Portugal’s special tax regime for Non-Habitual Residents (NHRs) enables qualifying entrepreneurs, professionals, retirees and high-net-worth-individuals who are tax resident in Portugal to enjoy beneficial tax planning for a period of ten years, in particular those who benefit from pension or dividend income.
The NHR regime was introduced in 2009 to increase Portugal’s global competitiveness by attracting professionals of high commercial, scientific, economic or cultural worth. Individuals of any nationality – including non-EU/EEA citizens – can potentially benefit from NHR status for 10 consecutive years if they qualify as a tax resident in Portugal. Portuguese-source salary or self-employed income derived from one of the eligible professions is then subject to a final flat rate tax of 20% if it qualifies as a high-level activity regime.
NHR status has proved to be extremely popular. There are more than 10,000 NHRs in Portugal, and the number of applicants is steadily growing each year. But NHRs lose their special status after 10 years and, if they stay in Portugal, must pay tax at standard Portuguese rates going forward.
The NHR regime has now been in place for 14 years and an increasing number of NHRs are coming to the end of their NHR status. Many NHRs will have made their home in Portugal and will be prepared to remain tax resident in Portugal, but others may consider that their tax exposure in Portugal without NHR status will simply be too substantial. What should their next move be?
“The answer may be Cyprus,” said Shelley Wren, Head of Business Development at Sovereign Consultoria in Portugal. “Non-Domiciled (non-dom) Tax Residency in Cyprus offers an even greater array of tax benefits than the NHR regime in Portugal – and for longer because the status endures for 17 out of 20 years. And under the ’60-day rule’ you only need to reside in Cyprus for 60 days a year to maintain your status. That is why many residents of Portugal whose benefits under the NHR are now coming to an end are considering a move to Cyprus.”
Until 2017, an individual was considered a tax resident only if physically present in Cyprus for more than 183 days in a year of assessment. This is known as the ‘183-day rule’. As of 1 January 2017, however, Cyprus amended its tax Income Tax Law (ITL) to provide that an individual who is physically present in Cyprus for more than 60 days in a year of assessment (and does not reside in any other single state for a period exceeding 183 days in aggregate) can ‘elect’ to be tax resident in Cyprus in that tax year if certain conditions are met.
Nor are potential applicants for non-dom tax residency actually required to have stayed in Cyprus for 60 days to become eligible. They are simply required to sign a declaration stating their intention to abide by the rules of the scheme during the application process. A qualifying individual must also have other defined ties with Cyprus, as follows:
- Carry out any business in Cyprus, be employed in Cyprus or hold an office (director) in a company that is tax resident in Cyprus at any time in the tax year provided that the arrangement is not terminated during the tax year.
- Either own or rent a permanent residential property in Cyprus in the tax year.
Setting up a Cyprus company enables an investor to benefit from one of the lowest corporate tax rates in the EU at 12.5%. As an EU member state, Cyprus companies have access to all EU Tax Directives as well as an extensive double tax treaty network covering more than 60 countries, and there is no withholding tax on outgoing dividend, interest or royalty payments.
Foreign dividends received by a Cyprus company are generally exempt from corporate tax in Cyprus and may also be exempt from Special Defence Contribution (SDC) in Cyprus, subject to certain conditions. Capital gains tax is only imposed on the sale of immovable property situated in Cyprus and gains from trading in securities are tax exempt. There is a Notional Interest Deduction (NID) for investment into Cypriot companies.
Individuals who are tax resident of Cyprus under the provisions of the ITL – both the ‘183-day rule’ or the ’60-day rule’ – can enjoy the stability afforded by full EU membership status, first-class healthcare, no inheritance tax, no gift tax, no wealth tax and the potential benefit of non-dom status under which they will be exempt from the Special Defence Contribution (SDC) for 17 out of 20 years. This SDC exemption means non-doms pay no tax on their worldwide dividend, interest and rental income.
Additional benefits of Cyprus non-dom status include 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, and the ‘50% exemption rule’ for individuals who take up employment in Cyprus with an annual income of more than €100,000 per year. This exempts 50% of their income from tax for a period of ten years.
EU/EEA citizens can purchase property and reside in Cyprus with no restrictions. Non-EU/EEA nationals are permitted to buy and hold the freehold in one property in Cyprus. The property can be either an apartment, house, villa on a building site or plot of land limited to no more than 4,014m2. Owning real estate in Cyprus entitles the owner to obtain a multiple-entry national visa. There is also a ‘fast track’ permanent residence permit for those who purchase real estate valued above €300,000.
“Cyprus has the second highest percentage of foreign citizens in the EU, with 13% of the total population originating from other EU member states and around 7% from non-EU countries,” said George Ayiomamitis, Managing Director of Sovereign Trust (Cyprus). “The biggest group of expats living in Cyprus consists of British nationals, but there are also large numbers of expats from the US and Eastern European countries.
“With an idyllic lifestyle, a rich culture, 340 days of sunshine a year and a convenient position in the Eastern Mediterranean, Cyprus combines a high standard with a low cost of living in a modern and well-functioning environment. And as a popular holiday destination, Cyprus is well connected to Europe’s main cities, as well as to Asia and the Middle East.
“Cyprus offers a good stock of residential properties for sale or rent – from townhouses and apartments to villas, cottages and sea-side bungalows – and in a wide range of styles,” said George. “With three quarters of the population concentrated into its five main cities – Nicosia, Limassol, Larnaca, Paphos and Famagusta – Cyprus offers its residents the choice to enjoy a dynamic urban lifestyle or to embrace a more relaxing way of life in the countryside villages.”