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Tax: No one wants to pay tax…But if you have to, Cyprus is the place to do so!

Blevins Franks – March 2006

Apart from almost guaranteed sunshine for 320 days of the year, one of the obvious attractions of living in Cyprus is the relatively benign tax regime.

If you are physically present in Cyprus for more than 183 days in a calendar year, you automatically become tax resident there. This in turn means that you will be liable to Cyprus tax on your worldwide income. That said the top rate of tax on earned income is 30%, which applies to amounts of C£20,000 or more, 10% on cash deposit interest regardless of amount and 15% on dividends again regardless of amount.

There is no capital gains tax on anything other than Cyprus based property, no local inheritance tax and no wealth tax. Cyprus also grants unilateral relief, whether or not a double tax treaty is in force, so if you have already paid tax on any income source, you will get a 100% credit for it against your liability in Cyprus.

One of the most attractive tax regulations for residents of Cyprus is the ability for retired people to opt for a discounted rate of 5% on their pensions. There are in fact currently two regimes under which pensions may be taxed and retirees are able to select the one that is most advantageous to them. They are then able to make further selections year by year in accordance with their circumstances.

The first regime is the normal income tax rates, which for 2006 are:-

Nil to C£10,000 – nil

C£10,001 to C£15,000 – 20%

C£15,001 to C£20,000 – 25%

C£20,000 + – 30%

The second regime is:-

Nil to C£2,000 – nil

£2,000 + – 5%

Retired individuals with pensions in excess of approximately £15,000 pa will find the second regime to be more beneficial, with the exact figure being determined by the exchange rate applying at the time.

Another advantage for pensioners moving to Cyprus is that it is one of the very few places where all pensions may be paid to residents without UK tax having to be deducted at source.

Ordinarily, pensions are treated as UK source income and are therefore taxable at source unless the recipient is resident in a country that has an appropriate double tax treaty with the UK. Even then, Government pensions usually remain taxable in the UK, but as said above, not for residents of Cyprus. This means that substantial pension income can be enjoyed at a maximum tax rate of 5%, as opposed to a top rate of 40% in the UK. In order to achieve this Form DT Individual must be completed and submitted to your local tax office in Cyprus.

Lump sums cash commutations taken from pension schemes are tax free in Cyprus, so there is no need to rush into taking the lump sum before you make the move.

As far as reporting tax liabilities is concerned, the onus is on you to complete annual returns and not on the tax authority to send you a form. The first step is to register for tax which you are required to do if you are resident in Cyprus for more than 6 months of the year. In order to be able to register for tax however, you must firstly have applied for and been granted an Alien Registration Certificate by the immigration authority.

EU nationals are able to stay in Cyprus for up to 90 days using their passport as a temporary visa. Anyone wishing to stay in Cyprus for more than 90 days at a time is required to obtain a residence permit from the immigration office. You will need to make an appointment, which could be up to 2 months ahead depending on which area of Cyprus you are going to be living in and at that time you will given a list of items to take with you on the day. Always ensure that you take plenty of copies of everything and that you retain all original documentation. The permit itself will take many months to be issued, but the Alien Registration Certificate will be given to you on the day.

You can then either approach the tax office yourself or employ a local accountant to complete the task for you. The latter can often be advantageous, except in the most straightforward of cases. You will be required to make stage payments based on an estimation of your likely income for the year from the various sources. Earned income, pensions and letting income for instance are liable to income tax and payments are made in three stages throughout the year on 31st July, 30th September and 31st December. Investment income is subject to the defence contribution and is payable in two instalments on 30th June and 31st December. Your full return must be submitted by 30th April in the year following the year of assessment.

It is possible to protect investment income from liability to the defence contribution by holding the capital inside an appropriate structure, such as a trust, offshore company, or a private client portfolio bond. Withdrawal of accrued income from these structures will remain liable to the defence contribution, but only on the amount withdrawn, whereas withdrawals of capital are tax free under current regulations. It is essential therefore to be able to identify what is capital and what is income within your investment portfolio.

There is no doubt that Cyprus currently has a very advantageous tax regime, but as in other EU member states, the Cyprus Government is looking for ways to increase their revenue from taxation and changes to the regime are almost inevitable over time. It is therefore imperative that you seek the best professional advice in relation to the minimisation of liabilities both now and in the future.

© Blevins Franks 2006

This article is reproduced with the kind permission of Blevins Franks.

For information and advice on tax issues, contact the Blevins Franks Tax Advisory Service on +44 (0) 207 015 2126 www.blevinsfranks.com

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