On the 9th July 2015, the Cypriot House of Representatives voted a number of significant amendments to the Cyprus tax legislation, further improving the attractiveness of the Cypriot tax system. One of the most important changes made was the introduction of the concept of a non-domiciled resident individual.
Special Contribution for Defense (“SDC”)
Up until now, Cyprus tax resident individuals were subject to an additional type of taxation on certain types of income, called Special Contribution for Defense. This taxation was imposed at the following rates:
- 30% on “passive” interest income;
- 17% on dividend income;
- 3% on 75% of rental income.
The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders (beneficiaries) of such companies are Cyprus tax resident individuals.
An individual is considered to be a Cyprus tax resident if he/she is physically present in Cyprus for a period or periods exceeding in aggregate 183 days during each calendar year. For the determination of residency, the purpose of being in Cyprus is not relevant, nor is it a condition that a Cyprus tax resident person owns or rents accommodation in Cyprus. It is literally based on the number of days spent in the country without any further conditions.
In calculating the days spent, the following apply:
- the day of departure is considered as a day outside of Cyprus,
- the day of arrival is considered as a day in Cyprus,
- arriving in Cyprus and departing on the same day is considered to be a full day in Cyprus, and
- departing from Cyprus and arriving on the same day is considered to be a day outside of Cyprus.
With the recent amendment, the SDC law provides for the imposition of SDC to an individual only if he/she is both a resident for tax purposes of Cyprus and is also considered to be domiciled in Cyprus.
As such, with the introduction of “non-domicile” or “non-dom” rules, a Cyprus tax resident individual who is not domiciled in Cyprus will 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 SDC law defines the term domicile with reference to the Will and Succession Law, Cap 195, as amended. Under this law, a domiciled person is every person which has, at any given time either:
- the domicile received by him/her at birth (‘domicile of origin’), or
- the domicile (not being the same as the domicile of origin) acquired or retained by him/her by his/her own act (‘domicile of choice’).
Under (i) above, the domicile of origin of a legitimate child is that of the father’s, or in the case of an illegitimate child, that of the mother’s.
Under (ii) above, a person may acquire a domicile of choice by establishing his/her home at any place in Cyprus with the intention of permanent or indefinite residence.
The domicile of origin prevails and is retained until a domicile of choice is in fact acquired. Once a domicile of choice has been acquired, it will be retained until it is abandoned, in which case either a new domicile of choice will be acquired, or the domicile of origin is resumed.
As per the newly amended SDC legislation, an individual is considered to be domiciled in Cyprus by way of domicile of origin in accordance with the Wills and Succession Law, except for the following cases:
- An individual who has obtained and maintained a domicile of choice outside Cyprus in accordance with the Wills and Succession Law, provided that such an individual has not been a tax resident of Cyprus for a period of 20 consecutive years preceding the tax year; or
- An individual who has not been a tax resident of Cyprus for a period of 20 consecutive years prior to the introduction of the present 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 be subject to SDC regardless of his/her domicile of origin (“deemed domicile”).
The law includes anti-abuse provisions as per which the Cyprus Tax Office has 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.