New incentives for first employment in Cyprus

The long-anticipated tax incentives offered to individuals in relation to first employment in Cyprus were published in the Official Gazette of the Republic of Cyprus on 26 July 2022. The new incentives introduced in the income tax legislation, are part of a wider strategy of the Cyprus Government for attracting businesses and talented individuals from abroad.

As per the new provisions introduced under article 8(23A) of the income tax legislation, a 50% exemption for income in relation to first employment in Cyprus is now available for individuals with annual remuneration in excess of EUR55.000 (previous threshold EUR100.000). This exemption will be available for a maximum period of 17 years.

Individuals who are not eligible for the exemption under 8(23A) may take advantage of the new exemption introduced as per article 8(21A) of the income tax legislation, whereby 20% of the gross emoluments or an amount of EUR8.550 (whichever is lower), can be claimed as an exemption from salaries pertaining to first employment in Cyprus. This exemption is available for a maximum period of 7 years.

In addition, as per the new provisions introduced, individuals who have commenced employment in Cyprus prior to the date of enforcement of the abovementioned provisions and  have been previously claiming  an exemption under articles 8(21) and 8(23), may now be eligible to claim an exemption (subject to conditions) under article 8(23A) and therefore extend the duration of this exemption for the remaining of the available prescribed years (up to 17 years).
 

KPMG observation

This is a very positive development, as Cyprus will now become a more attractive destination for relocation of highly skilled and high earning individuals, either as employees of a Cypriot entity or as employees of a non-Cypriot entity exercising their duties through a remote working arrangement (e.g. Digital Nomads).

Combining the generous tax incentives and  the quality of life an individual can enjoy, constitute Cyprus an even more attractive jurisdiction for entities from abroad to establish a business or expand their operations in Cyprus, as well as for individuals to relocate to Cyprus with their families for employment purposes.
 

Analysis of the new provisions

1. The 50% exemption

1.1 The new 50% exemption under article 8(23A)

As per the new provisions of the legislation, individuals who take up first employment in Cyprus as from 1 January 2022 onwards, will be eligible to exempt 50% of their employment income, assuming the following conditions are satisfied:

- The individual has not been a Cyprus tax resident for at least 10 consecutive years prior to the commencement of the employment in Cyprus;

- The annual remuneration from employment exercised in Cyprus is in excess of EUR55.000 (This annual remuneration threshold of EUR55.000 can be achieved either on the first or the second year of employment in Cyprus).

Important note: This exemption is available for a maximum period of 17 years (i.e. lifetime exemption) and it can be utilised from the year of commencement of employment in Cyprus. It is clarified that in cases where in a tax year the relevant conditions are not satisfied (e.g. annual remuneration is less than EUR55.000) the above stated exemption will not be granted for that specific tax year.
 

1.2 Grandfathering provisions

As per the grandfathering provisions of the relevant legislation, an exemption under article 8(23A) can also be claimed in the following cases:

- Individuals who previously benefited from the provisions of article 8(23) (i.e. old rules) and had continuous employment in Cyprus up to 2021;

- Individuals who commenced their employment in Cyprus between 2016-2021 tax years, with annual remuneration in excess of EUR55.000;

- Individuals who commenced employment in Cyprus between 2016-2021 with annual remuneration less than EUR55.000 and within 6 months from the date of publication of this legislation (i.e. 26/7/2022), their annual remuneration exceeded the threshold of EUR55.000.

Important note: For all the above cases, the individual should have been a non-Cyprus tax resident for a consecutive period of 10 years prior to the commencement of employment in Cyprus. In case where an individual falls within any of the above categories, s/he will be eligible to shift to the new exemption under article 8(23A). This exemption will apply as from 1/1/2022, for a maximum period of 17 continuous years, as from the date of commencement of employment in Cyprus.
 

1.3 The old 50% exemption under article 8(23)

For cases where individuals previously benefited from the first-time employment exemption under article 8(23), in relation to employment which commenced prior to the date of publication of this legislation and which do not fall within any of the grandfathering cases as per the above section 1.2, such individuals can continue to claim the exemption of article 8(23), up to the completion of the available 10-year period.
 

2.  The 20% exemption

2.1 The new 20% exemption under article 8(21A)

As per the new provisions of the legislation, individuals who take up first employment in Cyprus after 26 July 2022, with annual remuneration lower than EUR55.000 will be eligible for a 20% or EUR8.550 exemption (whichever is lower) from their employment income, for a maximum period of 7 years.

In order for an individual to be able to claim the relevant exemption, the individual should have been employed outside of Cyprus at a non-Cyprus tax resident employer for at least three consecutive years prior to the commencement of the employment in Cyprus.

Important note: This exemption can be claimed from the year following the year of commencement of employment in Cyprus (e.g. in case where employment commenced during 2023, the relevant exemption will be available for the years 2024-2030).
 

2.2.  The old 20% exemption under article 8(21)

For cases where individuals commenced their employment in Cyprus prior to the date of publication of this legislation (i.e. employment commenced prior to 26 July 2022) and already benefited from the exemption under article 8(21), but do not fall within any of the grandfathering provisions as analysed in section 1.2 above, they may continue to claim the exemption of article 8(21) up to the completion of the available 5 year period.

If any assistance or further clarifications are needed for this matter, please do not hesitate to contact our office

George Markides
Board Member
Head of Tax Services
KPMG Limited

Costas Markides
Board Member
International Tax Services
KPMG Limited

Katia Papanicolaou
Board Member     
Direct Tax Services        
KPMG Limited