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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