The abolition of the UK non-domiciled (or non-dom) status in the last UK budget marks the end of an era for the UK’s tax system. It might also be a game-changer in global mobility as many UK resident non-domiciled individuals might seek to relocate to other jurisdictions in order to shield their overseas earnings from taxation. One such jurisdiction could be Cyprus.
What are the UK’s non-dom rules?
Broadly, non-doms are individuals who are resident in the UK, but who claim that their domicile, being the centre of their personal and financial interests, is outside of the UK. Crucially, hitherto, a non-domiciled individual who was UK tax resident was broadly taxed on income and gains on a remittance basis only by contrast to a UK tax resident and domiciled individual who was taxed on income and gains on a worldwide basis, irrespective of remittance. The UK rules changed a few years ago whereby the non-dom status became time limited and, in fact, after a number of years, a hefty remittance basis charge was levied in order to benefit from the exemption. Nevertheless, it still remained an attractive (optional) regime for high net worth individuals with foreign earnings.
Following last week’s UK budget, the non-dom regime will be abolished from 6 April 2025. In its place, the UK government has introduced a new residence-based regime taking effect from April 2025. What is crucial to note is that the new foreign income and gains regime will be relevant only as far as new tax residents are concerned. This is because under the new regime, individuals who have been non-UK tax resident for at least 10 consecutive years will, regardless of domicile status, be eligible to use the new regime for four years.
Very importantly, under the new regime, non-UK income and gains will not be taxable in the UK and can be brought (i.e. remitted) to the UK without UK taxation during an individual’s four-year eligibility period. From the fifth year of UK tax residence onwards, an individual will be chargeable to UK income tax and capital gains tax on worldwide basis.
It would appear that the new regime will apply to all individuals becoming tax resident in the UK after not being tax resident for 10 consecutive years, irrespective of whether they are UK domiciled. As such, this new regime is likely to be very attractive to (UK) expats who decide to return to the UK.
Although Cyprus has many UK expats, as explained in this newsletter, Cyprus also has a very attractive non-dom regime. Therefore, it is unlikely that UK expats living in Cyprus would relocate to the UK just to benefit from the new regime, as many of the benefits of this regime are essentially replicated in Cyprus’ non-dom regime and for 17 years as opposed to the four years provided for by the UK non-dom regime.
What is likely to happen now is a competition between countries with preferential regimes for high net worth individuals to attract UK non-doms who will no longer benefit from the UK tax regime.
Cyprus is such a jurisdiction with an attractive system overall, combined with special privileges to non-domiciled tax residents.
The concept of domicile in Cyprus law originates from the Wills and Succession Law (Cap 195), which is based on English law. This law provides that every person has a domicile of origin or a domicile of choice. An individual’s domicile of origin is that of his/her father’s domicile (at birth). A person acquires a domicile of choice by establishing his home at any place with the intention of permanent or indefinite residence therein. The domicile of origin prevails and is retained until a domicile of choice is in fact acquired. Under the Special Contribution for Defence Law, a non-domiciled individual may be deemed as domiciled in Cyprus if he/she has been a Cypriot tax resident for at least 17 out of the last 20 years prior to the relevant tax year. This means that Cyprus’ non-dom privileges are available for 17 years.
But what are these non-dom privileges?
The combined application of Cyprus’ tax laws (i.e the Income Tax Law and the Special Contribution for Defence Law) allows Cyprus tax resident individuals who are not domiciled in Cyprus to be exempt on their worldwide dividends and interest, whether remitted to Cyprus or not. It is noteworthy that the exemption applies even if the dividends and interest have a domestic source (i.e. they are derived from Cyprus). There is also an exemption from the special defense contribution tax for rental income (but income tax is payable).
In addition to these privileges, the Cyprus tax system has other advantageous features for tax residents in general, whether domiciled or not.
For example, under Cyprus’ Capital Gains Tax Law, capital gains tax is only imposed on the sale of immovable property situated in Cyprus, and for the sale of shares in companies in which the underlying asset is immovable property situated in Cyprus. There is no capital gains tax in Cyprus for any other disposals. This means that the disposal of any other securities (shares, bonds, tradable contracts etc.) are not subject to tax in Cyprus.
Τhere is also a special tax regime for foreign pension income, which is exempt from tax up to €3,420 per year and taxed at only 5% above that threshold.
Furthermore, Cyprus does not have any inheritance tax or gift tax. Again, these rules are applicable to all Cyprus tax residents – whether domiciled or not.
It should be pointed out that dividends and interest received and pensions are subject to 2.65% General Healthcare System Contributions (GESY). However, this is capped so that for every natural person, the total maximum annual amount on which contributions will be paid is €180,000. This means that the maximum annual amount of GESY contribution levied is €4,770.
Another important tax exemption available to all Cyprus tax residents (whether domiciled or not) is the exemption on income from services rendered outside of Cyprus for more than 90 days in a tax year. The services must be rendered to a non-Cypriot tax resident employer. This, combined with the 50% exemption rule for individuals taking up employment in Cyprus (subject to some other conditions) makes relocation to Cyprus a very attractive option for UK non-doms who wish to explore other jurisdictions.
Of course, in order to access these benefits, as a non-dom or not, it is a prerequisite to become tax resident in Cyprus. For an individual to become tax resident in Cyprus, he/she must be resident in Cyprus for 183 days in the relevant tax year and must not reside more than 183 days per year in another jurisdiction. There is also a quicker route to becoming tax resident in Cyprus under the 60-day rule. Under this rule, an individual must spend at least 60 days in Cyprus in the relevant tax year and must not spend more than 183 days in another jurisdiction. The individual must also maintain a permanent home in Cyprus (owned or rented) and must carry on a business in Cyprus or be employed in Cyprus or hold an office with a tax resident of Cyprus during the relevant tax year.
On the basis of the 60-day rule, it is relatively easy to establish tax residence in Cyprus and obtain the non-dom status, if the aim is to access the specific privileges attached to this status.
Whether or not the abolition of the UK’s non-dom regime will lead to an exodus of high net worth individuals from the UK remains to be seen.
It is worth pointing out however that even before the changes to the UK non-dom regime were abolished Cyprus has for a long time now offered an advantageous tax regime for individuals wishing to take the relatively simple steps required to relocate their residence/domicile to Cyprus.
For information on any of the issues raised in this newsletter, please get in touch with us and note that working closely with our associated corporate services provider Nobel Trust we are able provide the full range of advice and services for anybody wishing to be advised as to the benefits of considering Cyprus as a replacement for UK non-dom status.
