Cyprus: Cyprus Tax Update – Summer Edition

Last Updated: 26 February 2019
Article by Petros Rialas

Cyprus becomes hotter than ever before!

Greets from Cyprus where the summer is already upon us reaching 33+ degrees Celsius. Whilst we cool ourselves with chilled watermelon accompanied by grilled halloumi cheese, the beaches are already packed with locals, tourists, ex-pats and ... non-doms.

Non-doms is the newest fruit offered by Cyprus. In fact, with the very recent introduction of the concept of 'non-domiciled' persons for tax purposes, foreign persons who decide to become Cyprus tax residents enjoy an array of tax benefits – including a total tax exemption on certain types of income, such as dividends, interest and profit from sale of shares.

In light of the forthcoming changes in the popular UK non-dom regime and compared with other similar EU programs, the Cyprus non-dom is undoubtedly the hottest program of its kind in the EU, attracting a dynamic interest from all around the world. More about the Cyprus non-dom can be read in our newest information sheet by clicking here.

Below are three client cases of ours who considered the advantages of the Cyprus non-dom regime as well as other recent attractive developments. Each client coming from a different part of the world, with different needs and intentions, and yet, all of them, enjoying the same benefits whilst achieving their personal aims.

Case 1: Alexei from Russia

Alexei has been a regular visitor and friend of Cyprus for many years now - for holidays with his family as well as for business. He has always used Cyprus companies and other local professional services in conducting his international affairs. After all, Cyprus companies have and continue to work in a tax efficient and practical manner in international tax structuring.

A couple of years ago, Alexei took advantage of the Cyprus Citizenship by investment program (click here to read about the Citizenship program in our newest product sheet). Through this, he obtained for himself, his wife and three children the Cyprus passport that offers all advantages of an EU passport. At the same time they can freely travel in and out of Cyprus without the need of any visa or restriction whatsoever.

For various reasons Alexei had considered for a few years now to move his business base and his family somewhere in the EU. As soon as the Cyprus non-dom regime was introduced, this was the opportunity he was looking for. He need not look any further.

In brief, he and his family have completely moved out of Russia and into Cyprus. Living in a villa by the beach, they became Cyprus tax residents (and automatically non-doms), the children enrolled in one of the international schools of our island, his wife socializing in a safe and easy going environment along with the thousands of Russians who permanently live here, and Alexei is now working from Cyprus with regular travels in the EU and Russia for business matters. He has also become a salaried director in all of his Cyprus companies (enjoying a 50% exemption from personal income tax on such salary) and works through a small office setup; thus adding to the much needed local business substance of these companies.

Alexei also took advantage of the newly introduced tax provision in relation to a Notional Interest Deduction ("NID") on new equity for Cyprus companies - click here for more on NID. His Cyprus companies have, amongst other, been actively involved in providing loans to related Russian and other foreign operational companies. These loans were traditionally effected through back-to-back loan arrangements allowing for a thin spread to be taxable in the hands of the Cyprus company. Appreciating the importance of his Cyprus companies to be able to demonstrate that they are the 'beneficial owner of the income' that they receive (e.g. interest from loans granted out) for the purposes of obtaining related double tax treaty and EU Directive benefits, Alexei was satisfied that the NID provision was to a large extent a solution on this matter. Having liaised with our tax specialists, all the loans received by the Cyprus companies have been rearranged, capitalized and made eligible for NID. This way, the Cyprus companies now grant out loans out of OWN funds, the resulting tax is similar to the previous back-to-back arrangements as NID is now available, and the companies have secured the reduction or elimination of foreign withholding taxes on foreign interest received.

Alexei, who is a high net worth individual, has also arranged a significant portion of his private international property (such as real estate, a yacht, deposits and other investments) in an underlying structure owned by a Cyprus International Trust. By doing so, he secured asset protection, estate planning and succession issues as well as a serious tax optimization on incomes generated through these assets which will no longer be taxed in his hands nor when he or his family members receive any distributions.

Alexei is most happy, so are his children and wife ... each one for their own reasons!

Case 2: Frank from Germany

Frank originally comes from Germany but had been a UK non-dom for many years. He is in his early 40's and has accumulated a good fortune from real estate investments around the world. The majority of his income derives from such real estate (rents and capital gains) as well as trading in shares. With all the recent developments and uncertainties, mainly to do with personal taxation, he has considered for some time now to move his personal tax residency in some other country. Monaco was one obvious choice – but he quickly abandoned the idea when he was presented with the Cyprus non-dom alternative.

As Frank is European he could permanently move to Cyprus without obstacles, no need of local investment nor the need to buy a house. However, as Frank is business minded when it comes to real estate, he immediately recognized the potential of investing in prime properties in Cyprus. Combined with another tax incentive offered, whereby for any Cyprus properties purchased before the end of 2016, the 20% capital gains tax on future disposal shall not apply, he immediately searched the market and invested in two big properties with good capital appreciation prospects.

Frank has now effectively moved out of the UK, has become a Cyprus tax resident (and automatically a non-dom), working and doing his transactions from his laptop and smartphone whilst enjoying the mediterranean weather and sipping down cocktails and prime single malts – but most importantly enjoying an almost zero tax in Cyprus.

Frank has by the way started dating a local girl and could not be happier.

Case 3: Amir from the Gulf Area

Amir is a family man from a troubled area in the Gulf Area who owns a successful company operating in the Middle East. Worried about the future security of his family, he obtained the Cyprus Permanent Residency Permit by investment (click here to read about the PRP program in our newest product sheet). This was the best move he could do under the circumstances as he has now provided a 'Plan B' should he and his family decide or are forced to move in a rush to some other country without any delay for visa or other immigration paperwork arrangements. They can travel and stay or even permanently reside in Cyprus at any time. At the moment, they enjoy the house they bought for short break holidays. Should he ever decide to permanently live in Cyprus, Amir, as a non-dom, will not be subject to any Cyprus tax on dividends received from his company. Currently, Amir and his family are on a two week holiday in the Blue Flag beaches of Ayia Napa.

Wishing you all a happy summer!

Originally published 13 July 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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