Navigating Non-Domicile Tax Status: A Detailed Comparative Analysis between UK and Cyprus

Introduction:

As the global tax landscape evolves, recent developments in tax policies, particularly in the UK and Cyprus, have brought non-domicile tax status to the forefront for individuals seeking tax-efficient solutions. In this comprehensive analysis, we delve deeper into the proposed changes in the UK alongside the established non-domicile tax regime in Cyprus, providing detailed insights into the advantages and implications for international residents.

Proposals Affecting Individuals:

In UK, the forthcoming transition to the Foreign Income and Gain (FIG) regime from April 6, 2025, signifies a significant departure towards residence-based taxation. Under this regime, individuals will face taxation on their worldwide income and gains sooner than before, marking a pivotal shift in tax planning strategies. The implications of this change extend beyond mere compliance, impacting investment decisions, asset allocation, and overall wealth management strategies.

Conversely, Cyprus offers a stable and attractive tax environment for non-domiciled residents. With its well-established non-dom regime, Cyprus provides exemptions from certain taxes and offers favourable rates on remuneration, dividends, and foreign-derived income. This makes Cyprus an appealing destination for individuals seeking to optimise their tax liabilities while maintaining financial flexibility.

Proposals Affecting Trusts:

The British government’s decision to abolish the protected trust regime will have far-reaching implications for non-UK trusts with UK resident settlors or beneficiaries. The taxation of trust income and gains is set to change, necessitating a thorough review of trust structures and estate planning strategies. This transition underscores the importance of proactive tax planning and the need to explore alternative wealth management solutions.

In contrast, Cyprus continues to offer tax advantages for non-domiciled residents through its robust trust framework, notably the Cyprus International Trusts. These trusts provide opportunities for wealth preservation, asset protection, and tax optimisation, making them a valuable tool for individuals seeking to safeguard their assets and mitigate tax liabilities.

Inheritance Tax:

The impending transition of inheritance tax to a residence-based system in UK from April 6, 2025, presents significant implications for individuals’ estate planning strategies. The shift in tax treatment necessitates a reevaluation of succession plans, asset structuring, and wealth distribution mechanisms. This underscores the importance of proactive estate planning and the need to explore tax-efficient strategies to mitigate potential tax liabilities.

In contrast, Cyprus offers non-domiciled residents exemptions from inheritance tax, wealth tax, and estate duty, providing a favourable environment for wealth management and succession planning. This presents a compelling advantage for individuals seeking to preserve and transfer their wealth efficiently to future generations.

Understanding tax residency and non-domiciled status in Cyprus is crucial for individuals seeking to optimise their tax positions and comply with legal requirements. In this legal analysis, we explore the criteria for tax residency, the advantages of non-domiciled status, and the implications for individuals under Cyprus law.

What are the criteria for Tax Residency in Cyprus?

Cyprus tax residency hinges on two primary criteria:

1. the internationally recognised 183-day rule or
2. Cyprus’ unique 60-day rule.

Under the 183-day rule, individuals spending more than 183 days annually in Cyprus are deemed tax residents. This rule aligns with global standards and practices.

Conversely, Cyprus’ 60-day rule offers an alternative path to tax residency. Individuals residing in Cyprus for more than 60 days per year can attain tax residency if they meet specific conditions, including:

• Not being tax residents elsewhere.
• Not exceeding 183 days of residence in another jurisdiction.
• Demonstrating economic ties to Cyprus, such as property ownership, business activities, or serving as a Director of a Cypriot tax resident company.

Attaining tax residency in Cyprus presents several legal advantages, including favourable income-tax rates, reduced social insurance contributions, and advantageous corporation tax rates.

What are the Criteria for Qualifying for Non-Domiciled Status?

Under Cyprus’ legal framework, individuals may qualify as non-domiciled if they meet specific criteria outlined in the Wills and Succession Law. There are two recognised types of domicile:

1. domicile of origin and
2. domicile of choice.

Non-domiciled status can be obtained by individuals residing in Cyprus for less than 17 years while spending over 60 days annually in the country, regardless of their domicile status.

Additionally, individuals with a domicile of origin in Cyprus may acquire non-domiciled status if they:

• Have not been Cyprus tax residents for at least 20 years prior to the tax year.
• Have not maintained continuous Cyprus tax residency for at least 20 years preceding the implementation of new rules (since July 16, 2015).

Non-domiciled individuals must adhere to residency requirements, such as spending no more than 183 days per year in any other jurisdiction and lacking tax residency elsewhere. They must also spend a minimum of 60 days annually in Cyprus and demonstrate substantial ties to the country, such as through employment contracts, business ownership, or Directorship of a Cyprus-registered company.

What are the Advantages of Non-Domicile Status in Cyprus?

Cyprus offers a multitude of tax advantages for non-domiciled residents, including:

1. Exemption from Special Defence Contributions (SDC): Non-doms are exempt from SDC on various income sources, providing significant tax savings.
2. Tax Exemptions: Non-domiciled residents enjoy exemptions on dividends, interest, and income derived from abroad, enhancing their overall tax efficiency.
3. Capital Gains Tax Exemption:With exceptions for immovable property in Cyprus, non-doms benefit from exemptions on capital gains, promoting investment and wealth accumulation.
4. Low Social Insurance Contributions: Non-domiciled residents benefit from reduced social insurance contributions, enhancing their overall financial flexibility.
5. Reduced Tax Rates: Non-domiciled residents may benefit from a 50% reduction on their income tax on employment remuneration if they receive equal or more than EUR 55,000 gross salary per year, this tax exemption is valid for 17 years and incentivising high-net-worth individuals to relocate to Cyprus.
6. There is also no gift tax, wealth tax, estate duty or inheritance tax.

Comparable Table:

Conclusion:

In conclusion, while the UK undergoes significant reforms in its non-dom tax regime, Cyprus continues to offer a favourable tax environment for international residents. Understanding the intricacies of these tax regimes and their implications is crucial for individuals seeking to optimise their tax positions, preserve their wealth, and structure their assets effectively in an ever-evolving tax landscape. Proactive tax planning, thorough analysis, and expert guidance are essential to navigate the complexities of non-domicile tax status and capitalise on the opportunities presented by both the UK and Cyprus tax regimes.

In case that you require any specific advice please do not hesitate to contact our Founding Partner in Cyprus Mr. Theo Antoniou at [email protected]