Cyprus tax for Expats

If you are one of over 70,000 British expats living in Cyprus, it is essential to understand the Cyprus tax rules that you face.

This article provides a general overview of the Cyprus tax situation, however it should never be used in isolation or relied upon to make decisions about your Cyprus tax obligations. You must always seek professional advice from a qualified Cyprus tax specialist.

Cyprus tax basic overview

Foreign pension income is taxed at the flat rate of 5% on amounts over €3.420.

You can however, on an annual basis, elect to be taxed at the normal tax rates and bands set out above.

Cyprus source widow(er)’s pension is taxed at the flat rate of 20% on amounts over €19.500.

Again, the taxpayer in question can however, on an annual basis, elect to be taxed at the normal tax rates and bands set out above.

An individual working in Cyprus, earning above the tax free amount of €19,500 should submit an annual income tax return (IR1) every year.

The due date is 30 April following the tax year if the return is submitted manually.

An extension to 31 July is granted if the return is submitted electronically.

Foreign interest and dividends received where special defence contribution has not been deducted at source but is applicable, is due by 30 June for the first half of the year in which the interest and dividends are received, and by 31 December for the second half of the year in which interest and dividends are received. 

Who pays tax in Cyprus?

All Cyprus tax resident individuals are taxed on all chargeable income accrued or derived from all sources in Cyprus and abroad.

Non-residents are taxed only on their Cyprus-source income from employment exercised in Cyprus, a permanent establishment in Cyprus, rental of immovable property located in Cyprus, and pensions from employment exercised in Cyprus.

If you're an expat resident, you will be taxed on your worldwide profits or other benefits from a business, profits or other benefits from an office or employment, dividends, interest or discounts, pensions and any rental income arising from immovable property.

All European Union citizens have the right to work in Cyprus but are required to register with the migration authorities within four months of moving to Cyprus. Upon registration, they will receive a registration certificate for Union citizens

You are considered resident in Cyprus if you are present in Cyprus for an aggregate of more than 183 days in any calendar year.

Days in and out of Cyprus are calculated as follows:

• The day of departure from Cyprus counts as a day of residence outside Cyprus
• The day of arrival in Cyprus counts as a day of residence in Cyprus
• Arrival and departure from Cyprus in the same day counts as one day of residence in Cyprus
•  Departure and arrival in Cyprus in the same day counts as one day of residence outside Cyprus

Foreign taxes paid can be credited against the personal income tax liability.

The tax year in Cyprus is the calendar year, 1 January to 31 December

To date, Cyprus has signed over 55 double tax treaties with other countries.

Base income tax rates

How is income taxed in Cyprus?

The taxation of various types of income is described below.

Employment income

For an expat tax resident of Cyprus, tax is levied on all gains or profits from any office or employment in Cyprus or abroad. Foreign-source income from employment is not taxed if the recipient spends at least 90 days in any calendar year outside Cyprus. This is known as the “90-day rule.”

For an individual who is a non-tax resident of Cyprus, tax is levied on gains or profits from any office or employment in Cyprus only.

Income taxable through expat tax preparation includes that from employment such as the estimated value of any ‘extras’.

There are some important exemptions to be aware of:

Remuneration from any employment exercised in Cyprus by an individual who was not a resident of Cyprus before the commencement of the employment is exempt (on 50% of the remuneration), for a period of 10 years for employment commencing from the 1st of January 2012 - provided the annual remuneration exceeds €100.000.

For employments commencing from 1st January 2015, the exemption does not apply in case the said individual was a Cyprus tax resident for 3 (or more) tax years out of the 5 tax years immediately prior to the tax year of commencement of the employment, nor in the preceding tax year.

In certain cases it is possible to claim the exemption where income falls below €100.000 per annum.

The other exemption to be aware of is 20% of the remuneration with a maximum amount of €8.550 annually - this is based on remuneration from any employment exercised in Cyprus by an individual who was not a resident of Cyprus before the commencement of the employment.  

For employments commencing during or after 2012 the exemption applies for a period of 5 years starting from the tax year following the year of commencement of the employment with the last eligible tax year being 2020.

This exemption may not be claimed in addition to the immediately above mentioned 50% exemption for employment income, because the Inland Revenue Department allows only one of the above two deductions.

Self-employment and business income for expats

Expat residents are subject to income tax on self-employment income.

Non-residents are subject to income tax on self-employment income received from sources in Cyprus.

Investment income tax rules for expats

Dividends and interest received are exempt from income tax.

Dividends received by resident individuals are subject to a defence tax of 17%. Interest received by resident individuals is subject to a defence tax of 30%.

Expat pensions received by residents for employment exercised outside Cyprus are taxed at a rate of 5% for amounts exceeding EUR3,420.

Withholding tax is not imposed on dividends and interest paid to non-residents.

Directors’ fees for expats

Directors’ fees are considered compensation and are taxed in the same manner as income from employment.

Do I have to pay capital gains tax?

Expat tax at a rate of 20% is levied on gains derived from the disposal of immovable property located in Cyprus or from the disposal of shares of companies whose assets include immovable property located in Cyprus, unless the shares are listed on a recognised stock exchange.

The gain is the difference between the sale proceeds and the original cost of the property, adjusted for increases in the cost-of-living index. No other assets are subject to capital gains tax.

Capital gains and property in Cyprus

Only gains arising on the disposal of real estate located in Cyprus are chargeable. Gains made on the sale of shares, overseas property or any other assets are not taxed in Cyprus.

Note that you are also liable on gains made on unlisted shares of companies owning Cypriot real estate and on shares that directly own such immovable property.

Since December 2015, where a company indirectly owns immovable property in Cyprus and at least 50% of the market value of the shares is derived from real estate located in Cyprus, gains on disposal of such shares are subject to capital gains tax.

There is an exemption for property acquired between 16th July 2015 and 31st December 2016.

There is no charge for assets passed on death, or transfer between spouses or members of the family up to the third degree.

So you can pass property within the immediate family, or even to a sibling/aunt/uncle etc, without any liability arising. 

If you sell one property to buy another, if the whole gain is rolled over into the new house you do not need to pay any tax.

If the whole gain is not rolled over, payment of the tax is deferred until sale of the new property.

There can also be exemptions where land and buildings are transferred into or out of family companies, although there are restrictions as to length of ownership etc.

A single lifetime allowance of €85,430 is available on disposal of a resident’s main residence once they have lived there for at least five years.

This is a one-off allowance, and once fully utilised, no further exemptions or allowances are available.

If this exemption is not fully utilised, the balance cannot be carried forward to use against the disposal of a future main residence.

Since this exemption is for main residences, it does not apply to non-residents. However they do receive a lower lifetime allowance of €17,086.

Sales of agricultural land attract an allowance of €25,629.

Only one type of allowance can apply to a particular disposal, and the maximum capital gains tax exemption (where more than one allowance applies) is €85,430.

Special contribution

As from 1 January 2017, Special Contribution is abolished.

Special defence contribution

A Cypriot tax resident individual who is domiciled in Cyprus is subject to special defence contributions on the following sources of income at the rates indicated

Source of income - SDC rate =

Dividends - 17%

Interest - 30%

Interest from Cyprus Government bonds and saving certificates - 3%

Rental income - 2.25%

Non-Cypriot tax residents and Cypriot tax residents who are not domiciled in Cyprus are exempt from this special defence contribution.

Therefore, a non-Cypriot domiciled individual who relocates to Cyprus would be exempt from this special defence contribution, even if they spend more than 183 days in Cyprus in a tax year.

Foreign pension income

An individual who is Cypriot tax resident can choose one of two methods for the taxation of pension payments received from a pension fund in relation to employment of the individual whilst that person was outside Cyprus:

• The first €3,420 is tax free with the remainder of the payments subject to tax at the flat rate of 5%; or
• The income is added to other taxable income and taxed at the normal income tax rates noted above. The tax liability calculated under either option is reduced by any available foreign tax credit relating to any tax deducted at source from the pension payments.

Estate tax

Estate duty has been abolished since 1 January 2000.  But the executor/administrator of an estate of the deceased, is required by the Deceased Persons Estate Law, to submit to the tax authorities a statement of assets and liabilities of the deceased within six months from the date of death.

Finally on this point, do not assume that just because you've expatriated to live in Cyprus that your estate will not be liable to inheritance tax (IHT) in your old home nation, or any nation where you hold assets.  For example, those domiciled in Britain remain liable for IHT on their worldwide estate.

Deductible expenses & exemptions for expats

The following are exempt from income tax:

• 50% of the remuneration from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his/her employment in Cyprus. The exemption applies for a period of ten years starting from the first year of employment provided that the above income of the employee exceeds €100,000 per annum. This exemption does not apply in case the employee was a Cypriot tax resident in the preceding tax year or for at least three out of the last five tax years immediately prior to the tax year of commencement of employment...
• 20% of the remuneration or €8,550 (whichever is the lower) from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his/ her employment. This exemption applies for a period of five years from 1 January following the year of commencement of the employment and may be claimed up to tax year 2020.
• All interest income
• All dividend income
• All gains arising from the disposal of securities such as shares and bonds
• Remuneration from the rendering of salaried services to a non-resident employer based outside of Cyprus or to an overseas branch of a resident employer for an aggregate period in the year exceeding 90 days
• Any lump sum received as a retiring gratuity, commutation of pension, death gratuity or as compensation for death or injury
• Any lump sum repayment from life insurance schemes or from approved provident funds. Amongst other items of expenditure, the following are deductible for income tax purposes:
• Contributions to approved provident funds
• Subscriptions to trade unions or professional bodies
• Donations to approved charitable organisations
• Expenses for the letting of buildings up to the 20% of the rental income.  

Social security payments in Cyprus

Social insurance contributions are made by individuals employed or self-employed in Cyprus. An employer also makes contributions in respect of its employees. The contributions are calculated by applying the relevant contribution rates to the weekly wages or monthly salaries, subject to certain income limits.

Employer contributions = social insurance fund 7.8%, redundancy fund 1.2%, industrial training 0.5%, social cohesion fund 2%.

Employee contributions = social insurance fund 7.8%

Self-employed contributions = social insurance fund 14.6%

Foreign nationals employed by local employers must contribute to the Cyprus social security system unless either of the following applies when formulating expat tax returns.

• They can claim exemption on the basis of bilateral agreements entered into by Cyprus (applicable for employees working in Cyprus for periods of up to three years).
• They are European Union (EU) nationals who are in Cyprus on secondment.