Cyprus: Private Client Law In Cyprus: Overview - Sep 12, 2016

Last Updated: 13 September 2016
Article by Elias Neocleous, Lefkios Tsikkinis and Christos Vezouvios

TAXATION

Tax year and payment dates

1. When does the official tax year start and finish in your jurisdiction and what are the tax payment dates/deadlines?

Tax year

The tax year in Cyprus starts on 1 January and ends on 31 December.

Tax payment and deadlines

Provisional declaration of income. Any income that is not dealt with under the pay as you earn (PAYE) system is dealt with on a self-assessment basis. Individuals must submit, by 1 August, a provisional declaration of their income for the year to the tax authorities together with a remittance for half the estimated liability. The balance must be paid no later than 31 December.

Payment of the balance due. Different rules apply concerning the payment of the balance of the tax due on income, depending on the circumstances of the individual:

  • Individuals who carry on a trade or profession with a turnover for the year of more than EUR70,000 must:
    • prepare audited annual financial statements and pay the balance of tax due on their income by self-assessment no later than 1 August of the following year; and
    • submit their final personal income tax returns no later than the following 31 December.
  • Other individuals must file their personal income tax returns and pay any tax due no later than 30 June of the following year.

In both cases, tax paid late or underpaid will be subject to interest at 9% per annum from the due date.

Special contribution for defence tax (SDC tax). SDC tax is payable on a self-assessment basis on interest, dividends and rent received. The estimated liability on income received in the first six months of the year must be paid by 30 June, and the estimated liability on income received in the second six months must be paid by the end of the year.

Up to and including 15 July 2015, all Cyprus tax-resident individuals were subject to SDC tax. With effect from 16 July 2015 the SDC (Amendment) Law, Law 119(I) of 2015 introduced an exemption for individuals who are resident but not domiciled in Cyprus. The exemption aims to encourage foreign nationals to use Cyprus as a base for their investments.

Domicile and residence

2. What concepts determine tax liability in your jurisdiction (for example, domicile and residence)? In what context(s) are they relevant and how do they impact on a taxpayer?

Tax liability is based on residence. Resident individuals and companies are liable to Cyprus tax on worldwide income. Non-residents are liable for Cyprus tax on Cyprus-source income.

Cyprus treats the concepts of residence and domicile in the same way as other common law countries.

Domicile

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. Domicile is the determining factor as to whether Cyprus succession law applies in a particular case (see Questions 24 to 26).

For the purpose of determining liability to SDC tax (see Question 1), 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.

Residence

Individuals are 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.

Residence determines liability to most forms of taxation in the private client context (see Question 6, Taxable income).

Companies

For companies, the test of residence and liability to Cyprus tax is based on the locus of management and control.

Taxation on exit

3. Does your jurisdiction impose any tax when a person leaves (for example, an exit tax)? Are there any other consequences of leaving (particularly with regard to individuals domiciled in your jurisdiction)?

As an EU member state, Cyprus does not impose any restrictions on the freedom of movement of EU citizens, or on citizens of other countries leaving Cyprus.

Temporary residents

4. Does your jurisdiction have any particular tax rules affecting temporary residents?

For tax purposes, residence is dealt with on a year-by-year basis. EU citizens and their dependants have the right to live in Cyprus. Nationals of other countries who have lived legally in Cyprus for a continuous period of five years have a right of permanent residence.

In 2013, Cyprus introduced a scheme allowing purchasers of property to obtain permanent residence permits, and a citizenship by investment scheme which enables individuals of good character who invest substantial sums in Cyprus (EUR2.5 million and above) and their dependants to obtain Cyprus citizenship on an accelerated basis.

Taxes on the gains and income of foreign nationals

5. How are gains on real estate or other assets owned by a foreign national taxed? What are the relevant tax rates?

Capital gains tax (CGT) is charged at 20% on gains from the disposal of:

  • Immovable property in Cyprus.
  • Shares in companies (but not companies listed on a recognised stock exchange) owning immovable property in Cyprus to the extent that the gain is derived from an appreciation in value of the immovable property.

All other gains are exempt from CGT.

CGT is not charged on gains that are subject to corporation tax. As with corporation tax, CGT is paid by reference to the calendar year, under a self-assessment system.

A gain on the disposal of immovable property in Cyprus is calculated by deducting from the sale price (or the market value in certain circumstances, such as where the revenue authorities do not accept that the sale price was an arm's length price):

  • The acquisition cost, including expenses (or market value as at 1 January 1980 if the asset was acquired before that date).
  • Expenditure that is wholly and exclusively incurred to enhance the asset's value.
  • Sale expenses, interest on loans and immovable property tax.

These costs and expenses are adjusted by indexation to take account of inflation. The taxpayer can offset, against gains, capital losses on chargeable assets that were incurred in the current year or that have been brought forward from previous years.

Gains on disposals of shares in companies that own immovable property in Cyprus are calculated by first deciding the amount of the share disposal proceeds that are attributable to immovable property in Cyprus. The taxable gain is then calculated as above.

The Capital Gains Tax (Amendment) (No 2) Law of 2015, Law 117(I) of 2015 exempts gains on disposal of property (whenever the disposal may occur) that was acquired by the alienator on an arm's length basis within the period beginning on 16 July 2015 and ending on 31 December 2016. The exemption does not apply to property acquired under the foreclosure process prescribed in Part VIA of the Transfer and Mortgage of Immovable Property Law.

6. How is income received by a foreign national taxed? Is there a withholding tax? What are the income tax rates?

Taxable income

Income tax treatment depends on whether or not the individual is resident in Cyprus for tax purposes (see Question 2, Residence). There is no distinction between Cypriots and nationals of other countries in this context.

Residents must pay income tax on their 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 concerning:

  • Profits or other benefits from:
    • a permanent establishment (that is, a fixed place of business through which its business is wholly or partly carried on) situated in Cyprus;
    • any office or employment exercised in Cyprus.
  • Pensions from past employment exercised in Cyprus.
  • Rent from property situated in Cyprus.
  • Consideration received in respect of any goodwill in respect of a trade carried out in Cyprus, reduced by the cost of that goodwill.
  • Gross income that an individual derives from the exercise in Cyprus of any profession or other occupation. This includes the remuneration of public entertainers and the gross receipts of any theatrical, musical or other group of public entertainers.

Withholding taxes

The only withholding taxes apply to:

  • Rental payments made to non-residents concerning films shown in Cyprus. These are subject to withholding tax at 5% of the gross payments.
  • Royalties or any other payments to non-residents for intellectual or industrial property rights. These are liable to a 10% withholding tax, subject to relief under any applicable double taxation treaty. No tax needs to be withheld if the rights are used exclusively outside Cyprus.

Tax rates

Income tax is charged at progressive rates, according to each band or tranche of income. The current rates are:

  • Up to EUR19,500: nil.
  • EUR19,500 to EUR28,000: 20%.
  • EUR28,000 to EUR36,300: 25%.
  • EUR36,300 to EUR60,000: 30%.
  • Above EUR60,000: 35%.

Husband and wife are taxed separately.

For the first five calendar years following the start of their employment or until 31 December 2020, whichever occurs sooner, individuals taking up residence and employment in Cyprus are entitled to an annual allowance of the lower of:

  • EUR8,543.
  • 20% of their remuneration.

For individuals taking up employment in Cyprus whose remuneration exceeds EUR100,000 per annum, a 50% deduction is allowed for the first ten years of employment.

The five-year and ten-year exemptions cannot both be claimed.

Individuals receiving pensions from overseas may choose between taxation on the normal basis or opt for an alternative basis, with the first EUR3,420 being exempt from tax and the remainder taxed at 5%. The choice can be made each year.

Interest, dividends and profits from the sale of securities are exempt from tax. Interest and dividends (but not profits from the sale of securities) of individuals who are resident and domiciled in Cyprus are subject to SDC tax at 30% and 17% respectively. Where interest is earned in the ordinary course of business or closely connected to the ordinary course of business of an individual, the progressive tax rates of income tax set out above apply.

Rental income is subject to:

  • Income tax on 80% of the gross rent received.
  • SDC tax at 3% on 75% of the gross rent received.

Companies, partnerships, and national and local government bodies must deduct SDC tax from rents they pay, and pay it over within the following month. In all other cases, the landlord must pay the SDC tax at the end of each half-year.

Inheritance tax and lifetime gifts

7. What is the basis of the inheritance tax or gift tax regime (or alternative regime if relevant)?

The Estate Duty (Amending) Law of 2000 abolished any form of succession tax on the deaths of persons domiciled in Cyprus occurring on or after 1 January 2000 (see Question 2, Domicile).

8. What are the inheritance tax or gift tax rates (or alternative rates if relevant)?

Not applicable (see Question 7).

9. Does the inheritance tax or gift tax regime apply to foreign owners of real estate and other assets?

Not applicable (see Question 7).

10. Are there any other taxes on death or on lifetime gifts?

There are no taxes on death or on lifetime gifts.

Taxes on buying real estate and other assets

11. Are there any other taxes that a foreign national must consider when buying real estate and other assets in your jurisdiction?

Purchase and gift taxes

The principal ancillary costs of acquiring immovable property in Cyprus are the transfer fee charged by the Department of Lands and Surveys, and stamp duty. These apply equally to resident and non-resident purchasers of any nationality.

Transfer fee. The transfer fee is charged on each tranche of the value of the property at progressive rates:

  • Up to EUR85,000: 3%.
  • EUR85,000 to EUR170,000: 5%.
  • Above EUR170,000: 8%.

Therefore, the transfer fee on a property with a value of EUR500,000 is EUR33,200.

In July 2015, in order to stimulate the property market, the fee charged on transfers of immovable property was reduced by half until 31 December 2016. No transfer fee is payable if VAT is payable on the property, provided that the sale agreement is deposited with the Department of Lands and Surveys before the end of 2016. The reduction is not available for property acquired under the foreclosure process prescribed in Part VIA of the Transfer and Mortgage of Immovable Property Law. The 50% reduction in transfer fees was made permanent by the Lands and Surveys Department (Fees and Rights) (Amendment) (No 2) Law in July 2016.

Stamp duty. The following rules apply to stamp duty:

  • For transactions with a consideration up to EUR5,000, no stamp duty is payable.
  • For transactions with a consideration in excess of EUR5,000 but not exceeding EUR170,000, stamp duty of EUR1.50 for every EUR1,000 or part thereof is payable.
  • For transactions with a consideration in excess of EUR170,000, stamp duty of EUR2 for every EUR1,000 or part thereof is payable.
  • The maximum stamp duty payable on a contract is EUR20,000.
  • Where no amount of consideration is specified in the contract, the stamp duty is EUR35.
  • 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 EUR2.
  • Stamp duty of EUR430 is payable on the creation of a trust under the International Trusts Law (see Question 30).

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% 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.

Annual taxes

Immovable property tax has been payable on 30 September each year, calculated on the basis of the 1980 market value of immovable property that the taxpayer owned at the beginning of the year. This tax has been abolished with effect from 1 January 2017 and therefore the current year (2016) is the last year when this tax will be levied.

Council and other service charges, such as water and sewage charges, are much lower than in most European countries.

Wealth taxes

There are no wealth taxes in Cyprus.

Other

There are no other relevant taxes to consider.

12. What tax-advantageous real estate holding structures are available in your jurisdiction for non-resident individuals?

Natural persons, companies, partnerships or trusts can hold property in Cyprus. The choice of structure depends on the taxpayer's objectives. A Cyprus holding company can be a tax-efficient structure. A Cyprus International Trust (see Question 30) can hold real property situated in Cyprus and is a highly advantageous (tax-neutral) structure.

Property can be held either absolutely or in shares. The Cyprus government and the Greek and Turkish religious institutions, such as the Greek Orthodox Church and the Muslim Evkaf, can also own property.

Taxes on overseas real estate and other assets

13. How are residents in your jurisdiction with real estate or other assets overseas taxed?

Income from overseas assets is taxed in the same way as income from assets in Cyprus. Relief for tax paid overseas is available either under a double tax treaty or, if there is no treaty, in the form of unilateral relief from Cyprus tax (see Question 14).

Capital gains on overseas assets are exempt from tax. If a double tax treaty provides that capital gains are taxable only in the country of residence of the taxpayer (as some of Cyprus's older treaties do) this can exempt the gain from taxation altogether.

International tax treaties

14. Is your jurisdiction a party to many double tax treaties with other jurisdictions?

Cyprus has concluded double taxation treaties with more than 50 jurisdictions, including the following:

  • EU jurisdictions, as follows:
    • Austria;
    • Belgium;
    • Germany;
    • Greece;
    • Malta; and
    • the UK.
  • Jurisdictions outside of the EU, such as:
    • China;
    • India;
    • Russian Federation; and
    • US.

Treaties are under negotiation, or awaiting ratification, with many other jurisdictions (including Brazil, Iran and The Netherlands).

All double taxation treaties provide relief from double taxation by applying the credit method to the taxation of dividends and interest. Tax paid or payable in the other country reduces the liability of Cyprus residents for Cyprus income tax and SDC.

The Cyprus tax authorities will also grant unilateral relief from Cyprus tax on income received from a foreign country with which Cyprus has no double taxation treaty. This relief applies up to the amount of tax paid in the foreign country and is granted by exemption, credit or deduction.

Cyprus's double taxation treaty network allows international transactions to be structured in a number of tax-efficient ways, particularly when combined with a Cyprus holding company and other fiscally beneficial entities.

WILLS AND ESTATE ADMINISTRATION

Governing law and formalities

15. Is it essential for an owner of assets in your jurisdiction to make a will in your jurisdiction? Does the will have to be governed by the laws of your jurisdiction?

It is strongly advisable for an owner of assets in Cyprus, particularly real property, to make a will in Cyprus. Cyprus law governs the disposal of immovable property in Cyprus, including restrictions regarding the statutory portion (see Question 24). However, under Regulation (EU) 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession (Succession Regulation), testators can choose the law of their country of nationality to apply to their estate instead of Cyprus law.

16. What are the formalities for making a will in your jurisdiction? Do they vary depending on the nationality, residence and/or domicile of the testator?

The testator must have testamentary capacity. The will is not valid unless it is in writing and executed in the following manner (section 23, Wills and Succession Law (WSL)):

  • Signed by the testator.
  • Signed by some other person:
    • on the testator's behalf;
    • in the testator's presence; and
    • under the testator's direction.
  • The signature must be made or acknowledged by the testator in the presence of two or more witnesses present at the same time.
  • The witnesses must witness and sign the will in the presence of the testator and of each other, but an attestation clause is unnecessary.
  • If the will consists of more than one sheet of paper, each sheet must be signed or initialled by or on behalf of the testator and the witnesses.

Any will made in Cyprus must comply with these requirements, irrespective of the nationality, residence or domicile of the testator.

Law 96(I) of 2015 amends the WSL by inserting a new section 23A giving the court discretion to overlook or amend any grammatical or numeric errors in a will, provided that it has been presented with persuasive evidence by an interested party and that it considers it equitable to do so.

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.

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