Working Together in Prosperity

I N T R O D U C T I O N

In 2002 the Government of Cyprus announced reforms aimed at complying with European Union Law as part of the accession of Cyprus to the European Union. This briefing is intended to be a short guide specifically relating to those matters that affect retired expatriates.

 1.1Tax Residence

The Fiscal year in Cyprus runs January to December.  As from 1st January 2003 you will be regarded as tax resident if you spend more than 182 days in a calendar year in Cyprus and will be assessed on worldwide income. 

If you spend less than 183 days, from 1st January 2003 you will not be regarded as Cyprus tax resident even though you may not be a tax resident elsewhere.  To take advantage of the Double Tax Treaties, you will have to be in Cyprus for more than 182 days and therefore tax resident. To register as Cyprus Tax Resident a certificate of registration is required from the Civil Registry and Migration Department.

1.2 Taxes in Cyprus

1.3. Earned Income and Pensions

Rates                                            2008

The individual has the option to select the normal or reduced rates for the assessment of tax on Pension Income.

Husband and wife taxed separately.

Employment income
There is no longer any distinction between local and expatriate employees. For new Cyprus residents taking up employment in Cyprus, a special tax exemption of 20% of income earned or €8550 p.a. (whichever is the lower) will apply for the first 3 years of employment.
Where employment is rendered abroad, and more than 90 days overseas in a tax year, and the employer is not a tax resident in Cyprus, and has no permanent establishment in Cyprus, then the entire salary is tax free in Cyprus (it might be taxable elsewhere however).

1.4   Capital Gains
Capital gains only on real estate located in Cyprus are charged with income tax at the rate of 20% (even if you are a Cypriot non-resident).In calculating capital gains on real estate, the purchase costs, improvement, legal and transfer fees, and indexation may be deducted.  Additionally certain exemptions may apply e.g. one off €85,430 exemption for 5-year resident homeowner and €17,086 exemption for owners of lesser duration.

1.5 Defence Levy on Interest
From 1st January 2003, worldwide interest is charged with a “Defence Contribution” at the rate of 10%. Tax paid elsewhere on this income can be deducted.
If total income (including interest) is less than €12,000 the defence levy on interest is reduced to 3%

1.6   Defence Levy on Dividends
From 1st January 2003, worldwide dividends are also chargeable to Defence Contributions at the rate of 15% less any tax deducted at source elsewhere.

1.7   Rental Income
There is no Cypriot income tax due on rents derived from overseas (i.e. outside Cyprus) properties, whether or not remitted.  These would normally be taxed in the country where the property is situated.

For Cyprus based real estate the scale rates of income tax apply but after deducting:-

• 20% of rent for repairs etc;
• 3% depreciation on  building cost (not land)
• any interest on a loan to acquire or improve the property

In addition, after deducting 25% of the gross rentals, there is a 3% Defence Levy charge.

1.8   Taxation of Trust Income
A Cypriot tax resident is not taxed on any income or gains within a Trust established and managed outside Cyprus. Receipts of capital are tax-free whilst Receipts of income are taxable (whether or not remitted) to the 15% Defence Contributions   as from 1st January 2003.

1.9 Local Property Tax

1.10   Non-Cypriot Residents
Taxable only on income arising in Cyprus including capital gains on real estate.

1.11    Inheritance tax
Inheritance and gifts tax was abolished in Cyprus in 2001.  Any persons UK domiciled (as apposed to resident) will be subject to UK IHT on their worldwide assets unless a new domicile of choice outside of the UK has been established. (It is not sufficient to simply live outside of the UK no matter for how long).
Interspouse transfers are exempt providing both spouses are of UK domicile.

1.12 Exempt income
The main exemptions from tax are :

• Sums received by way of retirement gratuity, commutation of pension, death gratuity, or as consolidated compensation for death or injuries;
• All interest derived from within Cyprus from capital imported from abroad with the consent of the Ministry of Finance;
• 30% of the amount invested to acquire first issue shares in a company listed on the Cyprus Stock Exchange (assuming that the shares are held for one full year).

• Allowances

From 1st January 2003 personal allowances and most of the tax deductions were abolished. Social Insurance or Provident Fund contributions (where paid) and Life Insurance contributions are however allowable.

• Capital Appreciation Funds & Bonds (Gross roll up)

Withdrawals of capital are tax-free.

Ross Pays is the Chairman of The FAA based in Cyprus. FAA offer advice on wills, tax registration services, home, health and car insurance, investment services and tax planning, including Inheritance Tax Planning, together with full accounting services.

Visit Ross Pays website at www.rosspays.com, Telephone 00 357 25 82 58 76, Fax 00 357 25 33 35 93 or e-mail ross@rosspays.com
Initial consultations are free and no obligation and fee quotations will be provided in advance for all services.