New Employment exemptions made lucid

On the 26th of July, Legislation L.121(I)/2022 No. 6 was published in the Official Gazette making amendments and incorporating new Articles to the Income Tax Law regarding employment exemptions.

The Legislation is amending ITL by the addition of two new Articles 8(21A) and 8(23A) in replacement of the old ones 8(21) and 8(23) which will continue to apply to any taxpayer that has taken employment up to the 26th of July 2022 and subsequently terminated and become obsolete by the 26th of July 2027 and 26th of July 2031 respectively.

The new legislation also embodies ‘transitional arrangements’ for those individuals already benefiting from the existing exemptions that wish and are eligible to make the transition from the old to the new employment exemption schemes.

Old Article 8(21)

Before the amendment non-resident individuals taking first employment in the Republic in the years 2012-2025 were entitled to an exemption of 20% or €8.550 (the lower) on their employment income.

The exemption applied for 5 years starting from the year following the year of employment. Article 8(21) still applies for those individuals taking employment up to the 26th of July 2022 i.e. an individual taking employment in Cyprus on the 31st of March 2022 is entitled to go with the old 8(21) for 5 years up to 31st of March 2027.

For employments taking place after the 26th of July the new Article 8(21A) is coming into force with taxpayers having to fulfill the new set of rules.

New Article 8(21A)

The new article 8(21A) applies if the following conditions are met:

• First employment starts after 26/07/2022 (to 31/12/2027).
• The individual was non-tax resident for 3 consecutive years immediately before the commencement of employment

The exemption applies for 7 years starting from the year following the year of employment.

Article 8(21A) is applicable for individuals whose employment income is lower than €55.000 per annum or even for those whose income is more than €55.000 and could not satisfy the conditions of the new Article 8(23A) (see below)

As the new Article 8(21A) refers to employments commencing after the 26th of July individuals already benefiting from the old 8(21) will not be able to make the transition to 8(21A) and benefit for an additional 2 years. They could though join the new employment exemption scheme as provided for by the new Article 8(23A) as far as they fulfill the conditions.

Old Article 8(23)

As per the amending legislation the provisions of Article 8 (23) will still be applicable for those taxpayers taking employment up to 26/07/2022. Not being tax resident in the year preceding employment and not being tax resident for more than 3 out of the last 5 years preceding the year of employment had to be satisfied by any taxpayer claiming this exemption. Article 8(23) had a minimum entrance requirement of €100k employment income whereas the new Article 8(23A) requires only €55k per annum.

New Article 8(23A)

According to the new Article 8(23A) any individual starting employment in Cyprus as from the 1st of January 2022 onwards is entitled to 50% exemption provided he was non-tax resident for 10 consecutive years immediately before the year of employment.

The 10-year non-residency test applies to All potential beneficiaries of the scheme; both newcomers taking employment from 1st January 2022 as well as individuals already benefiting from the existing exemptions either through 8(21) or 8(23) who wish to join the new scheme.

The 10-year test applies for the 10 years immediately before the year of employment. If in any of those years, the tax payer was Cy-tax resident then he will not be eligible for the exemption.

As per the new Article the threshold of €100.000 applied before is lowered to €55.000 in an effort to target younger high caliber individuals or even executives who have experienced a pay cut.

With the new Article the period of exemption is now extended to 17 years (to run concurrently with the period of exemption given to non-domiciled individuals) start counting from the year of first employment. It follows that any individuals entitled to make the transition from the old to the new scheme will be able to claim the exemption for another 7 years.

The exemption of 50% applies in any tax year employment income exceeds the threshold of €55.000, provided in the 1st or 2nd year of employment, income exceeded the threshold of €55.000.

The exemption applies from the 1st year of employment as was the case with its predecessor provided employment income on an annual basis (x12) exceeds the threshold.

Also, the exemption applies in cases where salaried services are provided to either resident or non-resident employers.

The 17-year period of exemption is affixed to the year of first employment (+17 year) with no extensions in case an individual in any tax year was not able to claim the deduction.

The exemption is effective from the 1st of January 2022 and applies to individuals who have been non-tax resident for 10 consecutive years immediately before employment.

As mentioned earlier the legislation incorporates provisions for taxpayers already benefiting from the old schemes who wish to join the new 8(23A).

Let’s take a look how the following groups of taxpayers may benefit from the new scheme:

a) Employees already benefiting from 8(23)

This group of individuals could be able to join the new scheme and extend their exemption from 10 to 17 years provided:

1) They have been non-tax resident for a continuous period of 10 years prior to the year of employment

2) Their employment in the Republic is continuous from the year employment commenced to the year 2021

3) Their employment income exceeds the minimum threshold of €55.000 per annum as from 01 January 2022

For example, an individual benefiting from 8(23) since 2012, when it first came into force, (expiring in 2021) could possibly join the new scheme and get an additional 7-year exemption, provided he had been non-tax resident for all the years 2002-2011.

b) Employees with first employment in the period 2016-2021 with employment income > €55.000

This group of taxpayers could be able to join the new scheme provided:

1) They have been non-tax resident for a continuous period of 10 years immediately prior to the year of employment

2) Their employment income remains above €55.000

Please note that individuals already benefiting from 8(21) will be able to make the transition to the new 8(23A) and extend their exemption period from 5 to 17 years.

c) Employees with first employment in the year 2016-2021 with employment income less than €55.000

This group of taxpayers will be entitled to the new 8(23) provided:

1) They have been non-tax resident for a continuous period of 10 years prior to the year of employment

2) Within a 6-month period from the 26/07 their employment income will rise to €55.000 for the tax year 2022.

d) Employees with first employment in the year 2015 or before with employment income less than €100.000

This group of taxpayers would not be able to join any of the new schemes provided for in either Article 8(21A) or 8(23A). In case they have been claiming the exemption of 8(21), the 5-year exemption period had already expired in 2020.

All the above reflect our interpretation of the ITL and the opinions expressed herein may have to be re-evaluated in the light of any releases issued by the Tax Office.

We expect, sooner or later the Tax Office will circularize further guidance with clarifying explanations on the application of the above changes.

Since then take care