Tax Guide for US Expats Living and Working in Cyprus
Who Is Liable For Income Taxes in Cyprus
Residents are taxed on their 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. Nonresidents 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.
An individual is resident in Cyprus if he or she is present in Cyprus for an aggregate of more than 183 days in any calendar year.
Income subject to tax.
The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Gains or profits from any office or employment in Cyprus, regardless of whether services were performed in Cyprus or elsewhere, are considered Cyprus-source income and are subject to tax. 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.”
Taxable income from employment includes the estimated value of any accommodation and other allowances from employment, whether paid in cash or in kind.
Nonresidents who become residents of Cyprus and take up employment there may deduct the lower of 20% of their salary or €8,550 during their first three years of employment in Cyprus.
Self-employment and business income. Residents are subject to income tax on self-employment income. Nonresidents are subject to income tax on self-employment income received from sources in Cyprus.
Gross income derived from Cyprus by nonresident professionals, artists, athletes and entertainers is subject to 10% final withholding tax.
Investment income. Dividends and interest received are exempt from income tax. Dividends received by resident individuals are subject to a defense tax of 15%. Interest received by resident individuals is subject to a defense tax of 10%.
Pensions received by residents for employment exercised outside Cyprus are taxed at a rate of 5% for amounts exceeding €3,420.
Withholding tax is not imposed on dividends and interest paid to nonresidents. Royalties and premiums derived from Cyprus by nonresidents from sources with in Cyprus are subject to a 10% withholding tax. Income received by nonresidents from film rentals is subject to a 5% withholding tax. Withholding taxes on income paid to nonresidents are final taxes.
Directors’ fees. Directors’ fees are considered compensation and are taxed in the same manner as income from employment.
Capital gains. 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 recognized 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.
Deductions
Deductible expenses. The range of deductible expenses allowed in Cyprus is limited. Membership fees for trade and professional organizations (if membership is mandatory), and documented donations to approved charitable institutions are fully deductible.
Personal deductions and allowances. The following are the principal deductions and allowances permitted.
Deduction or allowance
Contributions to social insurance and other approved funds
Life insurance premiums paid (certain restrictions exist)
Business deductions. All expenses incurred wholly and exclusively in the production of taxable income are deductible. In addition, the following allowances are given for depreciation and amortization:
- Plant and machinery: A straight-line allowance of 10% a year is given on most capital expenditure, except expenditure on certain automobiles.
- Industrial buildings: A straight-line allowance of 4% a year is available for industrial buildings.
- Disposal of assets: On the disposal of assets other than buildings, if the sales proceeds are less than the remaining depreciable base, a further allowance is granted, up to the difference.
If sale proceeds exceed the depreciable base, the excess (up to the amount of allowances received) is included in taxable income.
Relief for losses. Operating losses may be carried forward indefinitely.
B. Estate and gift taxes
Cyprus does not impose estate or gift tax.
C. Social security
Employers and employees each must make social security payments of 6.8% of monthly compensation up to a maximum monthly amount, which is currently €4,342. Self-employed persons must contribute to the social security scheme at a rate of 12.6% of monthly income. Minimum and maximum monthly incomes of self-employed persons are classified according to the type of business, profession or vocation.
Foreign nationals employed by local employers must contribute to the Cyprus social security system unless either of the following applies.
- 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.
Cyprus has entered into social security totalization agreements with Australia, Austria, Canada, the Czech Republic, Egypt, Greece, the Netherlands, Slovak Republic, Switzerland and the United Kingdom. Coverage for one to three years is usually permitted under these agreements.
To learn more about the history, culture, economy and other information about Cyprus
We have been preparing US income tax returns for US Citizens and permanent residents living in Cyprus for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Cyprus and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Cypus tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Cyprus.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email