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Domicile under Cypriot Tax Law

Surprising as it may seem, most of the advantages of the Cypriot tax regime were, up until recently, directed at non-Cypriot tax residents. This effectively meant that, to enjoy the full benefits of the regime, one had to be a non-resident.

The idea behind this was to have a twofold regime, one for Cypriot tax residents and one for investors wishing to use Cyprus as part of their tax planning operations. This distinction at first seems logical and is actually a method applied in many jurisdictions with attractive tax regimes. The locals pay their taxes to the government while specific tax incentives are in place to encourage international investors to make new investments.

Over the years, the government realised that many individuals from abroad liked the Cypriot weather and lifestyle so much that they decided to make Cyprus their permanent home. The applicable rule, in accordance with the provisions of the Cypriot Income Tax Law, is that anyone residing for more than 183 days within a given tax year becomes a Cypriot tax resident.

Many found the Cypriot tax regime attractive compared with their countries of origin. While the Cypriot regime was advantageous for the average individual wishing to enjoy Cyprus on a daily basis, this was not the case for high net worth individuals (HNWIs). More specifically, up until recently, a Cypriot tax resident had to pay, on a worldwide basis, a 17% special defence contribution (SDC) on dividends, 30% SDC on interest on bank deposits and 3% SDC on rental income.

Narrowing of SDC

In a bid to attract HNWIs, the government has sought to create a further differentiation in the tax regime of Cyprus by introducing the legal concept of 'domicile' as part of a series of amendments to the tax legislation passed in July 2015.

The concept of domicile was inserted into the provisions of the SDC law, clearly aimed at creating a further differentiation in the tax regime. The end result is that tax residents must also be domiciled in Cyprus in order to be required to pay SDC on dividends, interest on bank deposits and rental income.

The legal concept of domicile is not a new concept in Cypriot law. Domicile was already included in the provisions of the Cypriot Wills and Succession Law and is very important for determining which jurisdiction shall govern and regulate the succession of a deceased person. Indeed, the determination of domicile for succession purposes stems from a set of rules based on domicile of origin (where someone was born) and domicile of choice (where someone has decided to make their permanent home).

It should be stated, however, that the determination of domicile should be seen as distinct from citizenship or residence. The determination of domicile for succession purposes is based upon specific legal rules and specialist legal advice should be obtained.

The new amending provisions of the SDC law provide that a tax resident for the purposes of SDC law (and not income tax law) shall be a person also having its domicile of origin in Cyprus in accordance with the provisions of the Wills and Succession Law.

Furthermore, the new provisions provide that there shall be an exemption from SDC obligations for persons having their domicile of choice in accordance with the Wills and Succession Law outside Cyprus (provided they have not been tax residents in Cyprus under the 183 days rule during the 20 years before the tax year in question) or simply a person who has not been a tax resident of Cyprus for 183 days a year in the last 20 years. It should also be noted that anyone who has been a tax resident of Cyprus for 17 of the last 20 years preceding the tax year in question shall be deemed to have its domicile in Cyprus.

This new amendment will have profound effects in the area of tax planning and is expected to place Cyprus on the map as one of the best jurisdictions in the world for the establishment of residence for high net worth individuals. Obviously, specialist advice should be obtained from tax and legal experts in order to plan and achieve such tax migration exercises in accordance with the new provisions of the SDC law.

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Zoe Kokoni

Eurofast Taxand

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