Optimising the tax position of HNWIs

Why the quest for tax optimisation is a complex venture

High Net Worth Individuals (HNWIs) constitute an important segment of the taxpaying population, not only due to their sizeable wealth and larger income but also because they form a category of taxpayers that may potentially significantly contribute to local economies and create growth opportunities across various sectors of the economy. Given the increased availability of mobility, many HNWIs are exploring different tax-efficient solutions to optimise their tax affairs and minimise the tax burden on their wealth, income and gains generated.

The decision by HNWIs to move and change tax residency is a significant one. Consequently, the tax benefits provided by the new jurisdiction for relocation should match the gravity of this choice. Other than the available tax rules, complex declarative and compliance obligations may also be relevant in influencing an HNWI’s decision for relocation.

At the same time, given the increased attention paid to HNWIs due the complexity of their tax affairs, the jurisdiction of relocation needs to be one with a tax framework that includes tax provisions that are future-proofed against evolving developments on the European and international tax scene. Over the course of the last few years, professionals (tax advisors, lawyers, bankers, etc.) have become increasingly aware of the fact that tax can only be optimised through solutions that are aligned to acceptable tax standards, correspond to tax transparency requirements, and fall outside the scope of tax evasion.

Below is a brief overview of the applicable rules, showing how, from a tax perspective, Cyprus has become one of the most appealing options for HNWIs.

Tax Residency Rules

Cyprus applies two types of tax residency tests: the typical one based on the ‘183-day rule’ and the so-called ‘60-day rule’ test.

The ‘183-day rule’ for Cyprus tax residency is satisfied when individuals physically stay on the island for more than 183 days in a calendar year, without any further additional conditions/criteria being relevant.

The ‘60-day rule’ for Cyprus tax residency is satisfied by

individuals who, in the relevant tax year, cumulatively meet

the following criteria:

  • They do not reside in any other state for a period exceeding 183 days in aggregate
  • They are not considered tax residents by any other state
  • They reside in Cyprus for at least 60 days and should carry out business in Cyprus and/or are employed in Cyprus and/or hold an office (director) of a company that is tax resident in Cyprus and maintain a permanent residential property in Cyprus (either owned or rented).

Safeguarding Tax-efficient Succession

Wealth and inheritance tax is also an area of interest for HNWIs. Contrary to the area of income and capital gains tax, where double tax treaties contribute to eliminating the threat of double taxation, in respect of wealth and inheritance taxes, international double taxation often occurs when HNWIs have links with multiple jurisdictions.

Therefore, a major factor in assessing the different options for relocation relates to the potential application of wealth and inheritance taxes. Cyprus is one of the few EU member states that does not apply either wealth or inheritance taxes. It therefore accords the necessary safeguards to HNWIs who are, naturally, concerned not only with wealth preservation but also with the possibility of transferring their wealth to subsequent generations in a tax-efficient manner.

Tax-efficient Return on Investment

Taxation on the return on investment (RoI) in both debt and equity not only affects an HNWI’s level of wealth but may also potentially distort future investment decisions. Cyprus allows HNWIs to optimise their tax position on investment income. The country introduced the so-called “non-dom’’ rules in 2015, by which individuals, who are Cyprus tax residents but non-Cyprus domiciled for the purposes of the Special Defence Contribution, should not be subject to any tax on dividend, interest and rental income (other than limited National Health System contributions). In addition, the availability of a wide network of double tax treaties may be relied upon to render the after-tax position more efficient, providing for lower or zero withholding taxes.

Employment Income Incentives

When it comes to employment income, a 50% tax exemption for remuneration from first employment after 1 January 2022 and remuneration from employment in Cyprus exceeds €55,000 annually.

Interplay Between the Corporate and Personal Tax Systems

We are in an era in which the tax residency of shareholders, managing persons and people performing significant functions should be aligned with the tax residency of the corporate vehicles, given the increased focus on substance. Cyprus is uniquely placed to couple the tax-efficient provisions for individuals (stated above) with notable provisions in its corporate tax system. These include a dividend participation exemption framework, accompanied by a generous exemption on the profits arising from the sale of a broad range of financial assets. The result of this combination fits in with different investment strategies and profiles, especially in the context of Family Office arrangements. Collecting the income from the underlying investments without any income tax and then achieving a tax-

- efficient repatriation, free from any withholding tax to the ultimate beneficial owners of the structure, fits in both with private equity/medium-long term investments and short-term/liquid investments.

The quest for tax optimisation is a complex venture. The needs of each HNWI and her/his family need to be taken into consideration. All relevant tax issues, succession and estate planning, as well as wealth structuring, need to be factored in so as to arrive at the most suitable solution. Cyprus is undeniably an attractive destination for HNWIs, combining several efficient measures geared towards individuals, while it is also an efficient and tested environment for relocation and a platform for further investments.

By Panayiotis Tziongouros, Partner, International, Tax and Transaction Services, EY Cyprus

(This article was first published in The Cyprus Journal of Wealth Management. To view it click

here)

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