By broadening the tax exemption eligibility, Cyprus strategically aims to attract top talents from around the world. It has shown itself to be one of Europe’s most dynamic markets for talented professionals from all over the world. The generosity of these tax incentives is only a sample of the island’s commitment to fostering a dynamic and inclusive, growth-oriented economy. By doing so Cyprus is positioning itself as a preferred destination for dynamic companies and their highly skilled employees. With these additional incentives, a more inclusive version of the 20% and 50% exemption schemes has been introduced. These tax breaks have been designed especially for high income earners.
By extending the 50% income tax exemption, we are moving from Article 8 (23) to 8 (23A)
Under Article 8 (23) (A) of the Income Tax Law, a 50% income tax exemption was previously granted to individuals who were not residents of Cyprus for 10 years prior to their employment in Cyprus. However, as of 1 January 2022, a ‘new 50% exemption’ on remuneration has been introduced for “first employment” exercised in Cyprus by individuals whose remuneration exceeds €55.000 annually, previously being €100.000 annually. Individuals should not be residents in Cyprus for a period of at least 15 consecutive years immediately prior to their employment in Cyprus. In practical terms, this means that individuals can now benefit from the 50% income tax exemption if they were not residents of Cyprus for 15 consecutive years before starting their employment in the Republic, whether it is with a Cyprus resident employer or a non-Cyprus resident employer.
The employment should commence after 1 January 2022.
An employee is considered as exercising “first employment” in Cyprus if they did not exercise any salaried services (including occasional employment) in Cyprus, either for a local or a foreign employer, for a 15-year consecutive period immediately prior to the aforesaid employee taking up employment in Cyprus.
The exemption will apply once in each individual’s lifetime for a period of 17 years.
Individuals whose employment began prior to 1 January 2022 may also be eligible to transition into the new 50% exemption, subject to the following conditions:
They were eligible for the 50% exemption under the provisions of Article 8(23) of the Income Tax Law.
They were initially employed in Cyprus between 2016 and 2021 with an annual remuneration exceeding €55.000.
They commenced their first employment in Cyprus between 2016 and 2021 with an annual remuneration below €55.000, and within 6 months from the date of the new 50% exemption (26 July 2022) their remuneration exceeded €55.000.
The transition period starts in year 2022 and continues for 17 years from the year of employment.
This amendment further develops Cyprus's position as a destination for international professionals but also for expats who can now enjoy 50% income tax exemption for an extended period. The transition period provides the opportunity to those who started their employment before the new amendment came into effect to also benefit from the new 50% exemption.
With the new amendment the definition of ''commencement of first employment in Cyprus'' is defined as when an individual initially performs salaried services in Cyprus, either for a resident or non-resident employer, without considering occasional full or part-time employment in Cyprus for a period that does not exceed a total of 120 days in a tax year.
Previously, the “first employment’ was defined as the first time an individual worked as an employee in Cyprus. Shrot term or occasional work for periods not exceeding 120 days during a tax year was not considered as ''first employment.'' With the new definition of first employment, the qualifying period for the 50% exemption is now extended to 15 consecutive years of non-residency in Cyprus before starting employment. This change significantly expands the opportunities for employees to benefit from the 50% income tax exemption.
The New 20% Tax Exemption - From Article 8 (21) to 8 (21A)
Starting from July 26, 2022, Cyprus introduces a new 20% income tax exemption under article 8 (21) A of the Income Tax Law, with a maximum annual limit of €8.550. This exemption applies to the first employment that begins on or after this date and lasts for seven tax years, with the following conditions:
The employment must be carried out within Cyprus;
Individuals must not have been a resident of Cyprus for at least 3 consecutive tax years immediately before starting their employment;
They must have been employed outside of Cyprus by a non-resident employer.
A significant advantage is that both exemptions, 20% and 50%, do not require neither the individual nor the employer to be a Cyprus tax resident.
An individual can only claim one of the two exemptions. Individuals who were not Cyprus residents for 15 consecutive years and qualify for the income level can claim the 50% exemption. However, the 20% exemption comes in handy for individuals who do not meet the 50% exemption criteria, ensuring they still benefit from a tax advantage for up to 7 years.
Finally, yet importantly, individuals that do not meet the conditions to transition into the “new 50% exemption” but who are eligible to benefit under the previous 50% or 20% exemption may continue to benefit from the previous exemptions for any remaining period. The previous exemptions were available for a total period of ten years for the 50% exemption or five years for the 20% exemption, respectively.
Reviewing the ‘new’ 20% and 50% exemptions we can see that the intentions of the Cyprus government to attract foreign companies willing to relocate their headquarters/offices to Cyprus and bring along skilled personnel is a win-win arrangement. Cyprus targets to companies that are willing to create substance to contribute to the economic growth of the country. These companies can bring their key personnel along who will benefit from the favourable income tax exemptions. Further to the foreign individuals the big stake is also to bring back Cypriot professionals who excel in their field but choose to live and work abroad. The tax exemption is an additional incentive among others to achieve their relocation. Reflecting on the return of many expats lately, well renowned doctors, researchers, entrepreneurs, and many others, we can only conclude that these exemptions are successful incentives not only for companies to attract skilled professionals but also for the economy at large.
By: Cleri Evagorou