Jurisdiction
Special Focus: CYPRUS
by Lorys Charalambous
Cyprus
is an independent sovereign republic in the Eastern
Mediterranean, with a population of around
775,927 (June 2006), comprised of both Turkish
and Greek Cypriots. As a result, English, Greek,
(and Turkish in the northern section of the island)
are widely spoken. It is the third largest island
in the Mediterranean after Sicily and Sardinia,
and has hot dry summers and mild winters. For
more detailed information about the climate in
Cyprus, please click
here. The favourable climate means that a
wealth of activities such as sailing (about which
more later…), cycling, golf and skiing in
the winter are popular with residents and expats
alike.
There
are some political tensions between the Greek
and Turkish populations following what Greek Cypriots
see as the Turkish 'invasion' of the northern
third of the island, and UN troops have remained
in the country since 1974 to uphold the truce
between the two sides. Whilst
moves are (slowly) afoot towards a political settlement,
and restrictions on movement and trade over the
demarcation line have recently been lifted following
Cyprus' entry into the European Union, it is uncertain
when the island will become fully integrated.
In
the South, the currency is the Cyprus Pound (CY£),
whereas in the self-styled 'Turkish Republic of
Northern Cyprus' (recognized by very few of the
international powers other than Turkey), the currency
is the Turkish Lira. To convert currency into
Cyprus Pounds or Turkish Lira, please click
here.
The
cost of living in Cyprus is reasonable, although
there are quite large differences between the
north and south due in part to the collapse of
the Turkish Lira in early 2001. Compared to the
cost of living in Western Europe Southern Cyprus
is moderately inexpensive, whereas compared to
the Middle East, it is reasonably pricey.
Although
the compromise between the two sections of the
island is somewhat uneasy, and the eventual goal
of the internationally recognized Greek Cypriot
government is to reunify Cyprus, there isn't really
any cause for concern in terms of the stability
of the island, as civil disorder is rare. Just
bear in mind that the political situation in Cyprus
might not be appropriate dinner party conversation!
In
1994, the European Union announced that Cyprus
would be included in the next round of accessions
to the Union, and the Greek government made it
clear that were Cyprus to be excluded, Greece
would veto the EU enlargement proposals, whether
or not the Greek-Turkish disagreements had been
resolved by then. As a result, and following the
failure of UN-brokered attempts to reach a compromise
during early 2003, Cyprus became part of the EU
in May, 2004, with the northern part of the island
temporarily excluded from the Union pending a
settlement.
Cyprus As A Location For Your Assets
So
is Cyprus an appropriate location for your assets?
If you are a globetrotting career expat or have
a substantial liquid net worth which you would
like to protect from harm, the answer may well
be yes. Cyprus is well known for its financial
sector, and the particular expertise on the island
is in the formation and management of offshore
holding, investment, and trading companies, both
for expats and corporations. There are a number
of reasons why the country is especially suitable
for the groups previously mentioned, and here
we take a look at just a few of them:
-
Favourable Location.
Cyprus is often referred to as a 'European
country in the Middle East', and many people
are under the illusion that the island is
actually European. In fact it is located in
the north-eastern corner of the Mediterranean,
and is effectively at the crossroads of Europe,
Africa and Asia. This strategic position has
played a large part in its development into
a base for expatriates, retirees, and also
international business.
-
Double Tax Treaties.
Unusually for an offshore jurisdiction, Cyprus
has a great many double tax treaties, which
can make life a great deal easier for both
resident and non-resident expats with financial
concerns and responsibilities outside the
country. There are more than 40 treaties in
all in place, with several more in the pipeline.
Most follow the OECD model, although the US-Cyprus
treaty follows the most recent US agreements.
Cyprus has double taxation agreements in place
with countries including (deep breath…):
(* Indicates that the treaty is awaiting ratification)
Armenia
(*), Austria, Belgium (*), Bulgaria, Canada,
China, CIS (Former USSR), Czech Republic,
Denmark, Egypt, Germany, Finland (*), France,
Greece, Hungary, India, Ireland, Italy, Japan
(*), Kuwait, Malta, Norway, Poland, Romania,
Russia, Singapore (*), Slovakia, South Africa
(*), Sweden, Syria, Thailand (*), Ukraine
(*), United Kingdom, United States, Former
Yugoslavia (Serbia and Montenegro).
-
Tax Sparing Provisions. In addition
to the vast (by offshore jurisdiction standards,
anyway) network of double tax treaties, Cyprus
also has a number of tax sparing provisions
in place, whereby if the tax is spared in
Cyprus, it can still be credited against the
expat's tax liability in his home country.
These additional arrangements are in place
between Cyprus and (not quite such a deep
breath…):
Canada, Czech Republic, Denmark, Germany,
Greece, India, Ireland, Italy, Malta, Romania,
Slovakia, Sweden, Syria, United Kingdom, Former
Yugoslavia.
-
Efficient
Regulation.
The financial sector is regulated by the Central
Bank, and neither individuals nor approved
offshore entities are subject to exchange
controls.
-
Good Infrastructure.
Cyprus has a good, European standard infrastructure,
and in the business world, English is widely
spoken. However, a word of warning - for offshore
jurisdictions, Cyprus is a relatively, although
not prohibitively expensive location, and
some documents need to be filed in Greek.
-
Developed
E-Commerce System.
The Cypriot government says that the island
is the communications hub for the Middle Eastern
region (although don't they all?). However,
the e-commerce situation in Cyprus can certainly
stand up against that of most other offshore
jurisdictions, and the Cyprus Telecommunications
Authority boasts a virtually all-digital network.
Should you decide to locate your assets in
Cyprus, you should experience no problems
in communicating with your bank or asset manager
electronically.
-
Established
Stock Exchange.
The Cyprus Stock Exchange (CSE) began operations
in 1996, and is governed by the Stock Exchange
Council. The market has had a few problems
in the past, but things seem to be on the
up now. The market rose strongly in 1999 and
early 2000, but fell sharply after that. In
order to try and address the problems of the
CSE, the Finance Ministry commissioned a report
by the stock market expert Demetris Tsimbanoulis.
Some of the recommendations made in the report
have already been incorporated in new legislation.
The Cyprus Stock Exchange launched a fully
automated online settlement and clearing system
in 2002.
-
Types
Of Asset Protection Vehicles Available.
As previously mentioned, Cyprus is famed for
its expertise in the formation of companies
for holding, investment and trading purposes.
As a result, there are a great many variations
on the theme. However, probably the most suitable
vehicles for a non-resident expatriate would
be the International Business Company and
the International Trust:
Cyprus International Business Company: In
order to form an IBC (for the purposes of
property investment, asset protection, or
estate planning), you will need a bank reference
(from an entity which is recognized by the
Central Bank), and a notarised copy of your
passport. Fees and costs vary from provider
to provider.
All offshore companies (and an IBC is simply
a duly authorised offshore Limited Liability
Company) were taxed at 4.25% of profits until
2002, but as from 2003 all companies, offshore
or not, are taxed at 10% of profits.
However, in order to avoid inclusion on the
OECD blacklist in 2001, Cyprus was forced
to make certain changes to its regulatory
regime, and the government made a pledge that
by 2005, fiscal regulations governing local
companies would also apply to foreign owned
companies. Cyprus pledged at the time to maintain
its trust and company management regime, although
from December 2003, the identity of the beneficiaries
or recipients of any assets from the trust
or company have to be disclosed to the tax
authorities.
Cyprus International Trust: Trust law in Cyprus
is based on English common law, and the international
trust is the most common and advantageous
model for the foreign settlor, as broadly
speaking the assets and income of International
Trusts are not taxable in Cyprus (although
they may well be in your home country or country
of residence, so seek professional advice
before establishing this type of vehicle for
tax minimization purposes).In order to establish
an international trust in Cyprus, the settlor
and beneficiaries must be non-resident, and
one of the trustees must be a Cypriot individual
or entity. Client confidentiality is recognized
and protected in the laws of Cyprus, and unless
there is concrete evidence of criminal activity,
foreign judgements are not usually recognized.
As well as the costs of setting up and managing
a trust structure (which, as with company
formation and management vary considerably),
you should also expect to pay a stamp duty
fee. International trust assets may not, however,
contain immovable property in Cyprus.
For
more detailed information about the types of asset
protection and business vehicles available in
Cyprus, please visit the Lowtax
Jurisdictions Guide.
Cyprus
As A Location For Career Expats And Retirees
Cyprus
is a perennially popular location for international
consultants, and independent contractors, and
its burgeoning offshore sector accounts for the
greatest percentage of expatriate workers, for
reasons which we will examine later. However,
it is also a popular destination for active retirees,
(who are attracted not just by the lifestyle on
offer, but by the fact that the large number of
double taxation treaties in place mean that retirement
income from abroad will not usually be subject
to withholding tax at source) and both of these
groups are positively encouraged by the Cypriot
government. In this section of the focus on Cyprus,
we will be looking at the requirements for entry
and residence, working, living, and buying property
on the island, and the taxation liabilities for
both resident and non-resident expatriates. So
without further ado…
Obtaining Permission To Live And Work In Cyprus
The Temporary Residence Employment (TRE) Permit
acts as permission to live and work in Cyprus,
and these are usually classified as 'Executive'
(usually directors or general managers), and 'Non-Executive'.
Applicants for an Executive TRE should apply through
the Central Bank of Cyprus, and must be over 24
years of age, earning a designated amount, and
be registered as a director with the Registrar
of Companies. Non-Executive TREs are harder to
obtain, as it must be proven that there is no
suitably qualified Cypriot that could fill the
position, and must be applied for through the
Ministry of Labour. Non-executive applicants are
advised not to commit themselves to a position
in Cyprus before consulting the Ministry of Labour.
However,
temporary residence and employment permits are
issued fairly freely to employees of, or consultants,
to offshore operations, and also to foreign nationals
wishing to retire to the island, hence their preponderance
there. The first TRE permit is granted by the
Migration Department of the Ministry of the Interior,
and is usually valid for a two-year period, renewable
every three years after that. However permits
issued to intending retirees are only valid for
a one-year period, and are renewable annually
thereafter, subject to a demonstration of adequate
financial resources.
Cyprus
has recently introduced legislation to make the
jurisdiction more 'family friendly' for working
expatriates in certain sectors. Before November
2000, an expatriate had to have obtained a (rare)
five-year permit, or to have been resident in
the country for five years, before they were permitted
to bring their spouse and/or children to live
with them. However, new legislation introduced
at the end of 2001 has meant that for workers
in the education, foreign media, offshore, and
accounting sectors, and for those that have invested
more than CY£100,000 in local enterprise,
this rule has been significantly relaxed.
Property Taxation In Cyprus
Whether you are intending spend long periods of
your retirement in Cyprus, or just use it as a
stop off point as you jet round the world, you
may want to purchase property there. In order
for a non-resident expatriate to do this, permission
must be obtained from the Council of Ministers,
although this is usually easily granted provided
that the property or land is not intended for
commercial development.
If
you decide to rent out your Cyprus property when
you are not staying in it, be prepared to pay
tax on the income of between 20-25% if you purchased
it through some form of company, or between 20-45%
as an individual. Individual non-resident homeowners
cannot claim all of the deductions that are available
to companies, but can deduct a notional 20% on
the rental income independent of whether any expenses
are incurred in deriving the rental income.
Other
duties pursuant to the purchase and ownership
of Cyprus property for non-resident expats include:
- Capital
Gains Tax
A gain on the disposal of property held by a
non-resident (and acquired with the importation
of foreign currency between August 1980-July
1990) is not subject to CGT. In the majority
of other cases, CGT at a rate of 20% applies.
There are certain lifetime allowances which
apply to gains on the sale of Cyprus property,
and in any combination, they may not exceed
CY£50,000.
- Immovable
Property Tax
Immovable property tax is calculated on the
market value of the house as of January 1980,
and is levied at various rates.
- Transfer
Fees The purchaser of a property is liable
to pay these, at varying rates depending on
the market value of the property.
- Stamp
Duty and Mortgage Fees The purchaser is
also liable to pay the stamp duty arising from
the sale of the house.
Shipping Registration In Cyprus
This
may seem like an unlikely topic to include in
a jurisdictional focus, but sailing is fast becoming
a very popular pastime with active expatriate
retirees and HNWI, and if this pastime interests
you, then Cyprus is the place to be. Of recent
years, Cyprus has developed a maritime policy
which is highly favourable for ship owners (in
Cyprus there is no distinction made between ships
and pleasure craft such as yachts, other than
the fact that the procedures for the registration
of the latter are more simple and straightforward),
and there is a fast efficient infrastructure in
place to deal with the burgeoning demand. A number
of tax incentives combine with this to make Cyprus
one of the most attractive locations for ship
registration.
The
first step for a non-Cypriot ship owner wanting
to register a vehicle under the Cyprus flag is
to form a shipping company which will acquire
the vessel in its name. Broadly speaking there
are two different types of ship-owning company,
but of these, only the first will probably be
of interest to nautically minded expatriates,
as the second restrict themselves to activities
such as ship management, broking, average adjusting
and marine insurance (stop yawning-we're getting
to the good bit!), and are subject to income tax.
The
most suitable models for expatriates restrict
their activities to the ownership, bareboat (self-sail)
chartering and operation of ships in international
waters, and are totally exempt from income tax,
capital gains tax, and stamp duty on documents
or mortgage deeds.
Residence And Taxation
Although residence for the purposes of taxation
in Cyprus is defined as presence in the country
for more than 183 days (which seems simple enough,
doesn't it?), calculation of liabilities is complex,
because in effect, the country has several different
levels of taxation for the various categories
of citizens living there. For tax purposes, those
living in Cyprus are divided into: Cypriot residents,
foreign residents working for Cypriot companies,
foreign residents working for foreign companies,
foreign residents working for offshore entities,
non-working foreign residents, Cypriot non-residents,
and foreign non-residents. Luckily the concept
of domicile is not one which enters in to the
Cypriot legal framework, otherwise it might have
got really complicated!
However,
as a basic guide, with the exception of foreign
nationals working for offshore entities (for whom
the rate of income tax is reduced by half), all
of the groups mentioned above are liable to pay
the following taxes on income arising in Cyprus;
Income tax (at a progressive rate of up to 30%),
capital gains tax (at a rate of 20%), estate duty
(at between 20-45%), and real estate taxes (at
the rates detailed previously).
For
more detailed information on taxation liability
in Cyprus, please visit the Lowtax
Jurisdictions Guide.
Conclusion
So in the final analysis, is Cyprus a good location
for your assets, yourself, your family, your boat,
or (e) all of the above? Depends what you are
looking for. Cyprus is not one of the cheapest
offshore jurisdictions available, but nor is it
one of the most expensive in which to locate an
offshore structure, or spend your retirement.
There is an efficient and well-maintained infrastructure
in place, and the standard of living is high for
the most part.
The
government usually encourages independent contractors,
offshore employees, and those who wish to retire
to Cyprus, and although residents are subject
to income tax, for the most part this is only
levied on income deemed to have arisen in Cyprus.
Although it has shied away slightly from the 'offshore'
image it once had, and has been forced to implement
some changes to its legislation in order to satisfy
the OECD, it is still generally regarded as a
safe and secure location in which to do business
or reside, and as a shipping registration location,
it is widely considered to be unparalleled.
For up-to-date news about the offshore and taxation
regime, visit the Cyprus section of Tax-news.com
For general Information on Cyprus, visit WindowOnCyprus.com
Other
Useful Links
Cyprus
Yellow Pages
Lonely
Planet- Destination Cyprus
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