Tax Facts - Cyprus

Gerard Associates Ltd. Financial Advisory Services does not provide individual tax advice, and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.

It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.

This has been prepared based on our understanding of current legislation and tax practice as at the date above. However, these are subject to change, and may result in income tax consequences different from those detailed below.

We cannot accept responsibility for its interpretation or any future changes to law.

Introduction

Tax in Cyprus comes under the jurisdiction of The Inland Revenue Department of the Ministry of Finance. Tax legislation in Cyprus has undergone significant overhaul due to Cyprus joining the EU in May 2004. The new law was implemented as from January 2003.

Tax Year

1st January – 31st December

Assessment Basis

Cypriot residents are taxed on their worldwide income. If a Cypriot resident is employed and only earning a wage they do not need to complete a self-assessment tax return and married couples are taxed separately.

Income Tax

Cypriot residents are taxable on all income derived from employment whether salary or benefits in kind, together with certain other types of income such as rental income. Taxable income is taxed at progressive rates. The rates range from 20% to 30% on taxable income in excess of a tax free allowance of CYP£10,000. Tax on employment income is deducted at source, by the individual’s employer.

There are a few small reliefs available for social insurance contributions, professional subscriptions and for premiums paid into approved products e.g. life insurance and pension contributions. There are also some ‘social grants’ dependent on the size and make up of an individual’s family, such as progressive child benefits, blind persons’ benefit and child-in-higher-education benefit. Pensions received from outside Cyprus are taxed at a flat rate of 5% after a tax-free allowance of CYP£2,000.

Taxation of Investment Income

There is no tax payable on dividend and interest income sourced in Cyprus. Instead every Cypriot resident pays a ‘special defence contribution’ on certain types of unearned income:

• Dividend income from local and overseas companies is subject to special contribution for defence at the flat rate of 15%. Any foreign tax withheld abroad is always credited against this Cyprus liability.
• Interest income is taxed at a rate of 10% except for certain products (savings bonds and development bonds), which are taxed at a lower flat rate of 3%.

In the case where the total annual income including interest income does not exceed CYP£7,000, the interest income ‘special defence contribution’ rate is reduced to 3%.

The ‘special defence contribution’ is generally withheld at source. Where it is not deducted at source payment is due at six monthly intervals in the case of rental income or at the end of the month following the month in which income is received for interest and dividend income.

Tax on Property Rental Income

Income from rental property forms part of taxable income with a deduction for the first 20% of rental income. The remaining 80% is added to taxable income and taxed at the highest marginal rate applicable for each individual.

Rental income is also subject to the ‘special defence contribution’ at a rate of 3% less a 25% allowance. This only applies to Cypriot residents.

Wealth Taxes

There are no wealth taxes in Cyprus.

Capital Gains Tax

Capital Gains Tax is imposed at the rate of 20% on gains from the disposal of immovable property situated in Cyprus, including gains from shares in companies that invest in immovable property, but excluding shares listed on a recognised stock exchange.

There are various exemptions available and capital losses can be used to offset gains. There are also allowances available for the disposal of private residence (CYP£50,000), disposal of agricultural land (CYP£15,000) and any other disposal (CYP£10,000). These allowances can only be used once and any combination should not exceed CYP£50,000.

Inheritance and Gift Tax

There are no Inheritance or Gift Taxes in Cyprus. However, the executor/administrator of the estate of the deceased is required by law to submit to the tax authorities a statement of assets and liabilities of the deceased within six months from the date of death.

Regional and Municipal Taxes

In addition to the property tax listed below a further tax is levied by local authorities. Rates vary according to the size of property but are usually in the region of CYP£50 – CYP£225 pa.

Property Taxes

Immovable Property Tax is imposed on the market value of the property as at 1st January 1980 and applies to the immovable property owned by the taxpayer on 1st January. The tax is payable by 30thSeptember.

There is a tax-free allowance of CYP£100,000 and in respect of excess property values a progressive rate of between 0.25% and 0.40% is applied. There are various exemptions but these are generally for public buildings.

Stamp Duty/Transfer Tax

There is a transfer tax payable to the Department of Land and Surveys for transfers of immovable property. Progressive rates are applied to all transfers starting at 3% and going up to 8%.

Stamp Duty is applicable on various documents and the amount varies according to the type of document.

Sales Tax

Sales tax is generally added at a standard rate of 15% to the sale price of goods and services. Some sales are exempt and other goods and services are subject to lower rates of 5% and 8%.

Social Security Contributions

Social security contributions are paid by both the employee and employer at a rate of 6.3% each on gross salary up to CYP£25,788 (2007) per annum. Self- employed individuals pay contributions of 11.6%. The contributions provide for a number of social security benefits, the most important being pension on retirement and benefits upon sickness and disability, maternity, unemployment and industrial injuries.

The contributions payable, as well as the benefits enjoyed through the system, are exactly the same for an expatriate subject to the Cypriot social security system as for any Cypriot citizen. The legislation does not distinguish between nationals and non-nationals.

Employers make further social security contributions of up to 3.7% in respect of the social cohesion, redundancy and industrial training funds and where applicable the holiday fund.

Taxation of ‘Non-Residents’ Living in Cyprus

If an individual is deemed to be a non-resident of Cyprus for tax purposes they will only be taxed on certain types of their Cypriot sourced income. Such income would be employment income (including benefits) in relation to services rendered in Cyprus, profits from a business activity, which is carried out through a permanent establishment in Cyprus, rentals from immoveable property situated in Cyprus, and pensions in respect of employment exercised in Cyprus, . These incomes are subject to Cypriot income tax at the progressive rates applicable. Unearned income such as interest and dividends earned from Cyprus sources are however exempt from any income tax.

Non-residents are fully exempt from the ‘special contribution for defence’ on any Cyprus arising income. Cyprus has concluded social security agreements with a number of countries. These agreements provide the rules for determining which countrys social security law is applicable to an individual connected with both countries. As a general rule employees working in one country are subject to the legislation of that country except in a number of cases, which include temporary postings, government officials, international transport workers and mariners.

Taxation of Expatriates Living in Cyprus

The new tax legislation implemented in January 2003 introduced the concept of residency to Cypriot tax law for the first time. An individual is resident in Cyprus for tax purposes if they spend more than 183 days in any single tax year in Cyprus. Anyone who becomes resident in Cyprus for tax purposes is liable to taxation on their worldwide income at the rates described above.

If an individual is considered a tax resident of Cyprus but is earning income from salaried services rendered abroad for more than 90 days in a tax year, the part of their salary earned abroad is exempt from tax. Such salaried services must be carried out for either:

· A non-Cyprus resident employer, or

· The foreign permanent establishment of Cyprus resident employer.

Any individual taking up employment in Cyprus for the first time is given an extra tax allowance on their income for a period of three years commencing from 1st January following the date they commence employment. This allowance is the lower of 20% of income or CYP£5,000 annually.

Cyprus has an extensive network of double taxation treaties with over 35 countries in respect of interest, dividends and royalties paid from and received in Cyprus.

All employees, whether they are Cypriot or EU nationals, are subject to the social security system in Cyprus. EU nationals taking on employment in Cyprus may however apply for an exemption from the Cyprus social security system if they continue to make contributions of such nature to their home country fund under EU regulation No. 1408/71.

However, Non-EU nationals employed by Cypriot companies are not subject to the social security system in Cyprus provided the employer company does not trade within Cyprus and they are not considered to have their ordinary residence in Cyprus.

Foreign employees working in Cyprus who are subject to the Cyprus Social Security system have to register with the Social Security authorities after they have obtained their Alien Registration Certificate (ARC).