In 2021, the Government of the Republic of Cyprus introduced a special type of residence permit — Digital Nomad Visa. This program allows foreign nationals to move to Cyprus together with their families, provided they have remote working opportunities. Applicants for the visa should meet the following criteria:

1. Work online in the remote mode;
2. Work for a non Cyprus-company or to be a freelancer and work for foreign clients;
3. Have an official income of at least EUR 3,500 per month.

Part 1. Taxes in Cyprus

Personal income tax

If an individual has been residing in Cyprus for more than 183 days[1], he/she automatically becomes a tax resident in Cyprus and, therefore, is obliged to report his/her income and pay taxes in Cyprus. Cyprus tax regulations allow a digital nomad to use the special regime and become a tax resident within 60 days, if so required. The personal income in Cyprus is subject to a progressive scale of taxation:

In order to attract highly skilled professionals to their country, the Cyprus Ministry of Finance provides incentives in the form of exemption from the personal income tax on a part of their income. The personal income tax reliefs available to highly paid expats in 2023 are:

• 20% of remuneration (but maximum EUR 8,550 per year) for work activities of an individual, who was not a tax resident of Cyprus before commencement of his/her employment. This relief may be applied starting from the tax year following the year of employment.

or

• 50% of the employee’s remuneration, provided that the annual pre-tax remuneration exceeds EUR 55,000 and the employees have not been residents of the country for the 10 years immediately preceding commencement of their employment in Cyprus.

20% and 50% reliefs are mutually exclusive and only one of them may be applied by a particular taxpayer.

If a digital nomad is officially employed by a foreign employer, the latter should be registered with the Cyprus Tax Department and obtain a tax identification code for the employee in order to be able to withhold and pay the personal income tax acting as a tax agent.

Social security contributions and other contributions

At a recent forum held by the Cyprus Tax Department in cooperation with ICPAC[2] and the Department of Social Insurance Services, it was agreed that the employees working with the Digital Nomad Visa will not be subject to social security contribution obligations, as this type of work is considered temporary. Contributions to GESY healthcare fund will be 2.65%.

Example: let’s calculate tax obligations of a Cyprus Digital Nomad subject to the available personal income tax reliefs implemented in 2022 in Cyprus.

Input:

• applicant applies for a Digital Nomad Visa in Cyprus
• employer – company registered outside the Republic of Cyprus (in this article, we will take a Russian employer as an example)
• basis of cooperation – employment contract
• salary under the employment contract is EUR 56,000 per year (EUR 4,667 per month)

Let’s calculate the tax applying the available personal income tax relief of 50%.

Part 2. Taxes in Russia

The personal income tax payment procedure does not depend on the employee’s nationality, but depends on two factors: place of work performance and tax status.

Pursuant to Article 209 of the Russian Tax Code, the subject of the personal income tax:

• for tax residents – income both from sources in the Russian Federation and outside the Russian Federation (Article 209 of the Russian Tax Code);
• for tax non-residents – only income from sources in the Russian Federation (Article 209 of the Russian Tax Code).

Salary from a Russian company, if properly structured for tax purposes, may be exempted from the personal income tax in the Russian Federation, should the employee stay in Russia for less than 183 days at the end of the year.

Social security contributions

Payments and other remunerations accrued by an organization located in the Russian Federation as part of employment relations in favor of the employees who are Russian citizens and perform their duties under a contract of remote employment outside Russia shall be subject to insurance contributions under the general procedure (Letter of the Russian Ministry of Finance No. 03-04-06/27827 dated 14/04/2021).

NB! Scheduled amendments to the laws of the Russian Federation:

1. It should be noted that the Russian Ministry of Finance is about to amend the Russian Tax Code in order to eliminate the practice of non-payment of the personal income tax on payments to remote employees.
2. In a short while, a bill restricting remote work opportunities for the Russians departed abroad will be introduced to the State Duma. Remote work restrictions will apply to public sector employees, information security specialists of companies and some other sectors.

[1] A residence permit implies that the applicant will stay in Cyprus for the most of the permit validity period. The regulations state that the permit will be revoked, if the foreign national stays outside Cyprus for more than 90 consecutive days.

[2] Institute of Certified Public Accountants of Cyprus

Viktoria Latysheva

Specialist

IFRS

Korpus Prava (Russia)