I INTRODUCTION

Despite being among the smallest countries in terms of area and population, Cyprus has developed into one of the world's most important financial and business centres. It has numerous advantages, including a strategic location, membership of the EU and the eurozone, a mature and transparent legal system, world-class professional and financial services and a modern, business-friendly tax regime, which offers attractive planning opportunities.

During the years following perestroika, Cyprus developed into the portal of choice for investment from the west into the rapidly developing economies of Russia and central and eastern Europe.

Even the largest Russian and eastern European companies have a substantial degree of owner involvement, and high-net-worth individuals from the region have found Cyprus an excellent location for their personal financial affairs. In 1992 Cyprus enacted the International Trusts Law, which gave investors from overseas formidable asset protection and tax mitigation opportunities and allowed individuals from jurisdictions with forced heirship regimes effectively to regain testamentary freedom.

The links between eastern Europe and Cyprus extend beyond finance. Both share a common Orthodox religious culture and Cyprus is home to tens of thousands of Russians and eastern Europeans.

Today, Cyprus is a low-tax jurisdiction with a modern tax regime and an extensive network of double taxation treaties, allowing effective tax planning. All forms of succession taxes were abolished in 2000. It has world-class professional and financial services and a robust legal infrastructure founded on common law. It enjoys an excellent climate and a high standard of living, and its strategic location at the crossroads of Europe, Asia and Africa gives it a cosmopolitan atmosphere. While Russia and central and eastern Europe remain the key markets for Cyprus, China, India and the Middle East are also significant. The island is home to a large number of extremely wealthy individuals and the financial base for many thousands of non-residents.

The 'bail-out' that took place in the spring of 2013, and particularly the 'bailing-n' of depositors imposed as a condition of assistance from the European Stability Mechanism, have caused substantial losses for holders of deposits of more than €100,000 in Cyprus's two largest domestic banks. Nevertheless, the decisions of the eurozone do not detract from the favourable Cyprus holding company regime or diminish the advantages offered by Cyprus international trusts or other structures. Since there are no restrictions on where Cyprus companies, entities or trusts may maintain bank accounts, and no requirement for them to maintain bank accounts in Cyprus, the island remains an excellent location for wealth holding.

II TAX

i Introduction

Cyprus offers a benign personal tax system, with generous allowances and a top rate of 35 per cent on taxable income in excess of €60,000. Interest and dividends are exempt from income tax. A special defence contribution (SDC tax) is payable on interest, dividends and rents received by resident individuals (see below); non-residents are not liable to SDC tax. There are no succession taxes and all capital gains apart from those deriving from the disposal of real estate located in Cyprus are exempt from taxation.

ii Personal income tax

The tax year is the calendar year and individuals are considered to be resident if they are present in Cyprus for more than 183 days in the relevant year. Cyprus residents are taxed on the basis of worldwide income, irrespective of whether it is remitted to Cyprus. Husbands and wives are taxed separately. Persons who are not resident in Cyprus are subject to income tax on income accruing or arising from sources in Cyprus.

Personal income tax rates are as follows:

Income band Tax rate Cumulative tax at top of band
0–€19,500 0 0
€19,500–€28,000 20% €1,700
€28,000–€36,300 25% €3,775
€36,300–€60,000 30% €10,885
€60,000 and above 35%

Relief is given for donations to approved charities, professional and trade union subscriptions, life insurance premiums and contributions to pension, social insurance and welfare funds. Relief may also be available under a double taxation treaty.

Resident expatriate employees or secondees are subject to income tax on their worldwide income at the rates shown in the table above. For the first three calendar years following the start of their employment, individuals taking up residence and employment in Cyprus will be entitled to an annual allowance of the lower of €8,543 or 20 per cent of their remuneration. With effect from the 2012 tax year, if income from employment exceeds €100,000 per annum, a 50 per cent deduction is allowed for the first five years of employment.

Exemptions and special cases

The following are exempt from income tax:

  1. interest and dividends receivable by individuals (these are subject to SDC tax – see below);
  2. lump sums received on retirement;
  3. profit from the sale of shares;
  4. capital sums from approved life assurance policies and provident or pension funds;
  5. income from employment services provided abroad to a non-resident employer or an overseas permanent establishment of a resident employer for a period exceeding 90 days in the tax year;
  6. certain pensions, such as a widow's pension;
  7. salaries of officers and crew of ships owned by a Cyprus shipping company that sail under the Cyprus flag and operate in international waters; and
  8. income from a qualifying scholarship, exhibition, bursary or similar educational endowment.

For income tax purposes a 20 per cent deduction is allowed from rental income received.

The first €3,420 per annum of any foreign pension is free of tax and the excess over that amount is taxed at 5 per cent.

Special defence contribution

SDC tax is payable by Cyprus-resident (determined in the same way as for income tax) individuals on interest, dividend and rentals received at the rates set out below. Relief or credit for tax paid abroad may be available either under the terms of a double tax treaty or by way of unilateral relief.

Type of income Rate
Dividends 20%
Interest 30%
Rents 3% of 75% of the rent

Special contributions by private sector employees and pensioners and the self-employed

For the tax years 2014 to 2016 inclusive, a special contribution is payable on remuneration and pensions (excluding overseas pensions) paid to private-sector employees and the self‑employed at the following rates:

Gross monthly amount Contribution
Below €1,500 0
Between €1,500 and €2,500 2.5% (minimum €5)
Between €2,500 and €3,500 3%
Above €3,500 3.5%

In the case of an employee, the special contribution is borne by the employer and the employee in equal shares.

iii Capital gains tax

There is no taxation of capital gains in Cyprus apart from gains made on the disposal of real estate located in Cyprus or on the shares of companies holding real estate in Cyprus, to the extent that the gains are attributable to the real estate holding.

iv Succession taxes

There are no succession taxes in Cyprus.

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Originally published by Law Business Research Ltd.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.