You don’t dream of a place in sunny Cyprus and consider the negative’s like tax returns, winter months, red tape and sunburn. You focus on an idyllic and relaxing Mediterranean lifestyle of sun, sea, mousaka, vino and that most vital of commodities – woefully absent in the UK – time to enjoy it all.
Today we look at the relocation process when you plan to move, work, invest or retire in Cyprus. We're looking at tax planning to be followed by investing for income, money management, Wills and Estates. Over a year you will find useful information on buying property in Cyprus, how to pay low tax in Cyprus, obtain tax rebates from the UK, ensure your money is securely managed, protecting your assets using Wills and avoiding 40% UK inheritance tax.
Low Taxes
So why is Tax planning important? From two respects. Firstly, as in the UK, you don’t want to pay more tax than you have to. Secondly, Cyprus is a low tax country and you can reduce your income tax bill by around 70% if you become a Cyprus tax resident.
The low cost of living in Cyprus stems from low taxes that give more spending money to you and business lower costs to pass on to consumers. More spending money and lower costs in the shops……….
The low tax regime is a major decision making factor in making your move to Cyprus. So I want to take you on a journey of little or no tax planning.
EU Rules
Having joined the EU in 2004 Cyprus has had to adapt its rules to meet the criteria laid down for entry into the EU state. These are based upon 4 basic principles and freedoms granted to all EU nationals in any member state – movement of people and money, ability to work or trade – all without discrimination.
These principles have all been adopted in Cyprus in a whole raft of tax & financial reforms that have been introduced since joining the EU.
Gone are the restrictions of exchange control and moving money in and out of Cyprus. Gradually the financial and banking system is being liberalised with international banks beginning to enter the Cypriot market.
Most importantly all the changes to tax rules have been made with the approval of the EU. This means that if your tax returns are correct in Cyprus there is no come back to you in the UK even though you pay 70% less income tax.
No Discrimination
The EU requirement for no discrimination of EU nationals in other member states means that although the UK may want you to pay more tax you don’t have to as long as you legally declare your worldwide income in Cyprus.
An important point to note is that the discrimination rule is against nationals of another EU member state. A country can discriminate against its own people as long as it treats everyone else in the EU the same.
This distinction has allowed the Cypriot Government to agree a domestic tax regime where EU nationals retiring to Cyprus receive a preferential low tax rate of only 5% - a rate that is not available to Cypriot pensioners.
This 5% flat rate tax for retired expats will remain indefinitely. The Cypriot will not be forced by the EU to alter this domestic tax arrangement. The Cypriot government can choose to alter the domestic law, but that would involve a major policy change.
State Control
Article 95 of the EU harmonisation rules is directly relevant when considering the permanency of the low Cyprus tax regime. This Article details quite clearly that the EU cannot interfere in the direct taxation policy of a country like Cyprus.
This status quo is unlikely to change as policy issues in the EU change can only be made by a unanimous council of ministers decision. Individual Governments don’t want to give away the power to tax – and the power to govern - and so it is unlikely any change will ever be implemented.
The EU harmonisation rules and treaties enshrine the freedom of the Cyprus government to decide its own level of taxes.
Two Models
Clearly among the 25 EU countries there will become differing style of government in each member state; just as in the USA each state has its own peculiar laws and taxes. Two distinct tax models can be identified among member states.
Firstly the member state that has High Taxes but offers high social benefits in terms of pensions, healthcare and social security benefits. These models are best represented by Scandinavian countries with the likes of the UK somewhere in the middle.
The alternate is a low tax economy with low social benefits. Cyprus has always chosen this route and has elected to stay this way on joining the EU.
By living in Cyprus you choose to accept that you will have to pay for many of the services provided by the state in high tax countries. You choose to accept this because you choose to pay less tax.
The USA is another example of this approach where many of the social benefits are offered by the community, family, church or charities rather than the state.
Fair
These two models are accepted as fair tax competition between member states and the local approach will continue as long as the Cyprus government want it to.
Cyprus as an economy is dependant on tourism and property purchase for at least 60% of its GDP and can only benefit if it continues to be a preferred destination for retirement by North Europeans.
EU law allows individuals the freedom of movement between member states and to choose which country to live in and hence which level of tax to enjoy.
Conforming
The Cyprus tax rules are in line with EU Rules, conform to OECD requirements and are within the definition of Double Taxation treaties. The Cyprus tax rules are applied with a mixture of hard and soft EU law that will allow interpretation and flexibility to be applied to keep the spirit of traditional Cyprus low tax approach.
Generally tax for Cyprus residents has been set at 5% for retired expats, 10% for business and investment income and 20% for working individuals. But there are some loopholes in the new tax laws that were known and accepted when they were put in place.
Cyprus was never recognised as a tax haven or a country of harmful tax practices by the international community. With membership and freedoms enshrined in EU treaties Cyprus can clearly now been classified as a tax paradise.
Indexed Pensions
Being a member of the Commonwealth state pensions have always continued to be indexed if people retired to the island. Now a member of the EU the ties between the two countries are strengthen and index linked state pensions will continue to be received.
Tax Threat
The next step for the EU regarding indirect taxes is the new EU Directive on the Savings tax which brings withholding taxes and exchange of information.
This is the EU commissions well intentioned initiative to help us all pay tax on our investment income. You remember the bank interest we always forget to add to the tax return. Well the EU will help you from now on.
Exchange of information is already in place between many countries and in the coming years many people who have left money off shore and not declared the income will receive a call from the taxman about their tax evasion.
Investment Income Tax
In the UK people are used to paying investment income tax at source on dividends and bank interest and a tax rate is up to 40%. Usually tax at source cannot be reclaimed.
In Cyprus this Withholding Tax is called the Defence Levy and charged at 15% on dividend income and 10% on bank interest and investment income sourced in Cyprus.
Under the new rules a Cyprus tax resident must declare their worldwide investment income on tax returns and pay these levels of tax on their investment income.
There are loopholes in the Cyprus tax law that allow for legitimate tax planning to protect investments from incurring withholding taxes.
ProACT clients invest their capital for income and largely avoid any investment income tax. If you move to Cyprus you can choose to pay the lower flat rate investment income taxes here on bank interest or pay none by using the right method of investment and tax planning through ProACT Cyprus.
Exchange
The enforcement of the new investment income tax rules comes through exchange of information. Every bank and investment company must now send a statement of investment income to the tax authority of the investor’s resident country.
This will put those who do not declare worldwide income in a very difficult position if ever their tax return is reviewed and they are forced to admit to an undeclared offshore holding.
Exchange of information will flush out the die hards who don’t do a full tax return now, forcing them to pay a penalty or come clean and declare world wide holdings in the future.
This would be a very unusual position for any Cyprus tax resident to take because using the right tax planning moves today you can pay little or no investment income tax.
Paradise
The EU inspired tax changes means that Cyprus is positioned as the premium Mediterranean location for people retiring abroad. The mixture of culture and lifestyle coupled with low, low taxes mean that we can officially call Cyprus a Tax Paradise.
Cyprus tax rules are there with an objective of allowing expats to pay no more than 5 to 10% tax on income. By organizing your affairs in the right manner you can minimize the tax you pay. It may be possible to avoid legitimately paying any income tax.
Tax efficiency planning must always work for the individual. The cost of action must always be less than the tax saving in order to offer good value for money. ProACT aim to save Expats 000’s of pounds of income tax legally.
None or under declaration of any worldwide income, in the UK or Cyprus, gives the UK Inland Revenue a way back into your affairs. If you are found cheating then the best that can happen is you are reassessed to pay tax on your worldwide income again for up to the last 7 years – at UK rates.
Stay legitimate in a world of exchanged information in your Cyprus tax paradise and you can enjoy your place in the sun.
Who Pays?
There is an unwritten rule in Tax Law that the very rich and the very poor do not pay tax. The very poor because they don’t have enough income. The very rich because they can afford to set up the structures that avoid paying tax.
The people in the middle are the people who pay tax primarily these people except their lot and do nothing. This makes them an easy target for the tax man to catch.
Relocation to Cyprus would help the middle class win for a change and allow them to pay as little as no income tax at all.
No Tax
The objective in all tax planning is to pay as little tax as possible without breaking the rules. If you are moving to Cyprus you should consider a tax assessment to see how much you will be left with after tax.
By organising your assets in the most tax efficient way you can ensure you can leave the most money in your pocket for spending on your lifestyle in the sun.
Simple
As we have seen the new EU Cyprus tax system was deliberately left with loopholes to allow Cyprus Tax Residents to pay low taxes. The UK is a high tax location but you can make the move to Cyprus and pay 70% less pension income tax in the Cyprus tax paradise.
Investment income tax up to 15% can be avoided with effective organization of Investment and Bank deposits.
Paying less tax retaining more spending money is an excellent start to your new life in Cyprus.
Straight Forward
ProACT Partnership is a family based business permanently established Cyprus to look after individuals, their spouse, their business, their property, down the generations and tailored to individual needs.
Using our knowledge, expertise and professional associations we offer Tax Services, (returns, rebates and registration), Will Services UK & Cypriot, Property Investment (Cyprus and UK) and Wealth Management bringing all these issues together, a view of the whole process, planning tax, estate, investments for the maximum tax efficiency
Our judgement is that 12-18 months is the time scale needed to plan and implement a tax efficient relocation to or from the UK. Offering our UK & Cypriot expertise we provide a complete and unrivalled Private Client Service for Expats planning a place in the sun.
Sam Orgill
www.proactpartnership.com
www.facebook.com/proactpartnership
Tel: (+357) 26 819 424
Skype: proact.admin
info@proactpartnership.com
