Special defence contribution: non-domiciled individuals exempt!

Posted on 28 Apr 2017

As part of the policy of the Cypriot government to promote the economy of the state, by means of creating attractive and competitive conditions for foreign investors, certain significant changes have recently taken place in the tax regime of the Republic that worth our attention.

The state of the law before the recent amendments, as described in Article 3 of the Special Defence Contribution Law 117(I)/2002 (hereinafter the “Law”), was that any individual residing in Cyprus for at least 183 days a year, i.e. a tax resident for the purposes of Article 3 of the Income Tax Law 118(I)/2002, was obliged to pay a special contribution for the defence of the Republic by means of deducting a percentage from income derived from dividends, interest and rent.

As of the 15th day of July 2015 however, new provisions in the Law came into force to the effect that individuals not domiciled in Cyprus but being tax residents only, are exempted from paying Special Defence Contribution on dividend, interest and rental income and this would be the case regardless of the origin of such income and the place that is invested.

In order to satisfy the requirements of a non-domicile status and thereby to claim exemption from Special Defence Contribution, an individual must fall in one of the following three categories as described in Article 2(3) of the Law. That is, in spite the fact that an individual has his domicile of origin in Cyprus, i.e. the place of his birth is Cyprus, according to the provisions of the Wills and Succession Law, Chapter 195:

  • he maintains a domicile of choice in a country other than Cyprus, according to the Wills and Succession Law, and he has not been a tax resident in Cyprus for any period of at least 20 consecutive years preceding the tax year in question; or
  • he has not been a tax resident in Cyprus for at least 20 consecutive years before the present Law came into force, i.e. he has not been a tax resident from 1995 to 2014, both years inclusive.
  • Despite the fact that an individual does not have his domicile of origin in Cyprus, namely he is domiciled abroad; he has not been a tax resident in Cyprus for at least 17 years out of the last 20 years prior to the tax year in question.

In implementing the new regime, the Cyprus Tax Department has issued relevant Tax Forms and has established a procedure to enable Cyprus tax resident individuals to apply for the non-domicile status and to qualify accordingly. The relevant forms to be submitted are T.D.38(2016) which is a Declaration of the Individual for Exemption as non-domiciled, T.D.38QA(2017) which is a Questionnaire to determine Domicile of Origin and T.D.38QB(2017) which is a Questionnaire to determine Domicile of Choice. T.D.38(2016) and T.D.38QA(2017) are submitted by all applicants whilst T.D.38QB(2017) is submitted (together with T.D.38(2016) and T.D.38QA(2017)) only by applicants that fall in category (i) as illustrated above. In addition to the forms, certain supporting documents are also requested as evidence. The place to submit the relevant forms and documentation is the Returns Administrations section of the local Tax Department district office where the individual’s tax file is maintained. As regards the time for submission, that is during the first year in which the applicant acquires income from dividends, interest or rent for which he wishes to claim exemption from Special Contribution for the Defence Fund. In relation to individuals falling in category (i) above, the relevant forms and documents must be re-submitted every 3 years.

Few points that applicants must have in mind are firstly that they must provide true and accurate information in the submitted forms otherwise they run the risk to be charged with a criminal offence under the Assessment and Collection Tax Law 4/1978. Secondly, it must be noted that Article 3(11) of the Law states that if a person who is domiciled in Cyprus and therefore is subject to Special Defence Contribution transfers his assets to a person who is considered not domiciled in the Republic and thus not being subject to Special Defence Contribution and the former has up to a third degree relationship to the latter, and the Tax Commissioner is of the opinion that the main reason or one of the main reasons of such transfer was to avoid payment of Special Defence Contribution, any income that derives from such assets will be subject to Special Defence Contribution that will be deducted either from the new holder of the assets or from the previous owners of the assets.

In view of the above, the new tax regime introduced by the Cypriot government and the very simple and straightforward procedure that implements it creates, without doubt, a very attractive environment for individuals residing abroad that may wish to invest in Cyprus and with such favourable conditions in place we believe that such a movement not only worth the effort but also will certainly prove fruitful, profitable and highly advantageous.

The content of this article intends to provide a general guide to the subject matter. Specialist advice should be sought on each particular case. For any further information, please contact our firm.