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.

Income tax

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; and
b) are not tax resident in any other state; and
c) reside in Cyprus for at least 60 days; and
d) 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’. Rental income is subject to both income tax and defence contributions.

Your first €19,500 of income is tax free. Tax rates then start at 20% and rise progressively to 35% for income over €60,000.

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 €19,500 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.

Up until 31^st December 2018, this applied to all pension income, regardless of whether the pension was paid by the UK government, a company pension or a private pension. But the UK and Cyprus negotiated a new Double Tax Treaty which came into force on 1^st January 2019, which gives the UK exclusive taxing rights on UK government service pensions.

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, at the following rates:

• Interest                      30% (reduced to 3% if your income is less than €12,000)
• Dividends                 17%
• Rental income        3% (on 75% of gross income)

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. The rate is 20%. 

Capital gains made on the sale of shares are generally not taxed in Cyprus.  There is no capital gains tax on death, or on the transfer of assets between spouses and family members up to the third degree.

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.