Like any other nation, Cyprus has tax laws for its residents and established entities in the area. Still, this country has a very advantageous environment for investors – local and foreign. There are no restrictions on foreign share ownership, no withholding taxes on dividends or interest, and the sale of shares or other titles is not taxed. So how much tax do you pay in Cyprus?
Cyprus also has one of the lowest tax rates in the European Union. More so, non-Cyprus tax residents may take advantage of several tax exemptions. In late 2021, the government made an action plan for bringing in more businesses to expand their operations or open new establishments in the region.
Let’s tackle more about Cyprus tax laws and why businesses worldwide are attracted to this small island country in the Mediterranean.
Cyprus Basis of Taxation
All Cypriots are taxed on their income accrued or derived from local sources or abroad. People who are not tax residents of the country shall only pay taxes on the income they earn from the sources in Cyprus.
An individual is considered a tax resident of the country if they stay and work in Cyprus for more than 183 days a year. Likewise, the following are also Cyprus tax residents:
- They remain in Cyprus for at least 60 days in a tax year
- Have a business, are employed or have an office in Cyprus with a tax resident company any time of the tax year.
- Keeps a permanent residence in the country – can either be owned or rented.
Additionally, these individuals must not spend more than 183 days in another jurisdiction in a tax year and are not tax residents of another country within the same tax year.
For businesses or those holding an office in Cyprus, but the operation is terminated, the status as tax resident for that year will fall under a 60 days tax residency process.
The tax days in Cyprus are calculated as follows:
- The day of departure from Cyprus is day one of residence outside the country.
- The day of arrival in Cyprus is day one of residence in the country
- Departure and arrival in Cyprus on the same day are counted as day one of residence outside the country.
Income Tax in Cyprus
Cypriots and residents of Cyprus are taxable on their worldwide income. Specific income like dividends and bank interest is taxable as “defence contributions.” Additionally, rental income is subject to income tax and defence contributions.
Cyprus does not tax the first €19,500 of income. The rates apply at 20% and grow progressively to 35% for income more than €60,000.
If you have foreign pension income, you can choose how to tax it each year. It can have a flat rate of 5% on the excess of €3,420 or at a normal scale rate of income tax.
British retirees who choose to settle in Cyprus also enjoy the protection of the UK/Cyprus double tax treaty. It means that they are taxed solely in Cyprus. This treaty is in honor of the retirees’ service to the government.
Pension lump sums from UK pension are also tax-free in UK or Cyprus. However, extracting the full amount as a cash lump sum may lead to taxation of the excess over the tax-free amount.
What are Defense Contributions?
You will often see “defence contribution” on your taxes in Cyprus, but what is it all about? A defence tax is applied to the worldwide investment income of Cyprus residents and those domiciled in the country. The rates are as follows:
Interest – 30% or 3% for income less than €12,000
Rental Income – 3% or 75% on gross income
Dividends – 17%
Domiciled foreigners in Cyprus are exempt from paying deference contributions. Typically, a domiciled residence is Cyprus-born or has resided in the country for 17 years out of the last 20 years. Expatriates from the UK are not taxed on their dividends and interests in the first 17 years of living in Cyprus.
Capital Gains Tax
Capital gains taxes in Cyprus are applied on gains from the sale of real estate properties located within the country. Properties sold by Cypriots in the UK or anywhere else are exempt from this type of due. Capital gains tax rates are at 20%.
The sale of shares may also have capital gains, but these are not taxed in Cyprus. There is no capital gains tax on death or transfer of assets between spouses and relatives up to the 3rd degree.
Inheritance Tax
Another great thing about Cyprus tax laws is that no inheritance or succession tax is applied, and Cypriots can pass on their assets to their heirs without paying local tax.
On the other hand, it does not mean that ex-pats can escape from death taxes entirely. The UK inheritance tax will apply to those that remain domiciled in the UK. The UK will always apply taxes on assets declared in its jurisdiction regardless of domicile. If you live in Cyprus, find a specialist to help avoid unnecessary taxes for your family.
Pension Taxes
If you choose to move to Cyprus after retirement to establish a business, you should also review your pension funds.
Cyprus tax regimes provide positive opportunities for retirees. If you do not understand the laws, you should seek professional and regulated advice from a specialist in the area.
The Takeaway
In Cyprus, how much tax you pay is a common question for investors and expatriates. Though the taxation process appears simple, it can be challenging to navigate. A local tax specialist can help you understand how the rules can affect you and your decisions.
Ensure that you pay the right tax amount in the right country, especially if you own assets and have income from the UK or other countries. You should also make sure that you manage your assets in the most tax-efficient method while you are in Cyprus to achieve the right objectives.