Expats in Cyprus face paying higher taxes as the Cypriot government aims to save €975 million over the next four years to reduce its deficit gap, according to wealth managers.
It is understood that President Demetris Christofias is looking at tax rises rather than spending cuts, believing there is room for higher taxes, both direct and indirect.
These could include VAT increasing again, higher income tax and changes to local property taxes, says tax and wealth management provider Blevins Franks.
‘We understand that the government is considering reducing the taxable threshold for local property tax from €120,000 to €40,000, and also proportionally increasing the tax rates.
We cannot rule out the possibility that it will also look to earn more revenue from income taxes, whether from employment or income from capital,’ the firm’s latest analysis report says.
But it also points out that tax rates in Cyprus are still comparatively low compared with other popular expat destinations. When it comes to tax on investment income, in Cyprus it is 15% tax (defence contribution) on bank interest and 20% on dividends. Also there is still no tax on capital gains from shares and securities.
In Spain, for example, all savings income is grouped together and taxed at between 21% and 27%, depending on the amount. In Portugal the fixed rates of tax applied to bank interest and capital gains on securities increased from 20% to 25% last year.
Interest is taxed at 24%, dividends at 21% and capital gains at 19% in France, and French residents also pay 15.5% social charges. The government wants to start taxing this income at the scale rates of income tax, so higher earners will pay more tax.
When it comes to the scale rates of income tax, in Cyprus the top rate is 35% with a relatively high tax free threshold of €19,500. In Portugal the top rate is 46.5%, in Spain 52% and in France a new 45% rate is about to be introduced, plus a temporary 75% rate for income over €1 million.
‘Spain and France also impose wealth taxes and inheritance taxes, taxes which we have so far escaped here in Cyprus. Cyprus still applies a favourable tax regime for foreign pension income, and hopefully this will remain in place,’ the report points out.
Cyprus is also introducing new measures against tax evasion to help increase tax revenue. The government is looking to agree a withholding tax deal with Switzerland, similar to the Swiss/UK one due to start in January. Besides imposing withholding taxes on future earnings a retrospective one off levy will be applied to cover past unpaid tax.
The Cyprus Inland Revenue department will also start looking at visible wealth, in this case properties, to see how it compares to information the owner has supplied on his tax return. It has asked the municipal authorities for financial information on properties worth over €500,000 or which cover more than 400 square metres.
It also looks likely that in future every person employed in Cyprus will have to submit a tax return, even if they earn less than the threshold. Currently only around half of employees submit one.
‘Expats in Cyprus have benefited from a relatively benign tax regime so far. However times are changing and it is time to pay more attention to tax planning,’ the report concludes.