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Cross-border tax planning for High Net Worth Individuals

By Michael Michaelides, Partner, and Angelos Gregoriou, Senior Manager, Tax & Legal Services

If you are a High Net Worth Individual (HNWI), taxation can be an important variable in your “net worth equation”. In today’s complex world, HNWIs should carefully consider their tax position, particularly when their lifestyle requires significant travel.

If you live outside of Cyprus and the island could be part of your travel plans for at least 60 days per year, you could enjoy significant tax benefits, including no taxation on dividends, interest and capital gains (excluding gains from the disposal of immovable property in Cyprus).

 

TAX RESIDENCY AND TAXING RIGHTS ON WORLDWIDE INCOME

Globally, the single most used criterion that determines the tax residency of an individual 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 expanded their tax residency criteria, taking into account other connections between the country and the individual, like the ownership of a permanent home. The international tax principle provides that the country of tax residency would have taxing rights on the individual’s worldwide income. Therefore, the choice of such a country is crucial, especially for HNWIs.

TAX POSITION OF INDIVIDUALS WITH SIGNIFICANT TRAVEL NEEDS

The lifestyle of certain HNWIs 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 however, it is a complex situation that one may wish to avoid, since a number of countries may end up claiming taxing rights on the same income stream (double taxation).

CYPRUS TAX RESIDENCY IN 60 DAYS

Cyprus offers tax residency to individuals with a busy travel schedule. An individual can become a Cyprus tax resident when he/she spends at least 60 days (not necessarily consecutive) on the island, as long as he/ she also fulfils the following conditions within the same tax year (1/1-31/12):

  • does not spend more than 183 days in any other country,
  • is not a tax resident of any other country,
  • maintains a permanent home in Cyprus that is either owned or rented, and
  • carries on a business in Cyprus, or is employed in Cyprus or holds 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 self-declaring that they intend to meet all the above conditions.

Cyprus has a lot to offer to Cyprus tax residents. Besides the high-quality standard of living, an enviable combination of ideal climate, business  environment and culture, the following benefits are worth considering.

 

“NON-DOM” STATUS AND NO TAXATION ON DIVIDENDS AND INTEREST

A Cyprus tax resident who is not Cyprus-domiciled (“non-dom”) is exempt from tax on dividends, as well as interest income received from all over the world. 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, for a limited period, as not having his/her domicile in Cyprus.In essence, 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.

DOUBLE TAX TREATY NETWORK AND REDUCED WITHHOLDING TAXES ON DIVIDENDS, INTEREST AND ROYALTIES

Cyprus is party to more than 60 tax treaties, including with most EU countries, the UK and the US. 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. This is a particularly appealing consideration for HNWIs.

 

OTHER TAX BENEFITS

Earnings from overseas employment for which a Cyprus tax resident spends more than 90 days abroad in rendering 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 special (50%) 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 deciding to reside 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

HNWIs who are non-EU 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) purchase a new real estate property(ies) in Cyprus with a total purchase cost of at least €300,000 (excl. VAT) and have a secure and steady annual income transferred on a regular basis from abroad to a bank operating in Cyprus. The income should be derived from sources other than employment in Cyprus.

CHOOSE YOUR TAX RESIDENCY WISELY

If you are keen to add Cyprus to your travel plans, buy a permanent home and expand your business interests on this sunny island, Cyprus could have a positive impact on your “net worth equation” and, more importantly, on your quality of life.

The recent successful response of the Cyprus Government to the COVID-19 pandemic is proof that Cyprus is one of the safest places to live, let alone to spend just 60 days!

Nonetheless, any decision to change tax residency requires careful consideration of all the relevant facts and circumstances, as well as an appropriate tax analysis in order to mitigate potential risks and maximise benefits. Since each individual’s tax, legal and financial situation is different, it is imperative to request tailored consultation prior to taking any decisions.

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