For those who are determined to immigrate to another European Union State and therefore avoid taxes, there are two really good options: Malta and Cyprus.
In todays article we are going to look at the advantages of living and setting-up a buisness in Cyprus and then compare them with those of Malta. We are also going to look at the expenses, so you can assess if the transfer of your residence or the establishment of a company there would make sense for you or your business.
Finally, we will discuss the option of using the Cypriot banking system and of legally optaining a second passport there.
As many of you know, Malta and Cyprus are not only full memebers of the EU but also have the Euro as a currency and offer a very pleasant quality of life and climate.
Of course, as Cyprus has a poor reputation and many underestimate its tax advantages, Malta usually seems to be perfect option for the majority, in many cases without reason.
Theres no doubt that Malta offers a good quality of life, but its tax conditions haven´t stopped getting worse, just the opposite to what has happened in Cyrpus.
Reasons why Malta is losing its tax appeal
The non-dom system of Malta may seem very interesting at first, since it seems to offer complete tax freedom. According to taxation there with the transfer clause (Remittance Base Taxation), all foreign income remains untaxed while it is not being used in the country.
The only problem is that you always have to use your money in the country where you live, so that all non-dom is obliged to transfer at least a small salary to Malta, a salary on which you have to pay taxes and social security.
If you don´t have this money, you run the risk of being subjected to an inspection to see if you really live in Malta.
But this is only the beginning of the problems in Malta.
Just like before when you could manage foreign companies from Malta without any problem, lately the government is taking action against the ghost companies of residents in Malta.
That is, little by little CFC rules as they are known in other European countries are being introduced, laws designed to hinder the effective administration of ghost companies and their use to avoid corporate taxes.
These ghost companies have been taxed as if they were Maltese companies run from the island. Now, the only way to avoid this situation seems to be by creating “substance” in the country’s headquarters.
Now we might think that having a Maltese company is not the worst option, in fact, it is the standard solution for many entrepreneurs who want to save taxes.
Seemingly, Malta offers the lowest company tax rate in the EU, at only 5%. But the reality is that company tax there is actually 35%, with a return of 30% in two weeks thanks to the Maltese imputatation system. Well, as least thats what its like on paper.
In the last few months the cases of delays of more than 6 months in said return by Maltese Administration have been piling up. In fact, there seems to be cases in which the Administration has even denied returns.
Looking at it like that, having a Maltese company with 35% corporate tax doesn´t seem so attractive anymore.
By the way, tax refunds have to be transferred to a third person or another company as they cannot be made to the company itself. If that company resides in Malta, it will have to pay taxes on it, since it will count as income introduced in the country.
In this way, the Maltese solution requires another company, a holding abroad that can receive the return without paying taxes for it.
In this case, we also have to take great care with the structure of our companies, or we could have problems with international tax laws (CFC rules).
Either way, this double structure supposes a greater administrative cost, as well as having to wait several months for the return which can be a problem for the liquidity of any company.
One final point that makes residence in Malta a worse option than in Cyprus is the issue of the minimum presence period in Malta.
Officially, EU citizens have to spend a minimum of 183 days a year in Malta, a rather small island. It´s true that many people don´t do this and in the past it hasn´t necessarily brought any great complications, but this may change soon.
Malta offers a more expensive residency program (Program for High Net Worth Individuals) for people who do not want to be tied to this condition, and if word gets out that it doesnt check in any way the amount of time residents spend on the island, it will cost them more to sell it.
All in all, as the quality of life in Malta increases, tax conditions seem to be doing the opposite. So although moving your residence to Malta may remain attractive compared to what you had in the UK, Australia or Canada, it is not so attractive when compared with other options.
The maintenance and administration costs of the tax solution in Malta are high, and in addition you will continue to pay taxes, at least in part.
Reasons why residing in Cyprus is becoming more interesting
Nowadays, those who want to pay less taxes and stay in Europe have to look to the East of the continent.
In the southernmost corner of the Mediterranean we find the island of Cyprus. The island is much bigger than Malta, which has a positive effect on the number of options we have there. Of course, unlike with Malta, Cyprus has a big reputation problem.
For many, the geographical situation of the island, 100km from Turkey and Syria, is a disadvantage. Few know that there are almost no Syrian refugees in Cyrpus. Contrary to what happens with other European states, Cyprus maintains sovereignty over its borders.
Since the invasion by Turkish troops in 1973, Cyprus is divided in half. Just as the Republic of Cyprus has been in the European Union since 2002, the Turkish north does not officially exist, as only Turkey has recognized this area as an independent State. This is something that has certain advantages for us, as we will explain later in this article.
Few know that Cyprus is not only divided into two parts, but it is also divided into four autonomous zones. On the island we also find two completely independent British military bases: Akrotiri and Dhekelia. Cyprus has also been a British colony in the past, thanks to which we can now understand each other perfectly in English. That is to say, you will not have to learn Greek to live there.
Undoubtedly, what most damaged the image and reputation of Cyprus were the relatively recent banking problems and the economic and financial crisis of 2013, during which multiple citizens who had their money in Cypriot accounts were expropriated in order to save the banking system from the country.
We will not go deeper into this issue, we will just add that Cyprus has since returned all expropriated money. Company shares were distributed by value of the expropriated sums, from half a million to even giving away Cypriot nationality. Something that, in the end, was big business for many rich Russians on the island.
And although the current state of the Cypriot bank is reasonably good, there is no obligation to deposit the money in Cyprus. Anyway, if we follow the flag theory the smartest thing is to do is have the money in bank accounts outside the country where you live.
However, the banking crisis has had its consequences for the welfare of the people on the island. Salaries dropped by half and unemployment rose dramatically. However, four years later Cyprus has gotten back on the right track, salaries are at pre-crisis levels and the country has the highest level of European economic growth.
All of this is due to the intelligent measures of the Cypriot government, which have turned the island into something more than an attractive place to launder Russian black money, Cyprus has taken the necessary steps to become a perfect place to maintain fiscal residence and even your business.
The introduction of a special and very attractive program for foreign investors is the main reason why many investors, businessmen and smart entrepreneurs move to Cyprus. This special Cypriot program comes with the name Cypriot non-dom, but it doesn´t have much to do with the classic non-dom systems we know from Malta, Ireland or the United Kingdom. Moreover, in the last few weeks they have improved it a lot.
Cyprus up until now: The classic non-dom system
Relocating to Cyprus was also a good option in the past. The Cypriot government had very intelligently structured a special program, so that it became an interesting option for those who wanted to optimize their taxes without officially becoming a low tax country within the EU, which would have placed Cyprus in the black lists of tax havens.
Although it is possible, in practice, to live in Cyprus without paying taxes, on paper Cyprus maintains a rate of 35% on revenue income which is similar to that of other countries of the European Union. And this is what has allowed the country to avoid being classified as a country with low fiscal pressure and to still have the program approved by the EU.
This special Cypriot tax program offers total tax freedom for income via dividends and interests, national and foreign – and, unlike the classic non-dom programs, it does not matter whether these revenues are entered in the country or not.
This freedom was recently extended in a way that includes income from profits on the stock market, which has made Cyprus the perfect option for traders and investors. Moreover, the Easy-Non-Dom program doesn´t currently require you to establish a Cypriot company to become a resident there.
In the past to take advantage of this special programme you needed to move to Cyprus and live there for the good part of a year. That is to say, as well as buying or renting a house you also needed to spend at least 6 months of the year there (but even then they didn´t look at this too closely.)
This has now changed. Contrary to what happens in Malta, the Cypriot government has understood that in a mobile world it doesnt make much sense forcing people to spend a long time anywhere. Therefore, you only have to stay in Cyprus for 2 months of the year to maintain residence.
Another characteristic of the program was that in order to welcome you into the country and for you to obtain residency, you had to set up a company there and pay the expenses of managing it, even if you did not use it.
Having a Cyrpiot limited society doesnt have to be a disadvantage, since it allowed you to conduct business around the world without complications and make all kinds of deductions that allowed you to reduce tax benefits as much as possible.
For those who set up the company just to benefit from the special program, had to pay an additional payment of 5,000 euros during the first year (year the company was founded in Cyprus) and another 3,500 in the following ones.
This has also changed.
Living in Cyprus today: The Non Dom programs in Cyprus
As you can see, the program was always attractive for Cyrpiot residents, although somewhat less for small entrepreneurs and digital nomads. This is precisely the reason why the government decided to modify it and simplify it even further.
Not only has the minimum stay of 6 to 2 months per year been reduced, but the obligation to start a business in Cyprus has also been eradicated.
Easy Non-Dom for every budget
All you have to do is register as self employed in Cyprus or sign up as a well-to-do person.
What makes the option to register as self employed there even more interesting is its low cost. This is something you can do for only €1,250 and this will allow you to enjoy the tax advantages of the Easy Non Dom program without having to set up a company.
With the registration you will pay 14.8% in Social Security on a minimum of € 8,500 (that is, 14.8% of € 8,500, so around 1,258 in Social Security per year). It is not a good idea to use this registration to invoice much more, as from €19,500 (minimum amount free of taxes) your income will be subject to progressive taxation of up to 35%.
You manage these foreign businesses directly from your Cypriot residence with great tax advantages for you:
- On the one hand for example, if you had the company in the UK you wouldnt pay company taxes, only taxes on income on English territory (which makes this option especially interesting if you do not have customers in the UK), the rest would remain tax-free.
- On the other hand, dividend distributions of the company are not subject to taxes in Cyprus.
All of this is possible because Cyprus doesn´t have CFC rules that usually hinder the creation of companies abroad.
With this solution, not only do you avoid paying company taxes but you can also create a company that doesn´t scare off your clients for having a bad reputation (contrary to what could happen with the limited Cypriot) and is recognized throughout the world (for example the British ltd).
Cypriot Non Dom for affluent people
Another option, especially for wealthy individuals and traders is, instead of registering a business, proving that you have funds and assests available. This other variant of the Cypriot Non Dom program allows you to avoid the minimum Social Security expense, in addition to any other type of tax.
To qualify for this type of program you have to prove that you have valid health insurance at the time of applying, as well as a minimum income of around €6,000 a month. To prove it you have to show your bank statements from the last 3 to 6 months.
This minimum income can also come from dividends from offshore companies, so that this alternative is also valid for entrepreneurs with a good income.
Summary of the requirements and expenses of the different Non Dom variants in Cyprus
Now, here you have a summary of the costs and requirements to join the Easy Non Dom program in Cyprus and not pay taxes.
The first requirement is simple for some, but impossible for others:
- You have to have a passport from a country within the EU
The second one is very simple:
- You have to rent or buy a house in Cyprus, there is no minimum requiered price or size.
From here, there are 3 options:
The Classic Cypriot Non Dom (with the incorporation of a Cypriot company), the Easy Non Dom (you register as self employed there) and the Cypriot Non Dom program for the well-to-do (you have to prove that you have a minimum income of €6,000 per month).
The classic program requieres the establishment of a Cypriot limited society, with costs of around €2,650. We have to add the costs of accounting and administration, plus an additional state fee, which overall comes to a total of around €2,100.
The accompanying application for residence is another €500. In other words, the total expenses amount to around €5,000 (VAT not included), the solution includes tax-free residence and a limited company within the EU with a European tax identification number.
As with the Easy Non Dom program the classic program also invloves you paying Social Security in Cyrpus.
The program that we´ve dubbed Easy Non Dom involves becoming self employed in Cyprus. For this you have a total of about € 1,250, including the registration of the business and the necessary procedures to register your residence in Cyprus. The expenses for tax consulting for consecutive years to the first amount to around €1,000 per year (and don’t forget social security).
And finally the third alternative; Non Dom in Cyprus for the well-to-do. You will have to prove that you have a minimum income of €6,000 per month (you have to show the monthly statements from the last 3 to 6 months). Registration is about €1,500, the costs for tax consultation in consecutive years amounts to about €600 per year in this case. You don´t pay Social Security with this model, although as you will see below, it might be worth choosing a model that does include Social Security.
The Social Security system in Cyprus
Something you should keep in mind is that Cyprus has one of the best Social Security systems worldwide. Even if you are contributing the minimum amount, the advantages you get are enormous, especially if we compare it with other systems within the EU,
Thanks to the existence of an agreement between the EU and other states, the return to the UK, Ireland or any other country within the EU is greatly facilitated.
In Cyprus you get more “points” for your retirement even when contributing the same as in any other European State. You have some information about it here. There is a summary with the most basic information below.
The right to free state medical insurance depends on the amount of your contributions. This insurance is available to officials, individuals with incomes below 15,377.41 euros and families with annual incomes of up to 30,754.82 Euro (there is a tax-free amount per child of 1,708.60 Euro).
Those who don´t fit within the categories mentioned can make use of the state medical assistance paying the respective monthly contribution.
In Cyrpus, all kinds of necessary medical assistance in the case of an accident i.e. in the form of first aid, is free, without taking into account the patient’s economic situation or nationality (this includes tourists). On the other hand, you do have to pay for in-patient treatment.
State health care is financed by taxes collected by the State. Monthly contributions for private health insurance are clearly below the EU average. So, for example, the monthly contribution in the case of a 43-year-old man is approx. €50 (in-patient treatment, private room, treatment from a medical director).
In Cyprus, the social security system depends on the income level. Assistance is financed through the contributions of the interested parties themselves, the State and the employer.
Employees contribute 17.9% of their salary. The employer pays 6.8%, the worker another 6.8% and the State 4.3% (currently).
Those who are self-employed contribute 16,9% of the stated estimated income. In this case the interested party is left with 12.6% and the State with the remaining 4.3%.
Should I open a bank account in Cyprus and use the local banking system?
Bearing recent events in mind, it’s not a bad idea to question whether you should really use the Cypriot banking system and deposit your money (or part of it) there.
In theory, the banking system has already seen the worst of the crisis. By no means is the system an icon of stability, but nevertheless, the occurrence of another crisis resulting in expropriation of funds is highly doubtful. In all likelihood, this kind of crisis will affect other States first.
And it doesn’t make much sense to transfer all your capital to Cyprus in any case, because there are better, more stable solutions around the world, especially where large sums of money are involved. Of course, a business account in Cyprus could be a good option when operating with your local company.
You’re under no obligation to open an account in Cyprus. Foreign accounts are expressly permitted for limited companies there, suggesting that the government has taken into account the possible fears businesspeople might have.
To sum up, although leaving the majority of your capital outside the country is the best idea, Cypriot banks are an option for making transactions and performing day-to-day operations.
Domestic financial institutions are making every effort to regain their clients’ trust, and offer a good service with low commissions and rates. Unlike with offshore banks, where rates and commissions are usually very high, in Cyprus you can carry out free transactions within the European SEPA area, and at a relatively low cost for international transactions.
The banking system in Cyprus is modern and digital, offering many financial services, and its employees usually speak several different languages. To open an account on the spot, you don’t need a lot of paperwork or a large deposit. Of course, as with the rest of the European Union, don’t expect to find the next big banking secret there.
If you’re looking for a recommendation, the Lebanese Byblos Bank is a good option. In general, they only allow you to open a business account there if your turnover is higher than €250,000 a year. Other banks in Cyprus that don’t require such a high rate of income are Alpha, Euro, and Hellenic Bank.
Obtaining second nationality in Cyprus
In this article, we’ll also briefly touch on how to obtain second nationality, which is of special interest because Cyprus is a member of the European Union.
This means that, on the one hand, a Cypriot passport lets you reside in any EU state for an unlimited amount of time, and on the other, it gives you enough freedom to travel the world.
The main problem with obtaining nationality is that you lose your non-dom status.
The simplest means of getting hold of a Cypriot passport is by making investments. You have to invest €5m, or if you find five more people, €2.5m each, with a €12.5m fund as a minimum. You also have to keep at least €500,000 on the island. Apart from this, the process is quick and simple.
If you don’t have enough money at your disposal, you can always choose another option, such as nationalisation. In theory, once Cyprus has been your country of residence for 6 years, you can request to be nationalised.
Of course, in this case your stay must consist of continuous periods of at least 6 to 9 months a year.
A quicker option would be marriage. In this case, you can request to be nationalised after two years of residing in Cyprus and three years of being married.
Compared to other States in the EU, Cyprus offers some very good options for obtaining second nationality.
Setting up a business in Cyrpus in order to optimise taxes.
In some cases it may make sense to take advantage of the classic residence option in Cyprus, which as you know includes a Cypriot limited company. Despite its bad reputation, it is a legally recognized European company that can not be discriminated against in neighboring States.
On paper, companies in Cyprus pay 12.5% of company taxes, which doesn´t make it particularly attractive. However, Cypriot companies can massively reduce their profits on paper, more so than Maltese businesses. And we are not talking about the IP-Box here, an option that allowed you to pay 2.5% revenue for intellectual property (understood in a very broadly). This option went down in history and was suppressed due to the EU’s BEPS initiatives.
It is customary for Cypriot companies to deduct (or divert), with the approval of the Cypriot authorities, of up to 70% of their pre-tax profits through invoices from offshore companies located, for example, in Dubai. The offshore company receives the money before taxes and distributes it in the form of dividends (on which Cyprus does not pay taxes) between its partner (s).
Effectively, corporate tax for Cypriot companies amounts to 0.3 × 12.5, that is, 3.75%. This 3.75% is paid on profits that still qualify for deductions. So, for example, we have a €19,500 salary completely tax free.
Another fact to keep in mind is that throughout the whole of Cyprus there are only 2 tax inspectors.
Cypriot companies don´t have problems obtaining business bank accounts in other countries, nor to use payment services such as Paypal and Stripe or register on platforms like Ebay and Amazon.
For the company in Cyprus to do business in the EU, it needs a premises. However, the office can be located in any private apartment and, of course, you can deduct the rental costs of this, even if it were a luxury villa.
Ultimately, if you choose your tax advisor well, your company in Cyprus won´t pay hardly any taxes.
Your holding in Cyprus
Of course the Cypriot company can also be useful as a ghost company or as a holding company.
In Cyprus, sales of holding companies to their subsidiaries have the privilege of being tax free. Moreover, Cyprus is one of the few countries in the EU that doesn´t withold taxes on the transfer of profits to offshore jurisdictions.
On the other hand, the multiple double taxation agreements signed between Cyprus and other countries (including many considered highly taxed), reduce withholding taxes in case of transfer of profits to a Cypriot company.
Of course, as a country inside the EU, Cypriot companies also enjoy the advantages of the common directive applicable to parent companies and their subsidiaries (Directive 90/435/EEC) whereby profits distributed by a subsidiary to its parent company are exempt from withholding tax.
All in all, whether you are going to use it as a parent company or if you prefer to do it as an operating company, setting up a company in Cyprus can offer you multiple advantages and allow you to create very interesting structures.
The north of Cyprus and its advantages
Now, the benefits of opting for Cyprus as a country for your tax residence do not end there, even Turkey’s occupation of northern Cyprus has proved to have its advantages.
The Turkish Republic of Northern Cyprus is an unrecognized state that, even so, offers a lot of opportunities. Although it is seperated from the other part of the island by a wall, it is very culturally and economically integrated.
As a general rule, this allows us to move from the south to the north without passingg through any border controls.
Of course, thanks to this option those who spend more than 60 days in Cyprus and find it too long, can easilly move to the north of the island without having officially left Cyprus at any time.
Once in the north, the person could go from Turkey to any other country in the world.
Bank branches also enjoy certain advantages in the north.
All Cypriot banks have branches in the northern part of the island, but since Northern Cyprus is not a recognized State, international laws and conventions have no effect there.
That is to say, the automatic exchange of information doesn´t exist there and, therefore, if you deposit or withdraw money from a bank account in the north, even if the service and security is guaranteed by a bank in southern Cyprus, fewer in special cases, you will not exchange information with anyone.
The situation with the north of Cyprus doesn´t seem like its going to change, since it benefits all parties. Therefore, the reunification of the island seems quite far-off, also a new invasion by Turkish troops, thanks to the British and American military bases.
Living in Cyprus tax free
As you have seen, Cyprus offers many advantages that makes it more interesting than other European countries, such as Malta. In Cyprus, you will not only be able to swim at the beach and go skiing in the same day, but you will also be able to live cheaply and save many more taxes than in Malta.
The clarity of the conditions, the 2 months of minimum stay in Cyprus and the advantageous Cypriot tax programs officially approved by the EU over the next 17 years offer greater legal security than in Malta, where the problem for businessmen is that they are becoming more and more stringent.
We mustn´t forget that Cyprus offers a great quality of life, a quality that undoubtedly allows you to spend a pleasurable 2 months minimum stay in the country and maintain tax residence. It doesn´t matter if you decide to spend them in summer or in winter, the climate is always nice there.
Lastly, regarding a possible departure from Cyprus, it is important to bear in mind that there is no exit tax on the island. This means that you can take all the money that you have deposited during your residence in Cyprus to whichever country and invest it in whatever you want (for example in real estate) without worrying about additional tax.
Of course, you´ve probably become so used to the tax advantages in Cyprus that you wont want to live without them.
And now, if you too want to start living tax-free, write to us. We can offer you a consultation to help analyze your situation or, if you´re already sure about it, help you set up your residence in Cyprus thanks to our contacts on the island.