Location Taxation Obligation – Cyprus/UK Tax Residency Issues

It can be more difficult than you realise to establish one?s tax residence in certain circumstances. The onus is on the taxpayer to get it right. It is important to fully understand the tax resi

It can be more difficult than you realise to establish one?s tax residence in certain circumstances. The onus is on the taxpayer to get it right. It is important to fully understand the tax residency rules of both Cyprus and your home country (this article covers expatriates out of the UK) to make sure you apply the rules correctly.

Cyprus residency rules

You are regarded as a tax resident in Cyprus if you spend more than 183 cumulative days here during the tax year (1st January to 31st December). Days of arrival are counted towards the cumulative total (even if you leave again later the same day), but days of departure are not.

Cyprus takes a split-year approach. You are tax resident from the day you arrive if you go on to spend 183 days here that year. If you arrive later in the year and so spend less than 183 days here that year, your tax residency will start from 1st January the following year.

As a tax resident of Cyprus you are taxable on your worldwide income and on gains made on Cyprus real estate. Certain income, such as bank interest (including from offshore accounts) and dividends is exempt from income tax but taxable in the form of ?defence contributions?. Rental income is subject to both income tax and defence contributions.

UK residency rules

If you are a British expatriate and spend time or retain ties in the UK, you also need to be aware of the UK residency rules. While the UK also has day counting rules, HM Revenue & Customs can still deem you to be UK tax resident even if you do not break its 91 day limit.

In particular HMRC can attack your claim to have left the UK if you retain a property there. They may argue that your property in Cyprus is more of a holiday home than a permanent base. They may also argue that day counting does not have any relevance until it is established that you have really left the UK for a settled purpose. Maintaining a property, with perhaps your spouse returning frequently to the UK and staying there, could call into question your claim to be non UK resident.

To be non-UK resident you must first establish that you have left the UK either permanently or indefinitely. If you have not, then day counting is irrelevant.

UK/Cyprus tax treaty tie-breaker provisions

Where you are regarded as tax resident in both Cyprus and the UK under each country?s domestic laws, there are a series of tie-breaker tests in UK/Cyprus Treaty which will determine in which country you are deemed to be resident. If your residency cannot be determined under the first test, then the next test comes into play.

The first test deems you to be resident in the country where you have a permanent home. This is any form of accommodation continuously available to you for your personal use and does not have to be owned by you.

Under the second test you are deemed to be resident in the country with which your personal and economic relations are closer. This wide expression covers the full range of social, domestic, financial, political and cultural links. Considerations based upon personal acts are given special weight and can be used to demonstrate that your personal and economic relations are closer to the UK than Cyprus, or vice versa.

Under the third test, you are deemed to be resident in the country in which you have a habitual abode ? i.e. the country where you stay more frequently.

If none of these tests can determine your residence then you are regarded as resident in the country of which you are a national.

Whether for tax mitigation purposes, or to determine the best place to be resident from a tax point of view, or for reassurance that you have got your tax residency right, it is best to seek professional advice from Blevins Franks because the application of the rules can be more complex than you realise.

By David Franks, Chief Executive, Blevins Franks

29th March 2011

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.