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Information for Cyprus Expats On the UK Non Dom Issues For UK Born Cypriots
Limassol Marina
Tax structuring and re-structuring of existing investments is becoming increasingly common in the era of the economic crisis. As the world economy is facing severe hardships nowadays, the need for constructing efficient tax structures is imperative. Therefore, the selection of the most suitable jurisdiction to locate one’s company or residency so as to lessen tax burdens is of high importance.
Residency and Capital Gains Tax
In order for individuals or companies to be liable for UK Capital Gains Tax, they have to be resident in the UK in the year of disposal. If they wish to avoid such taxation, they should leave the UK and leave abroad permanently and their visits to the UK should last less than 183 days in a calendar year.. As a result any assets disposed of throughout this time period will avoid UK Capital Gains Tax altogether.
Nonetheless, even if this requirement is not fulfilled Capital Gains Tax can still be avoided if the individual resides abroad as non- UK resident or non- UK ordinarily resident for the tax year which the disposal of the assets was made, for example by working abroad for a complete tax year. This test applies even where social, domestic and family ties with the UK are preserved.
Whether an individual is a non –UK resident or a non- UK ordinarily resident depends on a number of factors, including frequency and duration of visits to the UK, the reasons for visiting and his/her connections to the UK including family, property, work or social connections.
The following factors are taken into consideration when deciding UK residency and each case is examined individually (the list is non-exhaustive):
- having a spouse and children in the UK or other close relatives who the person would frequently visit;
- Social links, consisting of club and association memberships or events frequently attended, including leisure and entertainment engagements;
- Business links, such as being a director in a UK company or being self-employed in the UK;
- Owning real estate in the UK, including a house or an apartment (even if this is provided as a part of an employment package for a period of time).
Another issue to be taken into consideration is that despite the fact an individual is considered non- UK resident or non- UK ordinarily resident, he/she may still be liable to Capital Gains Tax if he/she is carrying on a trade in the UK through a branch or agency. Any gains arising from the disposal of assets used for the purposes of that trade will be taxable.
When deciding whether someone should change his/her residency, professional guidance should be sought in order achieve optimum results as each case is examined on its own facts and the new jurisdiction of residency should be carefully and individually chosen.
Structuring and Real Estate
Even if, as mentioned above, a property owner will not be liable for Capital Gains Tax in the UK because he is not resident or ordinarily resident in the UK, it is essential that the property owner acquires residency in a jurisdiction where there is no Capital Gains Tax, or even though a certain Capital Gains Tax applies the rate is considerably lower compared to the UK’s rate.
The UK/Cyprus Double Taxation Convention was signed on June 20, 1974 as amended by a Protocol signed on April 1980. In general, Double Tax Treaties state that Capital Gains Tax is taxable by the State where the property is located. However, the UK/Cyprus Double Taxation Convention did not include regulations regarding Capital Gains Tax. Therefore, the provisions of the national tax laws of each country apply.
Cyprus is entitled to tax the capital gains only if the property is situated in the Republic of Cyprus, whereas the UK is entitled to tax only if the owner is UK tax resident. Therefore, if a company or an individual is resident in Cyprus and is in possession of property in the UK, the property will not be taxable in the UK for Capital Gains Tax. Moreover, the company or individual will not be accountable for Capital Gains Tax in Cyprus either as the property is situated abroad. Consequently, Capital Gains Tax can be completely avoided.
What is more, according to Article 7 of the Double Taxation Agreement, income from immovable property is taxed in the Contracting State in which such property is situated. Interest is fully deductible. Therefore, rental income from property in the UK will be taxable in the UK. Nevertheless, according to the Cypriot Special Contribution for Defence Tax regulations, a Cyprus resident receiving rental income, including from abroad, is liable to pay tax at a rate of 3% on 75% of the gross rental income. As the mentioned income will be taxable both in the UK and Cyprus, Cyprus grants a tax credit with respect to the UK tax suffered. As a result the tax obligation in Cyprus will be significantly reduced or eliminated.
Capital Gains Tax: Exemptions and Deductions from the disposal of immovable property
In Cyprus, a flat tax rate of 20% is imposed on all gains arising from the disposal of immovable property or from the disposal of shares in a company owning immovable property in Cyprus. The taxpayer will be liable to pay tax on the net gain being the difference between the price at disposal and the acquisition price. Allowable expenses are deducted from the taxable gain once invoices and receipts are presented to the competent authority. Tax deductible expenses include:
- Improvement Costs
- Property Transfer Fees
- Licensed estate agent commission
- Legal Fees
- Immovable property tax
It is also worth mentioning that there are certain life-time exemptions for individuals:
-
- €17,086 on any disposal or disposals of immovable property;
- €85,430 on the disposal of the principal dwelling residence used by the owner exclusively for own habitation for a period of at least 5 years;
- €25,629 on the disposal of agricultural property by an individual whose main occupation is agriculture.
Capital losses can always be offset against any gain.
Capital Gains Tax: Exemptions and Deductions from the transfer of immovable property
In order for the freehold ownership to be transferred to the new owner, certain real estate transfer fees have to be paid to the Land Registry. If the property is owned in joint names, then the transfer fees are reduced as the purchase value is divided into two parts. The new owner is exclusively liable for the payment of the transfer fees which are only payable once in accordance with the following scale:
- Up to €85.430,07 - 3% transfer fee;
- From €85.430,07 to €170.860,14 – 5% transfer fee;
- From €170.860,14 and over - 8% transfer fee.
Another point which needs serious consideration is that there are certain transfers that are exempted from the scope of the Capital Gains Tax:
- Transfer by reason of death;
- Gifts between relatives up to a third degree;
- Gifts to a company where the company shareholders are members of the donor’s family and the shareholders continue to be members of the family for 5 years after the transfer;
- Gifts to charities and to the Government;
- Transfers as a result of reorganizations;
- Exchange or disposal of immovable property under the Agricultural Land (Consolidation) Laws;
- Expropriations.
In line with the above, Cyprus may prove to be the perfect jurisdiction for UK individuals or companies seeking tax optimization of their income received from the disposal of property. The Cypriot Lands Registry, modeled after the UK Lands Registry, is regarded as a highly uncomplicated and trustworthy system ensuring that any deeds regarding Cyprus property are substantially secure. In addition, Cyprus has a flexible buying property system where EU citizens are allowed to purchase as many land items as they desire. What is more, the wide network of treaties for avoidance of double taxation signed by Cyprus and the implementation of the provisions of the EU Directives in the national law offer attractive opportunities for tax structuring and investment involving real estate.
Georgia Papa
Tel: +357 22 699 222
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