In Cyprus, an individual or entity is considered a tax resident based on the following criteria outlined in the Income Tax Law (Law 118(I)/2002), specifically in Section 2:
- Physical Presence: An individual who spends more than 183 days in Cyprus during a tax year (January 1st to December 31st) is considered a tax resident of Cyprus.
- Permanent Residence: Alternatively, an individual who maintains a permanent residence in Cyprus, has no permanent residence in any other country for a period exceeding 183 days in aggregate, and is not a tax resident in any other country is also considered a tax resident of Cyprus.
These criteria aim to ensure that individuals who have significant ties to Cyprus or spend a substantial amount of time in the country contribute to its tax base. By establishing tax residency based on physical presence or permanent residence, the legislation seeks to capture individuals who have a substantial economic presence in Cyprus.
However, Cyprus has signed numerous tax treaties, which may modify or introduce exceptions to the standard criteria for tax residency. Those tax treaties aimed at preventing double taxation and facilitating economic cooperation between the two countries involved.
Generally speaking, the tax treaties signed by Cyprus outline the criteria for determining tax residency for individuals. While the specific provisions may vary depending on the treaty, common modifications or exceptions introduced by tax treaties include:
- Treaty Tie-Breaker Rules: Tax treaties often include tie-breaker rules to determine tax residency in cases where an individual meets the criteria for residency in both contracting states. These rules may consider factors such as the individual's permanent home, center of vital and/or economic interests, habitual abode, or nationality.
- Exception for Certain Income: Some tax treaties may provide exceptions or special provisions for certain types of income, such as income derived from specific sources or activities. For example, income derived from immovable property may be taxed in the country where the property is located, regardless of the individual's tax residency status.
When applicable, those double taxation agreement would provide specific modifications or exceptions to the standard criteria for tax residency outlined in the Income Tax Law of Cyprus. These modifications or exceptions are intended to align individuals' tax treatment with the treaty's provisions, prevent double taxation, and promote economic cooperation between Cyprus and other countries, party at a double taxation agreement.
Overall, tax treaties play a crucial role in shaping the criteria for tax residency and determining the tax treatment of individuals or entities with cross-border activities. By modifying or introducing exceptions to the standard criteria for tax residency, tax treaties aim to provide clarity, certainty, and fairness in the taxation of cross-border income and investments.
