Cyprus has for many years been one of the most attractive jurisdictions for tax planning due to its favorable regime for individuals and legal entities. The introduction of Non-Domicile status in 2015 has significantly reduced the tax burden for foreign investors, entrepreneurs and expats. This status opens up opportunities to legally reduce taxes by excluding taxation of dividends, interest and capital gains. However, it is important to take into account the legislative nuances, conditions for obtaining the status and strategies for its application in accordance with current practice.

Cyprus tax legislation and Non-Domicile regime

The main regulations governing the Cyprus tax system are the Income Tax Law (ITL) and the Special Defense Contribution (SDC Law). According to the 2015 amendments, Cyprus residents with Non-Domicile status are exempt from paying Special Defense Contribution (SDC) on dividends, interest and rental income. This means that investors and entrepreneurs can receive income from abroad without additional taxation.

Main aspects of the Non-Domicile regime

1. Exemption from Special Defense Contribution (SDC):
   • Dividends: the SDC rate for ordinary residents is 17%, but Non-Domicile are exempt from this tax.
   • Interest income: ordinary residents pay 30% and Non-Domicile pay 0%.
   • Rental income: the 3% rate on 75% of rental income applies only to ordinary residents.
2. Capital Gains Tax (CGT):
   • Sales of shares outside Cyprus are not subject to Capital Gains Tax.
   • The sale of real estate in Cyprus is subject to CGT at the rate of 20%.
3. Income Tax (IT):
   • General scale of taxation of personal income:
     • Up to €19,500 – 0%
     • €19,501 – €28,000 – 20%
     • €28,001 – €36,300 – 25%
     • €36,301 – €60,000 – 30%
     • Over €60,000 – 35%
   • Non-Domicile are exempt from SDC but pay income tax on income earned in Cyprus.

Conditions for Non-Domicile status

To obtain Non-Domicile status, you must:

• Be a tax resident of Cyprus (reside for more than 183 days per year or meet the 60-day residency criteria).
• Not be Cyprus domiciled (not be a Cypriot citizen, not have resided in Cyprus for more than 17 of the last 20 years).

Persons who become tax residents are automatically granted Non-Domicile status if they did not previously have a Cypriot domicile.

Tax optimization: strategies and examples

Utilization of dividend payments

Since dividends are exempt from SDC, it is advantageous to structure income through dividend paying companies. For example:

Example:
An investor owns a Cypriot holding company that receives dividends from foreign subsidiaries. Since Cyprus has an extensive network of double tax treaties (DTT), the dividends are received by the holding company with minimal withholding tax. The dividends are then distributed to an individual with Non-Domicile status without SDC tax.

Structuring of interest income

Interest income is also exempt from SDC. It is advantageous to use corporate instruments, such as lending through Cypriot companies.

Example:
A foreigner provides a loan to his company abroad through a Cypriot structure. The interest received is withdrawn without SDC tax.

Real estate investments

If an investor purchases real estate outside Cyprus, the rental income is not taxed.

Example:
A resident of Cyprus with Non-Domicile status owns a commercial property in London. The rental income is deposited in a Cypriot bank account with no additional taxation in Cyprus.

Sale of business and capital gains

If the business is organized through a Cypriot company, the sale of its shares is not taxable in Cyprus.

Example:
An entrepreneur sells shares in a Cypriot company that owns assets in Europe. The transaction is free of capital gains tax as the shares are not linked to real estate in Cyprus.

Practice and statistics on the application of the Non-Domicile regime

According to the Ministry of Finance of Cyprus, since 2015, more than 30,000 foreigners have been granted Non-Domicile status. In 2022, this has led to an increase in capital inflows by €8 billion. At the same time, tax revenues to the budget have increased due to corporate taxes and VAT.

According to research by PwC Cyprus and KPMG, the most popular tax optimization strategies include:

• Holding companies (using Cypriot holdings for dividends);
• Financial structures (interest and loans through Cypriot companies);
• Investing through foreign SPVs (special purpose vehicles).

Limitations and tax risks

While the Non-Domicile regime offers significant benefits, there are risks:

• The introduction of a global minimum tax of 15% under the OECD initiative may affect the tax burden of Cypriot companies.
• The requirement for a company’s effective presence (substance) in Cyprus is strengthened.
• High tax countries may challenge tax residency through the concept of CFCs (controlled foreign companies).

Non-Domicile status in Cyprus remains one of the most favorable tax regimes in Europe. However, it is important to consider legal nuances, tax residency requirements and changes in international tax regulations. The most effective strategies include dividend payments, interest income, real estate investments outside of Cyprus and the sale of assets through Cypriot companies. If used correctly, this regime can significantly reduce the tax burden while maintaining full tax planning legality.