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Cyprus

Cyprus

Thinking beyond borders

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View of the town of Paphos in Cyprus
 
A person’s liability to Cyprus tax is determined by their residence status for taxation purposes. The general rule is that a person who is a tax resident of Cyprus is assessable on worldwide income. A person who is a non-tax resident is only assessable on income accruing or arising from sources in Cyprus. Benefits in kind provided to employees are included in the employees’ income and are subject to income tax. Taxable income is taxed at graduated rates ranging from 20 percent to 35 percent.

Key message

Extended business travelers are liable for Cyprus taxation on employment income relating to their workdays in Cyprus in the instance that the income exceeds the tax free threshold.

Income tax

Liability for income tax

A person’s liability for Cyprus tax is determined by their residence status. A person can be a resident or non-resident for Cyprus tax purposes. The Cyprus tax law defines the term ‘resident in Cyprus’ when applied to an individual, meaning an individual who stays in Cyprus for a period or periods exceeding in aggregate 183 days in the year of assessment (1 January – 31 December). A ‘non-resident or resident outside Cyprus’ will be construed accordingly. There is no de mininius number of days rule in respect of residency start and end dates under Cyprus laws and the Cyprus tax residency is determined solely based on the above described 183 day rule.

The general rule is that a person who is a tax resident of Cyprus is assessable on worldwide income. Non-tax residents are generally assessable on income accruing or arising from sources within Cyprus (i.e. income from employment exercised in Cyprus). Extended business travelers are likely to be considered non-tax residents of Cyprus for tax purposes unless they enter Cyprus with the intention to remain in Cyprus for more than 183 days in a calendar year.

Furthermore, the definition of a Cyprus tax resident has been amended to also provide that, an individual who does not stay in any other country/jurisdiction, for one or more periods exceeding in aggregate 183 days in the same tax year and is not tax resident in any other country/jurisdiction for the same year, is deemed as a resident in the Republic in that tax year, if all of the following conditions are met:

  1. the individual stays in the Republic for at least 60 days in the tax year
  2. exercises any business in the Republic and/or is employed in the Republic and/or holds an office with a Cyprus tax resident person at any time during the tax year
  3. maintains (by owning or leasing) a permanent home in the Republic.

The law is further amended to clarify that an individual that cumulatively meets all the above conditions shall not be treated as a Cyprus tax resident in the tax year if, during that year the exercise of any kind of business in the Republic and/or employment in the Republic and/or holding of an office with a tax resident person in the Republic is terminated.

Tax trigger points for employment income

Technically, there is no threshold/minimum number of days that exempts a person from the requirement to file tax returns and pay tax in Cyprus. To the extent the individual qualifies for relief in terms of the employment income article of an applicable double tax treaty, there will be no tax liability. The treaty exemption will not apply if a Cyprus entity is viewed as the individual’s employer. The economic employer approach is not adapted or legislated in Cyprus.

Types of taxable income

All earnings, whether paid in cash or in the form of a benefit-in-kind (e.g. rental benefit, private use of a motor vehicle, private use of a mobile phone, school fees etc.), made by an employer to an employee are taxable unless specifically exempted. Further, pensions, annuities, rents, etc. are also taxable in Cyprus.

Tax rates

The first 19,500 Euros (EUR) in annual earnings is tax exempt. Income above this amount is subject to progressive tax rates ranging from 20 to 35 percent. These rates are applicable to both tax residents and non-tax residents. Please find below the progressive income tax brackets:

Chargeable Income (€) Tax Rate (%)
0-19,500 0
19,501-28,000 20
28,001 – 36,300 25
36,301 – 60,000 30
Over 60,000 35

Social security

Liability for social security

Contributions to the Cyprus Social Insurance Fund are mandatory and cover any person that is gainfully employed in Cyprus, either as an employed or as a self-employed person.

Most extended business travelers from within the EU would not be liable for Cyprus social security as they are eligible to remain in their home country/jurisdiction’s social security system under the EU social security regulations.

Employees coming from countries/jurisdictions outside the EU (third country/jurisdiction nationals) are generally fully subject to social security payments in Cyprus.

As of 1 March 2019, contributions for the National Health Insurance System (NHIS) have been introduced. Please find below a table summarizing the contribution rates for NHIS in Cyprus:

Category

As from

1 March 2019

As from

1 March 2020

Employees 1.70% 2.65%
Employers 1.85% 2.90%
Self-employed 2.55% 4.00%
Income earners (e.g. rents, interests, dividends) 1.70% 2.65%
Persons holding office 1.70% 2.65%
Pensioners 1.70% 2.65%

It should be noted that in accordance with the informational guidance issued by the Cyprus Tax Department, individuals who have an obligation to pay Social Insurance contributions in any other Member States and have in their possession an A1 certificate should not be subject to NHIS contributions in Cyprus.

Further, it should be noted that non-tax residents are subject to NHIS contributions only on their Cyprus sourced income.

Compliance obligations

Employee compliance obligations

Tax returns are due by 31 July following the tax year-end, and are submitted in an electronic format via the Taxisnet System. 

Employer reporting and withholding requirements

Tax on employment income must be withheld by the employer, under the Pay-As-You-Earn (PAYE) system and remitted to the tax authorities monthly. This tax is credited towards the employee’s final tax liability. The employer has the obligation to submit annually tax form (IR7) entitled ‘Employer’s Return of Employees’. This return should be filed by the employer no later than 31 July of the year following the year of assessment, electronically via the Taxisnet System.

Immigration

Work permit/visa requirements

A visitor’s entry visa does not entitle you to work in Cyprus. A business visitor will be entitled to conduct normal business visitor activities (i.e. attending meetings, visit to sites, negotiation of contract etc.) within a specified time.

Persons wishing to enter Cyprus for employment or business should normally be in the possession of entry permits prior to their arrival in Cyprus.

Employees from outside the EU/EEA wishing to live or work in Cyprus must apply for a work and residence permit.

Individuals from the EU do not need to apply for a work permit, but they do need to register with the Cyprus migration authorities by obtaining the MEU1 certificate within 4 months from their date of entry into Cyprus. According to the relevant legislation, the EU individuals have the right to reside in Cyprus for a period not exceeding 3 months, without any conditions or formalities. However, in practice, the MEU1 certificate may be required for trips in Cyprus for less than 3 months for registration with the Cyprus Tax Department.

Other issues

Double taxation treaties

In addition to the Cyprus domestic tax legislation that provides unilateral relief from international double taxation, Cyprus has entered into double taxation treaties with more than 65 countries/jurisdictions to prevent double taxation, and allow cooperation between Cyprus and overseas tax authorities in enforcing their respective tax laws.

Permanent establishment implications

There is the potential that a permanent establishment (PE) could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has, which needs to be decided on a case-by-case basis.

Indirect taxes

Since 13 January 2014, the standard Value Added Tax (VAT) rate in Cyprus is 19 percent. A reduced VAT rate of 5 percent applies to various products and services such as food items, entry fees to theaters, cinemas and other similar cultural events. A reduced VAT rate of 9 percent, among others applies to various pharmaceutical products, hotel accommodation and public and private transport.

Transfer pricing

The Cyprus Transfer Pricing legislation is currently drafted and is expected to be enacted in 2020 with retrospective effect from 1 January 2020. The legislation is expected to be aligned with the OECD Transfer Pricing Guidelines. Transfer pricing issues may be relevant for extended business travel. In particular, if a business traveler is being paid by an entity in one country but conducting activities for the benefit of a related party in another country. In this case, it might effectively constitute a service transaction between related parties, and it may be appropriate to charge an arm’s length price for such services. The scope and nature of such activities, as well as service fee for it, should be determined on a case by case basis.

Local data privacy requirements

Cyprus has data privacy laws. Organizations have a legal duty to keep data private and secure.

Exchange control

Cyprus does not restrict the flow of currency in and out of the country/jurisdiction. However, certain reporting obligations are imposed to control tax evasion and money laundering. An individual requiring a bank account in Cyprus may only do so with proof of identity.

Non-deductible costs for assignees

Non-deductible costs for assignees include for example relocation expenses, children’s school fees, commuting to and from work, and all other costs considered as being of a private nature.

Disclaimer

All information contained in this publication is summarized by KPMG Limited, the Cyprus member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the Cyprus Income Tax Law of 2002 (L.118(I)/2002) as amended, the Assessment and Collection of Taxes Law of 1978 (L.4/1978) as amended, the Social Insurance Law of 2010 (L.59(I)/2010) as amended, the Right of Union Citizens and their Family Members to Move and Reside Freely within the Territory of the Republic of Cyprus Law of 2007 (L.7(I)/2007) as amended, the Cyprus VAT Law of 2000 ( N.95(I)/2000) as amended, the General Healthcare System Law of 2001 (L.89(I)/2001) as amended and the Informational guidance for General Healthcare System issued by the Cyprus Tax Department on 9 of April 2019.

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