Taxing Times In Cyprus

Expatriates living in Cyprus have had it pretty good, tax wise. Over the last few years we have watched as taxes in countries like Spain, France and Portugal climbed as part of austerity measures. 2011 and 2012 did see a couple of tax increases here in Cyprus, but nothing too worrying.

This is changing. Cyprus has, of course, just been hit hard with the banking crisis, and now the tax rises have started.

Under the terms of the Memorandum of Understanding signed between Government of Cyprus and the Troika (European Central Bank, European Commission and International Monetary Fund) as part of the bailout loan agreement, the following tax rises apply from 2013.

Defence contribution on bank interest

The special defence contribution – the tax rate paid on interest income – has shot up from 15% to 30%.

If you are resident in Cyprus, you are liable to this tax on your worldwide bank interest, including that earned in offshore centres.

The new rate will apply to interest received, or deemed received, or credited from 29^th April onwards (the date the amendment was published in the Official Gazette).

Your Cyprus bank should deduct the tax at source. When it comes to interest earned overseas, you need to declare it each year and pay tax accordingly.

The reduced rate of 3% remains unchanged. This rate applies to individuals whose annual income totals less than €12,000, and income earned from Cyprus bonds and provident funds.

Prior to September 2011 we only paid 10% tax on our bank interest. It then increased to 15% and has now jumped to 30%.

This is a huge increase in a short space of time – you will now pay 200% more tax on your bank interest than you did two years ago.

In comparison, the tax rate in Portugal (which also has bailout terms imposed on it by the Troika) is now 28%, while in Spain it ranges between 21% and 27%.

In the UK, bank interest is taxed at the income tax rates, so many British expatriates could be shocked to find they are paying more tax on bank interest in Cyprus than they did in the UK.

Dividends

Dividends are also subject to the defence contribution, but the rate levied remains unchanged at 20%.

It had however already increased twice recently. First from 15% in 2011, then from 17% at the beginning of last year.

The 20% rate is high for British expatriates. In the UK, basic rate taxpayers are taxed at a rate of 10% on their dividend income, and this is satisfied by the notional 10% tax credit, so they pay no more tax on dividend income. Higher rate and top rate taxpayers in the UK will have further tax to pay on dividend income, although the 10% tax credit can be offset against the final liability.

Immovable property tax

Immovable property tax has been revised with effect from 2013. Every owner of Cyprus property will now pay some tax, with a minimum charge of €75. This is expected to earn the government €136 million.

The tax is still based on the valuation as at 1^st January 1980. Rates start at 0.6% for the first €40,000 of the property’s value, and rise progressively to 1.9% for the excess of €3,000,000.

Income tax

There were no changes to income tax here, but in August 2011 a new top rate of 35% was introduced on income over €60,000. The first €19,500 remains tax free, so far at least.

The good news for retirees is that the special 5% rate on foreign pension income remains unchanged.

When it comes to your savings and investments, it is time to review the way you hold your capital to see what steps you can take to protect your income from tax. There are legitimate tax efficient structures available in Cyprus, and you should take professional advice for your personal situation to see how much tax you can save.

Many British expatriates here still have the same structures and investments they held in the UK, but what was tax efficient there is not tax efficient here. Seek advice from a specialist firm like Blevins Franks, which has decades of experience advising British expatriates in Europe, and which will consider both the UK and Cyprus aspects of your tax planning.

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.