAX BENEFITS
Earnings from overseas employment for which a Cyprus tax resident spends more than 90 days abroad in providing his/her services, are exempt from tax.
In addition, HNWIs taking up employment in Cyprus and earning more than €55,000 per annum, can take advantage of a 50% personal income tax exemption (subject to conditions). This would allow them to enjoy an effective tax rate on such employment income, in the range of 3,6%-17.5%. What is more, Cyprus exempts retirement gratuity from tax and offers a special tax regime on foreign pension income, whereby individuals can choose to be taxed at a flat rate of 5%. This can prove particularly attractive to those wishing to retire on the island.
Finally, an individual who decides to live in Cyprus does not need to worry about estate duty, property tax, wealth tax, gift tax or inheritance tax, since none of these are applicable in Cyprus.
CYPRUS PERMANENT RESIDENCE PERMIT
Individuals who are non-EU (e.g. British) nationals may apply for the right to have permanent access to Cyprus. Obtaining a Cyprus Permanent Residence Permit would exempt them from immigration entry procedures (i.e. Visitor’s Visa) and provide HNWIs with a base within the EU.
Applicants must (among others) invest a minimum amount of €300.000 (excl. VAT) in one of the of the four approved investment categories (Residential or any other type of real estate, Cyprus company’s share capital or units of a Cyprus Investment Organization of Collective Investments e.g. AIF, AIFLNP, RAIF etc.). Furthermore, they must prove that they have a secure and steady annual income transferred on a regular basis from abroad to a bank operating in Cyprus, which should be derived from sources other than employment in Cyprus.
UK-NON DOMS: CHOOSE YOUR TAX RESIDENCY WISELY!
UK non-dom HNWIs are now faced with a strategic decision, given the changing UK tax landscape. If they are keen to add Cyprus to their travel plans (at least 60 days), buy a permanent home and expand their business interests on the island, Cyprus could have a positive impact on their “net worth equation” and, more importantly, on their quality of life.
Nonetheless, changing tax residency requires careful consideration of all relevant factors and a thorough tax analysis to mitigate the potential risks and maximise the benefits. Since each individual’s tax, legal and financial situation is unique, it is imperative to request tailored tax consultation prior to taking any decisions.