• Tax Residency
• Sources of Income for Tax Residents
• Sources of Income for Non Tax Residents
• Income Exempt from Tax
• Deductions from Taxable Income
• Personal Allowances

Cyprus’ accession to the European Union in 2004 and the subsequent fulfillment of all necessary conditions and economic criteria for entering the Euro zone as of January 1st 2008, constitute Cyprus as a fully integrated member of the European family. As a prerequisite to the accession, the Cyprus tax legislation had to undergo a number of changes in an effort to become fully compliant with the European Union requirements and also with the OECD requirements against harmful tax practices. One major change, entrenched in the new Income Tax Law (N.118(l)/2002), is the establishment of tax residency as the principal criterion for assessing the tax liability of companies and individuals.

Tax Residency

The definition of “residence” in the tax legislation is now of critical importance. Cyprus has adopted the “183 days rule” whereby physical presence in Cyprus for more than 183 days in a calendar year constitutes tax residency for individuals.

Sources of Income for Tax Residents

Under the Law, resident persons are charged tax on their income accrued or arising from sources both within and outside Cyprus from:

• Any profits or other benefits from any business, office or employment;
• Any pension, charge or annuity;
• Any dividend, interest or discount;
• Any rents, royalties, remuneration or other profits arising from property;
• Any amount received in consideration for any trade goodwill.

Sources of Income for Non Tax Residents

Non tax resident persons are charged tax only on income accruing or arising from sources within Cyprus.

• Any profits or other benefits from any office or employment exercised in Cyprus;
• Lease payments, royalties, remuneration or other profits arising from property situated in Cyprus;
• Any amount received in consideration for any trade goodwill;
• Pensions deriving from past employment exercised in Cyprus. (With the exception of any pension paid by the Government or a local authority of Cyprus).

Income Exempt from Tax

In arriving at an individual’ taxable income, certain tax exemptions must be taken into consideration as prescribed in the Income Tax Legislation:

• The widow’s pensions granted under the Social Insurana Laws of 1980 to 2002.
• Any lump sum received by way of retiring gratuity, communication of pension or death gratuity;
• 20% of the remuneration from any office or employment exercised in Cyprus by an individual who has been resident outside Cyprus before the commencement of his employment, or €8543 Euros, whichever is lower. This concession is valid for three years.
• The remuneration from the rendering of salaried services outside Cyprus for a total aggregate period in the year of assessment of more than ninety (90) days to an employer not resident in Cyprus or to a permanent establishment abroad of an employer resident in Cyprus;
• Interest income; (Subject to the Special Contribution and taxed at a rate of 10%)
• Dividend income; (Subject to the Special Contribution and taxed at a rate of 15%)
  Profit for the sale of securities.

Deductions from Taxable Income

In arriving at the taxable income in a year of assessment, an individual is also entitled to certain deductions.

• 20% is deducted from income arising from the letting of buildings; (before the deduction of interest expense to acquire the buildings and wear and tear allowance)
• 40% of the deposits with the Housing Finance Corporation, with some restrictions; (for plans in effect as at 30 April 2003)
• Subscriptions to trade unions or professional bodies;
• Expenditure for the preservation of buildings in respect of which there is in force a Preservation Order; (subject to conditions)
• Donations or contributions made to approved charitable organisations; (with receipts)

Personal Allowances

The following personal allowance are permitted in addition to the exemptions and deductions outlined above:

• Social Insurance contributions, contributions to approved Pension or Provident Funds, premiums to an insurance company for the issue of an approved insurance policy with it’s main objective the provision for the individual of a live annuity in old age, premiums to an insurance company for a Pension Scheme or Medical Scheme, contributions under the General Health Scheme Law in force as well as life insurance premiums securing the payment of a fixed capital sum upon death, (such deduction shall not exceed seven percent (7%) of that capital sum).

The total deductions for all contributions above shall not exceed one sixth (1/6) of the taxable income of an individual before the deduction of these allowances. Income subject to tax:

The amount of taxable income that arises after taking into consideration the above is subject to the following progressive tax rates for 2008:

Pension Income from Services Rendered Abroad

Even after it’s accession to the E.U, Cyprus has managed to retain a very favorable tax regime in respect of foreign pensions received in Cyprus. Specifically, the first €3,417 of a foreign pension which is remitted to Cyprus, is tax-free. The rest is taxed at a flat rate of five percent (5%). The taxpayer may opt, from year to year, to be taxed in accordance with the normal income tax provisions where this special tax mode results in a higher tax liability.

Taxation of Foreign Employees

• According to the provisions of the current Income Tax legislation, the tax liability of both local and foreign individuals working in Cyprus is based on tax residency. Hence, a foreign national who is tax resident in Cyprus is liable to tax in the exact same manner as a Cypriot national who is a Cyprus tax resident.
• A Cypriot or foreign employee wholly exercising employment outside Cyprus is exempt from taxation in Cyprus even in the case where the salary is paid by a tax resident employer.
• A Cypriot of foreign employee, non-tax resident of Cyprus, who in a year of assessment exercise employment in Cyprus and abroad, is subject to tax in Cyprus according to the number of days corresponding to employment exercised in Cyprus, (subject to the provisions of a Double Tax Treaty where applicable).