Capital Gains Tax
Capital gains tax is paid on gains arising from the dale of the property at a rate of 20%, with the first CYP 10,000 being exempt for each person, as investment allowance. Proceeds from the sale, less the cost of the property, professional and legal fees, commission, interest paid, inflation allowance and investment allowance, The investment allowance is granted only once, unless it has not been exhausted at the first sale, in which case any balance would be carried forward.

Gains from the sale of a dwelling house are exempt up to CYP 50,000 in total if the owner resides in it continuously for at least five years prior to disposal.

The following categories are exempted from Capital Gains Tax:

• Transfers by reason of death.
• Donation between relatives up to the third degree of kindred.
• Donation to Limited Companies, all shareholders of which are members, and continue for 5 years after the donation to be members, of the family donor.
• Donations from family Companies to their shareholders, but only in cases where the property gifted was originally acquired by the Company also by way of gift.
• Donations to Charitable Institutions or to the Republic of Cyprus.
• Exchanges of permanent residence.
• Compulsory acquisitions.

Example of Capital Gains Tax calculation:
Proceeds on sale of property CYP 200,000
Cost of acquisition CYP (100,000)
Inflation allowance CYP 100,000 x 52.67% CYP ( 52,570)
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Gain on the sale of property = CYP 47,300
Less investment allowance CYP ( 10,000)
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Taxable Gain on sale of property = CYP 37,300
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Capital gains tax due = 37,300 x 20% CYP 7,460

Goods Eligible to Import Free of Duty

Intending residents are persons who are residents abroad and satisfy the director of Customs that they intend to live in Cyprus permanently. These individuals are allowed to import free of duty the following goods:

• Clothing
• Other personal effects
• Household goods and furniture
• Professional tools and appliances, plus any other goods which are intending resident and the opinion of the Director of Customs & Excise, reasonably require.
• One shotgun and one air-rifle
• Personal computers
• Image and sound recording appliances
• Pleasure and sport boats (irrespective of the above relief, yachts and other boats for pleasure and sports and charged with 10% excise duty)
• Pony horses

Prerequisites for the Granting of Relief are that the Goods:

• Are intended solely for the personal use of the intending resident or his dependants and quantities imported are in the opinion of the Director, reasonable
• Are imported within a period of twelve months prior to, or two years after the arrival of the resident
 

Tax Issues

(a) Permanent Residents

An individual who spends at least 183 days in Cyprus in the tax year will be considered to be a Cyprus resident for tax purposes. These are people who:

• Either they settle permanently in Cyprus upon retirement.
• Or are foreigners who live indefinitely or for a fixed period of tine in Cyprus are employees. Either of their own International Businesses (Offshore Company) or of a local or offshore firm, and who choose property in Cyprus rather than live in rented premises.
• Or are business people whom whish to take advantage of the tax and other fiscal advantages offered when having Cyprus tax residency.
• The Cyprus Government gives a series of incentives to these people, including very low taxation of their income, which emanates from abroad.

Individuals are taxed in Cyprus on the Following Types of Income

• Profits from a business activity in Cyprus, including rent etc, from property, profits earned from a permanent establishment abroad, are fully exempt from corporation tax.
• Worldwide employment income.
• Pensions in respect of past employment exercised in Cyprus.
• Pensions exercised outside Cyprus will be taxed either at normal income tax rates as shown on or at the option of the taxpayer, at the flat rate of 5% on the excess of CYP 2,000.

Income Tax Rates Applicable From 2004 Rate
Up to: CYP 10,000 Nil
From: CYP 10,001 – 15,000 20%
From: CYP 15,001 – 20,000 25%
Above: CYP 20,000 30%

Deductions and Allowances
The following can be deducted in calculating the tax liability:

• There will be a deduction of 20% for the first 3 years in Cyprus, limited to CYP 5,000 per annum.
• Life assurance premiums.
• Contributions to state social security and welfare fund and pension funds

Expatriate Tax and Social Security Contributions

Expatriate employees are taxed as follows:

• Individuals who perform all their employment duties abroad will not be taxed on their earnings.
• Those who are present for 183 days in Cyprus in the tax year will be taxed on their worldwide earnings.
• Those who are present for less than 183 days in Cyprus in the tax year will be taxed on their earnings attributed to their days work in Cyprus.
• Individuals who originate from countries (including E.U. countries until such time that Cyprus becomes a full E.U. member) where a social security agreement has not been signed between their country to social security contributions. UK citizens can opt out for a period of three years, as relevant agreement has been signed between the two countries.

Contributions are Currently Payable by Both Employer and Employees, at the Rate of 6.3%

Individuals are not taxed in Cyprus on interest or dividends received from sources either within Cyprus or from abroad, except for Defense Fund Contribution as explained below.

Defense Fund Contributions are Payable in the Following Cases

• 10% tax charge on interest from investments in Cyprus or abroad.
• 3% tax charged on 75% of the gross rental income from real property, wherever it is located.
• 15% tax charged on dividends received from both Cypriot and non-Cypriot companies.
• Relief in the form of tax credit is given for any foreign taxes paid on the above.

Gains from Disposal of Securities
Any gains made from the disposal of securities are not subject to taxation in Cyprus. The exemption applies for all gains, including those that arise from trading in securities.

It is the policy of the Cyprus Government to encourage tax incentives for foreigners in order to develop Cyprus as a financial centre in its area, without proclaiming or promoting itself as a tax haven. Individuals or companies who choose to reside in Cyprus may also enjoy, under certain circumstances, the benefits of the Double Taxation Treaty of their country of origin with Cyprus, if there is one in place. The main objective of the Double Tax Treaty is to avoid the double taxation of income earned in any of the two contraction countries.

Cyprus has signed 32 such treaties, in effect regulation tax regulations with over 40 countries. For example, United Kingdom citizens may take advantage of the Double Taxation Treaty Between the U.K. and Cyprus. This enables you to receive your pensions and investment income in Cyprus free of U.K. withholding tax. This treaty is unique to Cyprus, since it includes both public and private sector pensions.

Insurance pensions can be paid to retirees in Cyprus on a similar tax-free basis, and are index-linked by virtue of the Reciprocal Agreement, compared to their “frozen”
Status in other overseas destinations.

(b) Non Residents

These are people who:
• Either are holidaymakers who purchase properties in Cyprus as holiday homes or for possible permanent living upon retirement, or for the sale thereof with a reasonable profit at a later stage.
• Are Business investors and companies who acquire property in Cyprus for tourist and industrial purposes, making use of the location and climate of Cyprus, the excellent infrastructure and the various incentives offered for these purposes, especially in the area of taxation.

Individuals are Taxed in Cyprus on the Following Types of Income
• Employment income for work performed in Cyprus
• Profits from a business activity, which is carried out through a permanent establishment in Cyprus
• Pensions in respect of employment exercised in Cyprus, except for pensions paid from a fund established by the Cypriot Government or any local authority.