Setting up tax residency in Cyprus for digital nomads is a structure that could come with tax benefits. Therefore, I decided to devote an article to the topic.
Cyprus, the basics
Cyprus is an island situated in the Mediterranean Sea in front of the coast of Turkey. Because of this location, it offers a mild climate all year long with some warmer summer months.
Although the country deals with some political issues, it is undeniable that it is a beautiful island.
Living in Cyprus
Cyprus is part of the European Union but not (yet) in the Schengen Area. However, as a citizen of one of the other countries of the European Union you are able to live in Cyprus without the need to apply for a visa. You should now that if you plan to reside long-term in Cyprus, you should register with the local authorities.
If you aren’t a citizen of one of the Schengen countries, you will need a visa. Cyprus does offer a digital nomad visa. You can look for the basic information on the visa in my article with regarding European digital nomad visas.
Tax rules in Cyprus
If you plan to spend time in Cyprus or want to set up tax residency in Cyprus for digital nomads, you should be aware of the possible tax consequences that come with it.
Tax residency in Cyprus
Cyprus will consider you a tax resident if you spend more than 183 days in the country during the calendar year. Irrespective if you have any further links to the country. So, if you plan to spend more than six months in Cyprus, you should know you could be liable to taxes there.
Another option to create tax residency in Cyprus for digital nomads is by just spending 60 days in the country while also having other ties to the country. The other ties could, for example, be a local company which you use for your business. Additionally, you need to have a local home available to you. This can be owned or rented. Other criteria that apply are that you cannot spend more than 183 days in any other country or be a tax resident there.
Basically, this last option does fit the lifestyle of digital nomads very much and allows you to benefit from tax residency in Malta for digital nomads. We’ll discuss this later in more detail.
Tax residency in Cyprus for digital nomads: income tax rates
Income tax rates in Cyprus start at 20% as from an income of €19.500 and go up to 35% if you earn more than €60.000.
Dividends are exempted from income tax. However, a special kind of tax – called Special Defence Contribution – is applied to it at a rate of 17%. Nevertheless, this rate only applies if you are both a tax resident and domiciled in Cyprus. Most nomads, however, will not qualify as domiciled in Cyprus due to which the tax isn’t applicable. Practically, this means that the dividends you’ll receive are tax free.
Still, if you are a tax resident of Cyprus, you will have to pay social contributions on the dividend. The rate is 2,65%.
Also capital gains, except for those on real estate in Cyprus, are exempt from taxes.
Tax residency in Cyprus for digital nomads: social contributions
Social contributions of self-employed individuals are currently 15,60%. However, they increase each five years until they reach the amount of 20,40% as from 2039. Nevertheless, there are some maximum contributions that could apply depending on your profession.
In addition to the general social contributions there is also a contribution due to the General Health System which amounts to 4% for self employed individuals.
If you employ yourself as a director of your Cypriot company, your total social security contributions amount to 26%. Of this 12% is paid by the company on top of your wage and 14% comes out of your wage.
Tax residency in Cyprus for digital nomads
As I mentioned before, you can already become a tax resident in Cyprus by only spending there 60 days per year and obliging to some other criteria.
The fact that you only need to spend 60 days in the country is a major benefit to digital nomads. Yet, you still need to make sure you can commit to going there two months every year. It should not be an issue matching the other criteria.
You can create the necessary link with Cyprus by incorporating your company there. We’ll dive deeper into this now.
Setting up a company in Cyprus
In order to organize your business under a legal entity you can set up a company in Cyprus. This will also help you with creating ties to Cyprus in order to qualify as a tax resident while only spending 60 days in the country.
Company profits are subject to a flat corporate tax rate of 12,5%. A fairly decent tax rate. If you add the social contributions to this you end up with a total tax cost of around 15%.
Please note that if you set up a company in Cyprus, you need to pay yourself a minimum wage of €12.000 per year. On this amount, you’ll pay social contributions (see above). Given that there is a tax free threshold of €19.000 for personal income, you won’t pay any income taxes on this amount. You could even take out around €1.500 with surpassing the tax free threshold. Yet, this will mean paying more social contributions.
Conclusion
Tax residency in Cyprus for digital nomads can be a good choice. You do need to know that you need to commit to spending at least two months per year in the country. Given the nice climate, this isn’t too bad. By setting up tax residency in Cyprus for digital nomads you can benefit from their tax regime. The best setup is probably one where you opt for a local company taxed at 12,5% and then distribute dividends on which no withholding tax is applied.
