Interpretative Circular 2017/4 (the “Circular”), issued by the Cyprus Tax Department, deals with exemptions from income tax of income from employment in the Republic of Cyprus.
The first exemption has been in effect for many years and it is mainly targeting to attract Cypriots studying abroad to return to Cyprus for employment. The exemption from income tax applies for:
· twenty per cent (20%) of the salary or €8,550, whichever is the smallest;
· any employment in the Republic;
· a person who was a resident outside the Republic in the year preceding the year of commencement of his employment in the Republic.
The exemption commences on 1 January of the year following the year in which employment begins and:
The second and most important exemption has been in effect from 1 January 2012. It was implemented to attract foreign companies or groups to establish themselves or, as is usually the case, transfer their base and substance of operations in Cyprus by offering 50% exemption on personal income. The exemption applies to employment income of a non-resident person taking up residence in Cyprus to work for an employer in the country.
This exemption was granted initially for five years including the year of commencement of employment, but the application period was later on extended to ten years. Furthermore, a restriction was set providing that the exemption shall not be granted to a person who was a resident of Cyprus:
· in any three of the five tax years preceding the year of employment; and
· in the year preceding the year of employment.
For a person starting work in 2012, 2013 or 2014 already receiving the 50% exemption:
· the exemption continues to be granted until ten years have elapsed;
· the restriction for not being a tax resident in any three out of the five years preceding the year of his/her employment does not apply.
Clarifications concerning the application of both exemptions
· For fiscal years up to and including 2014, exemptions are not granted at the same time in a tax year, but only one can be selected. For the year 2015 onwards, if a claim under the second exemption is filed, the first exemption cannot be claimed.
· For each tax year, a different exemption from that granted in the previous year may be claimed, provided that the conditions for the application of each exemption are fulfilled.
· An exemption may be granted to persons who are either tax or non-tax residents of Cyprus during their employment in the Republic.
· An exemption may be granted to persons whose employment starts later in the tax year but they have completed more than 183 days in Cyprus in that tax year, provided that during the previous tax year (i.e. the year preceding the employment year) were non-tax residents of Cyprus.
· An exemption may be granted to a person who had previously worked in the Republic, provided that employment abroad (before returning to Cyprus for employment) was not a secondment or transfer to the same employer, to which the claimant returned for employment in Cyprus.
· An exemption is also granted if a person carries out his employment in Cyprus with the same employer in which he was employed abroad.
· An exemption is granted even when a person changes employment during the relevant period.
· In the case of graduates who complete their studies abroad and return to work in Cyprus, they are entitled to the exemption provided that during the previous fiscal year they were residents outside the Republic.
· An exemption may be granted simultaneously with the deduction provided for in the Income Tax Law, which relates to the remuneration for the provision of salaried services outside the Republic for a total period of more than 90 days in a tax year.
· The exemption is also granted to a person who is employed in a company established by that person – i.e. he/she is a director and/or shareholder of the company.
Clarifications specific to the second exemption
· The exemption is applicable in any of the ten years in which the annual remuneration exceeds €100,000. If in any of those ten years the annual earnings do not exceed €100,000, then the taxable person can claim the first exemption, assuming the five year period has not already expired.
· It is noted that the 50% exemption is granted in any of the ten years in which the salary exceeds €100,000 per year, even if at the start of the employment, the actual earnings do not exceed €100,000 in the tax year concerned, provided that the said earnings exceed €100,000 if calculated on an annual basis.
· The 50% exemption applies where the income from employment exceeds the amount of €100,000 on an annual basis, even if the actual income in a tax year does not exceed €100,000 due to the fact that the employment contract commences or ends or is interrupted within this tax year. The exemption also applies if the employment lasts for less than one year if the remuneration for that period exceeds €100,000.
· The maximum period for which the exemption applies is ten years, including the year of commencement of employment. This period runs irrespective of whether the taxpayer is a resident or non-resident of Cyprus, or whether he is employed in the Republic or not, or actually benefits from the exemption or not (e.g. If in one year the annual fee falls below €100,000 then for that year it is not entitled to the exemption but will be entitled to the exemption in subsequent years in which the annual fee exceeds €100,000).The variation in annual remuneration should not be due to an abusive (virtual) arrangement to benefit from the exemption, otherwise the Tax Department will not grant the exemption.
· For the purpose of calculating the threshold of €100,000 to apply the 50% exemption, earnings related to remuneration from employment, including allowances and bonuses, and any other covered by the Income Tax Law must be taken into consideration.
· The remuneration for the provision of salaried services outside the Republic, for which the deduction mentioned above, applicable to a period of service abroad of at least 90 days in a tax year, is granted, is not included in the income for the purpose of covering the threshold of €100,000 per year for the application of the 50% exemption, as income must relate to employment carried out in the Republic.
· The exemption is also granted if a person is employed by two or more employers in Cyprus, with the total remuneration exceeding €100,000 calculated on an annual basis.