Tax Planning for High Net Worth Individuals: The Case for Cyprus

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, especially when their lifestyles require extensive travel. If you live outside of Cyprus and the island could be part of your travel itinerary for at least 60 days per year, you can 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 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 as 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 of Frequent Travellers

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.

Cyprus Tax Residency in 60 Days

Cyprus offers a favourable tax residency option for individuals who do not spend more than 183 days in any specific country. An individual can become a Cyprus tax resident by spending at least 60 days (not necessarily consecutive) on the island, provided they meet the following conditions within the same tax year (1/1-31/12):

• They do not spend more than 183 days in any other country,
• They are not a tax resident of any other country,
• They maintain a permanent home in Cyprus (owned or rented), and
• They 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.

Cyprus has a lot to offer to Cyprus tax residents. Besides the high standard of living, sunny weather and a dynamic business environment, the following benefits are worth considering.

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 received. 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), 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, 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 gratuities 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

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) 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, a 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.

Choose Your Tax Residency Wisely

If you are keen to add Cyprus to your travel plans (just 60 days!), buy a permanent home and expand your business interests on the island, Cyprus could have a positive impact on your “net worth equation” and, more importantly, on your 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.

By Michael Michaelides, Partner and Angelos Gregoriou, Director, Tax & Legal Services, Deloitte

(This article first appeared in the 2024 edition of The Cyprus Journal of Wealth Management, commissioned by Eurobank Cyprus and published by IMH. Click here to view the article. Click here to view the entire magazine online.)