1. Which factors bring an individual within the scope of tax on income and capital gains?
Taxes on income
An individual who is resident in Cyprus for a particular tax year is liable to income tax on worldwide income, whether that income is remitted to Cyprus or not. Non-residents are subject to income tax on income accruing or arising from sources in Cyprus. However, there is no income tax on dividend and interest income, so if the individual is not domiciled in Cyprus and liable to SDC tax (see below), these categories of income are entirely free of Cyprus taxation.
Special Defence Contribution, commonly known as SDC tax, is payable on dividends, interest (other than interest received as a business activity) and rents receivable. In order to be liable for SDC tax an individual must be both resident and domiciled in Cyprus for the tax year concerned. Individuals who are resident but not domiciled in Cyprus are exempt from SDC tax.
Capital gains tax
An individual who is resident in Cyprus for a particular tax year is liable to capital gains tax. However, capital gains tax is levied only on a very limited category of gains, namely gains on disposal of immovable property in Cyprus and on disposal of shares in non-listed companies directly or indirectly holding immovable property in Cyprus, to the extent that the gain on disposal of the shares derives from the immovable property.
The traditional determinant of residence for individuals is physical presence, with individuals being considered to be resident if they are present in Cyprus for more than 183 days in the relevant year. Days of departure and arrival are treated as follows:
- The day of departure from Cyprus counts as a day of residence outside Cyprus.
- The day of arrival in Cyprus counts as a day of residence in Cyprus.
- Arrival in and departure from Cyprus on the same day counts as one day of residence in Cyprus.
- Departure from and return to Cyprus on the same day counts as one day of residence outside Cyprus.
Law 119(I) of 2017 introduced an alternative residence qualification for 2017 and later tax years. An individual will be deemed to be resident in Cyprus if during the tax year concerned he or she maintained a permanent residence in Cyprus, undertook any business or employment in Cyprus which continued to exist at the end of the tax year) and was present in Cyprus for at least 60 days. All three conditions must be satisfied and the individual concerned must not be a tax resident of any other country (for example by reason of a physical presence there for 183 days) for the tax year in question.
Domicile is a general legal concept and is distinct from nationality or residence. Generally, a person's domicile is the place that person considers their permanent home. As in many areas, Cyprus follows English common law in determining domicile. For the purpose of determining liability to SDC tax, an individual will be deemed to be domiciled in Cyprus if he or she has been a tax resident for 17 or more of the 20 tax years immediately preceding the year of assessment.
2. What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
For all taxes, the tax year is the calendar year. Spouses are taxed separately.
Income tax is payable on taxable income for the year at the following rates:
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.
Several categories of income are exempt from income tax, including:
- interest and dividends receivable.
- lump sums received on retirement.
- capital sums from approved life assurance policies and provident or pension funds.
- 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.
- profit from the sale of shares.
- certain pensions such as widow's pension).
- salaries of officers and crew of ships owned by a Cyprus shipping company that sail under the Cyprus flag and operate in international waters.
- income from a qualifying scholarship, exhibition, bursary or similar educational endowment.
For income tax purposes a 20% deduction is allowed from rental income received.
The taxpayer may opt from year to year for any foreign pension either to be taxed on the standard basis or on an alternative basis in which the first €3,420 per annum is free of tax and the excess over that amount is taxed at 5%.
There is a separate system of taxation for companies or individuals engaged in operation or management of ships engaged in international trade, based on the tonnage of the vessels concerned.
There is a self-assessment system for income tax, under which taxpayers must submit an estimated tax return part-way through the tax year accompanied by payment of half the estimated liability, and the balance of the estimated liability at by the end of the tax year. The final tax return is submitted after the end of the tax year, together with payment of any final balance. The tax return must be based on audited financial statements if the taxpayer has an income of more than €70,000 from trading or professional activities. Individuals must submit a provisional estimate of profits and tax payable for the year by 31 July of the tax year, together with a remittance of half the estimated tax payable. The estimates may be revised at any time before 31 December of the tax year, and the balance of the estimated tax payable must be paid by then. A penalty may be imposed in the event of an excessive difference between the first and the final estimate.
Individuals who are exempt from the requirement to provide audited financial statements are required to submit their final tax return for the year, with a remittance for any tax payable, by 30 September following the end of the tax year. Tax returns must be submitted electronically via the official TAXISNET system.
Special contribution for defence ("SDC tax")
Investment income (passive interest, dividends and rents) received by individuals who are both resident and domiciled in Cyprus for the tax year concerned is subject to SDC tax at 30 percent on interest, 17 percent on dividends and 2.25 percent on rents. If the individual is resident but not domiciled in Cyprus there is no liability to SCD. Given that interest and dividends are exempt from income tax, this means that interest and dividend income of resident non-domiciled individuals is exempt from all forms of Cyprus taxation, and in many cases exempt from overseas tax.
Taxpayers receiving rents, interest or dividends from which SDC tax has not been deducted must submit semi-annual returns together with payment of the amount due.
Capital gains tax
The only gains subject to capital gains tax, which is charged at 20 percent, are gains from the disposal of immovable property in Cyprus and shares in companies (but not companies listed on a recognised stock exchange) directly or indirectly owning immovable property in Cyprus, to the extent that the gain is derived from an appreciation in value of the immovable property.
Gains on disposal of any other kind of asset are entirely free of capital gains tax.
Taxpayers must report any capital gains as they arise and pay the tax. However, as capital gains tax only applies to a very limited range of assets this is not an issue that affects most taxpayers.
3. Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
There is a PAYE system for salaries. Subject to certain exemptions, SDC tax must be deducted at source from dividend and interest payments and certain rents and accounted for to the Tax Department.
Cyprus does not impose withholding taxes on interest, dividends or most royalties paid to non-residents.
Royalties paid to non-residents are subject to withholding tax at 10 per cent (or 5 percent in the case of cinema films), but only if they relate to the use of the intellectual property asset within Cyprus.
4. Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?
There are no wealth taxes in Cyprus.
5. Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
There are no succession taxes in Cyprus, and no taxes on lifetime transfers.
6. Are tax reliefs available on gifts (either during the donor's lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?
Not applicable - there are no succession taxes, and no taxes on lifetime transfers.
7. Do the tax laws encourage gifts (either during the donor's lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
Not applicable - there are no succession taxes, and no taxes on lifetime transfers.
8. How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
There is no immovable property tax in Cyprus, and no special taxation of property owned by an individual who has no connection with the jurisdiction other than ownership of property there.
9. Are taxes other than those described above imposed on individuals and, if so, how do they apply?
The following rules apply to stamp duty:
- No stamp duty is payable in respect of transactions with a consideration of €5,000 or less.
- For transactions with a consideration in excess of €5,000 but not exceeding €170,000, the rate of stamp duty is €1.50 for every €1,000 or part thereof.
- For transactions with a consideration in excess of €170,000, the rate of stamp duty is €2 for every €1,000 or part thereof.
- The maximum stamp duty payable on a contract is €20,000.
- Where no amount of consideration is specified in the contract, the stamp duty is €35.
- For a transaction which is evidenced by several documents, stamp duty is payable on the main contract and ancillary documents are charged at a flat rate of €2.
- Stamp duty of €430 is payable on the creation of a trust under the International Trusts Law.
Stamp duty must be paid within 30 days from the date of execution of the relevant documents or, if they are executed abroad, within 30 days after they are received in Cyprus. If stamp duty is paid late, a surcharge of approximately 10 percent of the unpaid amount is payable if payment is made within six months after the due date. Otherwise the surcharge is twice the unpaid amount.
Land transfer fees are payable when title deeds are issued by the Department of Land and Surveys. If VAT is payable on the property no transfer fee is payable; otherwise the transfer fee is charged at progressive rates on successive tranches of the acquisition price (or market value of gifts) as follows:
- Up to €85,000: 1.5 percent.
- €85,000 to €170,000: 2.5 percent.
- Above €170,000: 4 percent.
10. Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
With effect from the 2008 tax year, under article 8(21) of the Income Tax Law of 2002, individuals becoming tax-resident and taking up employment in Cyprus became entitled to an exemption of 20% of their annual income from employment in Cyprus for the first three years of employment. The exemption was limited to €8,550 per annum. In 2012 an alternative exemption was introduced in the form of article 8(23), exempting 50% of the first five years' income from employment in Cyprus of a person who was not previously resident in Cyprus, provided the income from employment in Cyprus exceeds €100,000 per annum.
In 2015, as part of a package of measures aimed at stimulating the economy, both these exemptions were modified with effect from the beginning of the 2015 tax year. In respect of employments which began after 1 January 2012 the article 8(21) exemption was extended to cover the first five years following the year in which the employment began, but ceases to be available after the 2020 tax year. The article 8(23) exemption for earnings of more than €100,000 was extended from five years to 10. In respect of employments that began on or after January 1, 2015, the article 8(23) exemption is not available to anyone who was resident in Cyprus in any three of the five tax years preceding the year in which the employment in Cyprus began, or to anyone who was resident in Cyprus in the year preceding the year in which the employment began.
Only one of the exemptions can be claimed in any tax year, but the taxpayer may elect from year to year which of the exemptions to claim, as long as the relevant conditions are satisfied, principally that the individual is resident and employed in Cyprus.
Originally published by The In-House Lawyer.
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.