Broadens the scope of the 20 and 50 per cent tax deductions on employment income
By Anna Cheimonidou and Theodora Alexandrou
Amendments to the Income Tax Law (ITL) were approved by the House of Representatives and published in the official gazette on of July 26, 2022 as the Income Tax Law 121(Ι)/2022 (Amending) (No 6) of 2022. The law seeks to broaden the scope of the tax deductions already in place in Cyprus as part of the country’s efforts to attract more foreign investment into Cyprus through employment and headquartering initiatives.
Specifically, the law amends section 8 of the ITL as follows:
- Makes amendments to the pre-existing sub sections 21 and 23;
- Introduces sub section 21A as of July 26, 2022; and
- Introduces sub section 23A as of January 1, 2022.
The newly introduced section 8(21A) and 8(23A) incorporate the definition of first employment, which was previously not explicated. The definition encompasses persons employed in Cyprus for the first time and notes that they should work on a salaried basis for a resident or non-resident employer in Cyprus. The definition does not take into account occasional full or part-time employment not exceeding 120 days overall in a tax year.
The 20% tax deduction:
The 20 per cent tax deduction previously available under section 8(21) is abolished for employment commencing after July 26, 2022, following the enactment of the law.
It should be noted that individuals commencing employment before the enactment of the amending law (July 26, 2022), and who were previously benefiting from the deduction under section 8(21), will continue to benefit from the deduction for the relevant five-year period.
As of that date, section 8(21A) provides that employees who for three consecutive years, immediately before commencing their employment in Cyprus, were employed outside Cyprus by a non-resident employer and whose first employment commenced after of July 26, 2022 can claim a 20 per cent tax deduction on the employment income of their first employment in Cyprus or the amount of €8,550 (whichever is lower). The 20 per cent deduction is applicable for seven years, commencing from the year following the year of employment.
The revised 50% tax deduction:
The law provides that both existing beneficiaries and new employees in Cyprus are eligible to apply for the 50 per cent tax deduction subject to certain conditions being met. It also broadens the applicability of the framework from 10 to 17 years and reduces the minimum threshold of the qualifying employment income from €100,000 to €55,000 annualised.
It should be noted that taxpayers can only claim either the 50 per cent or the 20 per cent deduction.
New taxpayers who commence employment in the Republic of Cyprus with an annualised employment income in excess of €55,000 will be eligible to the 50 per cent deduction for a period of 17 years, provided that they were not residents in the Republic for a period of 10 consecutive years prior to the commencement of their first employment in the Republic. The deduction is available for employment which commenced from January 1, 2022 onwards.
The deduction will apply irrespective of whether the employment income falls below the threshold (€55,000), provided that during either the first or second year of employment, the employment income exceeds the €55,000 and the Tax Commissioner considers that such arrangement was not aimed at granting the exemption.
Existing taxpayers can also claim the 50 per cent tax deduction provided they meet any of the following conditions:
- a) they previously qualified for the tax deduction provided for under section 8(23) ITL Law or,
- b) their first employment in the country commenced between the years 2016-2021 and their income from employment exceeded the amount of €55,000 annualised or,
- c) their first employment in the Republic commenced between the years 2016-2021 and the income from employment did not exceed the €55,000 yearly and within the period of six months from the date the law was published in the gazette (effectively January 26, 2023), the employment income exceeds the €55,000 annualised.
Assuming they are entitled to the above deduction, the lifespan is 17 years.
If a taxpayer commenced employment in 2019 and already claimed the deduction provided under section 8(23) for three years, he/she would be eligible for the new deduction on his/her employment income for further 14 years (until the year 2036).
If a taxpayer commenced employment in 2016 and already claimed the deduction provided under section 8(23) for six years, he/she would be eligible for the new deduction on his/her employment income for further 11 years (until the year 2033).
The new tax reforms are clearly a welcome development in Cyprus’ effort to attract new high profile and talented individuals and to repatriate skilled Cypriots who are either studying or working abroad. A headquartering incentive can only be successfully implemented when human capital requirements are met. These tax measures highlight the importance of attracting talented individuals to the island and is a clear marker of the direction in which Cyprus is heading.
Anna Cheimonidou and Theodora Alexandrou from Elias Neocleous Co LLC