Tax Planning in Cyprus

If you are you thinking of moving to Cyprus there are many benefits to living on this Mediterranean island and, while taxation may not be top of your priorities when looking for a new home, it is certainly encouraging to know that the local tax regime is relatively attractive.

Tax residency

In Cyprus, you are regarded as tax resident if you cumulatively spend more than 183 days physically present during a calendar year. Individuals may also be considered tax resident in Cyprus if they satisfy the ‘60-day rule’. This applies to individuals who in the relevant tax year:

a) do not reside in any other single state for a period exceeding 183 days in aggregate
b) reside in Cyprus for at least 60 days; and
c) have other defined Cyprus ties.*

*This would include carrying on a business in Cyprus, being employed in Cyprus, holding an office (directorship) of a company tax resident in Cyprus, as well as owning or renting a permanent residential property in Cyprus.

As a resident of Cyprus, you are taxable on your worldwide income. Certain income, such as bank interest and dividends, is only taxable in the form of ‘defence contributions’. Your first €22,000 of income is tax free. Tax rates then start at 20% and rise progressively to 35% for income over €72,000.

Cyprus and pensions

Cyprus offers advantageous tax treatment for residents who receive UK source pension income. You can opt for the pension income to be taxed at the scale rates of tax, so if this is less than €22,000 per annum, no tax is due on the income. Alternatively, you can opt for your pension income to be taxed at a fixed rate of just 5%, with the first €3,420 tax free.

Defence contributions

Defence contributions are just another tax and it is applied to the worldwide investment income of individuals who are resident and domiciled in Cyprus. Non-Cyprus domiciles are exempt from defence contributions. Generally, you will be considered Cyprus-domiciled if you were born in Cyprus or you have been resident for 17 out of the last 20 years. Most UK expatriates therefore should escape tax on interest and dividends for their first 17 years of residence.

Capital gains tax

In Cyprus, capital gains tax is only payable on gains arising on the sale of real estate located in Cyprus – property sold in the UK or elsewhere is exempt. On gains from disposal of immovable property situated in Cyprus, there is a lifetime exemption of €30,000 for each person.

After that, capital gains tax is 20 per cent. The gain is the difference between the sales proceeds and the original cost of the property – with the seller is entitled to a further allowance regarding the transfer fees paid, inflation, and the cost of any additions made to the house.

Gains from the disposal of your principal private residence are exempt up to €150,000 if the owner resides in it continuously for at least five years prior to disposal. While Cyprus taxation appears relatively straightforward, do take specialist advice to make sure you understand how all the rules affect you and to make sure you are paying tax in the right country, particularly if you continue to own assets and earn income in the UK.

You also want to make sure you are holding your assets in the most tax-efficient way for Cyprus as well as to achieve your objectives for yourself and your heirs. If you have not yet left the UK, take advice before you dispose of UK assets to ensure you do that as tax-efficiently as possible.

There is a lot to take in and be aware of and these are really only examples. Good planning can ensure you minimise the tax that impacts you and it helps to do so with specialists in this area.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.