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Tax Plan

Basis of Taxation
 
Tax Changes 
 
These new laws WILL effect every expatriate resident in Cyprus, making financial planning of your income and assets of utmost importance if you wish to avoid an increase in tax.
 
Time is of essence as these laws come into effect on the 1st January 2003 and the points below outline the major changes and the implications these changes have.
 
Residency
  
Taxation will be based on residency.  That is if you are resident in Cyprus for more than 183 days in a tax year (January to December) then you will be subject to Cyprus tax.  You will NOT have the option to be taxed in the UK (with certain exceptions such as income from the UK property) so your UK allowances WILL NOT apply.
 
Worldwide Income
 
Taxation will be on your worldwide income.  So interest on offshore bank / building society accounts.  UK pensions, bank accounts and investments will all be subject to a Cyprus tax of one form or another.  The old system of only paying tax on income remitted into Cyprus will no longer apply.
 
Income (including pensions)
 
Income between €00,000 to €19,500 is tax-free
 
Income between €19,501 to €28,000 is taxed at a rate of 20%
 
Income between €28,001 to €36,300 is taxed at a rate of 25%
 
Income of €36,301 and over is taxable at a rate of 30%
 
Interest
Exempt from tax BUT subject to a defense levy of either 3% or 10% depending on a total income. (>£7000 = 3%)
 
Dividends
Exempt from tax BUT subject to a defense levy of 15%.  Ability to offset other withholding taxes against Defense Levy.
 
Capital Gains Tax
Not on Cyprus shares BUT will apply to immovable property.
 
Don’t forget, the new tax laws apply to your WORLDWIDE income.  Everything you receive, in whatever form, from wherever in the world, if you are resident in Cyprus for more than 183 days in a tax year MUST be declared on your Cyprus tax return.  Failure to do so could be seen to be tax evasion.
 
Definition of “resident”
Resident of Cyprus is considered to be any person who in any tax year spends in Cyprus 183 days or more.
 
Taxation of resident individuals
Resident individuals are taxed on the following income:
 
Profits from a business activity, which includes trading, manufacturing, industrial mining, agricultural, professional or vocation
 
Rentals from immovable property and royalties
 
Profit from sale of goodwill
 
Employment income, including benefits
 
Pensions
 
Dividends (subject only to Defense Tax)
 
Interest (subject only to Defense Tax)
 
Taxation of non-resident individual
 
Profits from a business activity which is carried out through a permanent establishment in Cyprus
 
Rentals from immovable property located in Cyprus
 
Profit from sale of goodwill
 
Pensions in respect of employment exercised in Cyprus, with the exception of pension paid from a fund established by the government or any local authority
 
Emoluments received for employment exercised in Cyprus
 
Allowances granted to individuals
 
Contributions to various funds
 
Social security contributions
 
Life security contributions
 
Contributions to approved provident funds or pension schemes
 
Contributions to approved medical schemes
 
For an employee who was resident outside Cyprus and who moves to Cyprus to be employed by a Cypriot employer, during the first three years he can claim an exception of 20% of his salaried income up to a maximum annual amount of £5000.  This exception can be first claimed in the year following the year of his move to Cyprus.
 
All other personal allowances are withdrawn such as spouse, children and age allowances.
 
If employed outside Cyprus no taxation is payable
 
If employed in Cyprus for 183 days then they are taxed in Cyprus on the salary attributable to the employment in Cyprus.
 
Effective date of new law
 
The law comes into effect on the 1st of January 2003
 
Tax Diary 
 
30th April
 
Submission of personal returns for individuals not preparing accounts
 
Payment of premium tax for life insurance companies – first installment for the year
 
Submission of IR7 form by the employers
 
30th June
 
Payment of special contribution for defense for the first six months of the year.
 
1st August
 
Submission of provisional tax declaration and payment of first installment of provisional tax for the year
 
Payment of previous years final corporation tax under the self-assessment method
 
Payment of the previous years income tax based on the assessment raised by the Commissioner of Income Tax.
 
31st December
 
Submission of previous years accounts and tax returns
 
Payment of provisional tax – third and last installment for the year
 
Payment of second installment of special contribution for defense for the last six months of the year.
 
Payment of premium taxes for life insurance companies – third and last installment for the year.
 
Penalties
 
 
If the above-mentioned deadlines are not adhered to, an annual interest of 5 or 9 percent as well as a penalty of 1-11 percent is chargeable depending on the circumstances.
 
“Inheritance Tax is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue” (quote Lord Jenkins).
 
 
One of the biggest assumptions made by a client is that non-resident status for UK income tax exempts a person from inheritance tax.  This is simply incorrect.  Inheritance tax is a worldwide tax.  The calculations are simplistic and work on the basis of each and every person having a £250,000.00 allowance where no tax is charged.  In excess of this amount 40% tax is levied.
 
It is essentially a tax levied on any transfer of assets to other people or trusts.  It is most commonly paid in respect of an individual’s estate on death, but it can also apply in respect of certain transfers of assets during life.  Under current legislation, Inheritance Tax is often perceived as a voluntary tax.  This is because, with careful planning, it is possible to reduce or remove any liability altogether.
 
If an individual dies when they are domiciled (or deemed domiciled) in the UK, then Inheritance Tax applies in respect of all their property, wherever situated.
 
Lifetime Gifts
 
The simplest method of reducing the value of a taxable estate is to give away surplus cash and assets and then to survive for a period of seven years.
 
Unfortunately, few people can afford the luxury of parting with assets of significant value, and others are simply unwilling to relinquish control during their lifetime.
 
Will Planning
 
(a)      Using the nil rate bands to good effect.
 
The law of Inheritance Tax allows an individual to transfer as much as they like to a UK domiciled spouse, without liability, and then up to £250,000 to other people, before any tax is levied.  This can be achieved by inserting an appropriate provision in a will.
 
An amount equal to the nil rate plans at the time of death could be left to children, for example, or alternatively, a trust arrangement involving spouse and children.  The latter course of action may be appropriate if a surviving spouse needs income or capital from an estate to live on (Discretionary Trusts).  By utilizing the two allowances to the full a maximum of £100,00 could be saved.
 
(b)      Exempt transfers
 
Any gifts or bequests in favor of exempt beneficiaries are free of Inheritance Tax.  However, if the surviving spouse is named as beneficiary, the Inheritance Tax problem may simply be deferred until his or her subsequent death.
 
Use of Trusts
 
There are a number of trusts that can be used, the suitability depending on the precise requirement of the individual and the tax consequences of the trust.
 
E.g. Bare (Absolute) Trusts
 
An absolute trust is one under which the beneficiary is absolutely entitled to benefits (both income & capital).  At age 18, a single beneficiary, who is absolutely entitled, can call for the trust proceeds to be paid to him or her.
 
Flexible Interest in Possession Trust
 
This is a trust where the named beneficiary, or beneficiaries, is entitled to income.  Some trusts are inflexible so that on the death of the person entitled to income, (i.e. the ‘life tenant’)) the capital growth goes to another named person (the remainder man) e.g. “to my wife for life, then onto my son absolutely”.  Other trusts may be of the flexible power of appointment type, i.e. the applicant has the discretion to appoint capital and future income to another potential beneficiary or beneficiaries.  In either case, it is important that the person who is creating the trust reserves no benefits from it.
 
Chargeable Life Time Transfers
 
The usual category of lifetime gift, which is subject to an immediate Inheritance Tax charge, is a gift into a Discretionary Trust.  In addition to the tax charged on creation of the trust, a 10 yearly periodic charge is raised at a special rate of 15% of the current death rate, i.e. 155 x 40% = 6%.  A proportion of this tax will be payable on distributions from the trust during a 10 year period, or if a beneficiary is given an interest in possession.
 
Discretionary Trusts
 
If the Will Trust is discretionary in nature, the surviving spouse, children and grandchildren can be beneficiaries.  The trustees can decide who should benefit from income and capital and can make the appropriate payments.  So, for example, capital or income could be appointed to the surviving spouse as and when required, leaving the rest of the trust intact for distribution to children or grandchildren after the surviving spouse’s death.  Alternatively, if the trust includes an appropriate provision, the trustees may make loans to the surviving spouse, which comprise debts against their estate, reducing its value for Inheritance Tax purposes.  A very useful planning tool.
 
Whole of Life Assurance written in Trust
 
This is arguably the simplest method of meeting an Inheritance Tax liability. As the date of death is uncertain, a whole of life policy is effected to ensure that capital is available at death to meet the Inheritance Tax bill. Policies are normally written under a suitable trust arrangement to ensure that the policy proceeds do not comprise the deceased person’s estate on death.
 
Single Premium Bonds
 
A capital sum can be invested, with the policy written under trust for the beneficiaries of an estate. The investor has full control of the investment whilst alive. Single Premium Investment Bonds often prove particularly attractive as investments to comprise Will Trusts. The investor/s effect the investment bond whilst living, and exercise complete control over the investment prior to death. Withdrawals can therefore be taken to meet any particular income or capital requirements of the investor. (Revert to settler trust.).
 
SOME DO’S AND DON’T’S ON INHERITANCE TAX PLANNING
 
DO’S
 
Make sure you draw up an effective will
 
Estimate your wealth and the likely inheritance tax liability that will arise on your death and, if you are married, on the death of your spouse.
 
If possible, fully use your nil rate band of CYP250, 000. If your spouse will require income or access to the capital of your assets, consider a Discretionary Trust. Remember that for married couples, even the use of a part of the nil rate bands on the first death will save inheritance tax on the second death.
 
If you have assets that are likely to increase in value in your estate, consider making a lifetime gift of these, as all future growth will fall outside your taxable estate.
 
Where lifetime gifts are appropriate but you wish to retain control over the ultimate beneficiary of the gift, consider using a trust under which you are trustee. Make sure the trust meets all your future requirements.
 
Before making a lifetime gift, be sure you are satisfied that you will not, in future, be able to access either the income or the capital from the gift (otherwise the ‘gift with reservation’ rules will apply). Certain schemes do exist than can often avoid this problem.
 
Before making a lifetime gift, make sure you are comfortable about making the gift. The last thing you should do is making a gift and then worries about it.
 
Consider life assurance policies in trust to meet the tax that might arise on any gift you have made, or to meet the inheritance tax liability on you or your spouse’s death.
 
DON’T’S
 
Make a lifetime gift if you are likely to regret it.
 
Make a lifetime gift without considering the tax implications.
 
Make a lifetime gift if you feel you will risk your future financial security in terms of income or capital.
 
Make an outright gift without considering whether a trust may be more suitable.
 
Put off making your Will to some future date.
 
Make a Will without considering ways in which inheritance tax can be saved.
 
Forget to use the exemptions available.
 
Assume that just because you may have had some minor medical problem in the past that an insurance company will not offer you cover.
 
SOME DO’S AND DON’T’S WHEN SETTING UP A TRUST
 
DO’S
 
Do take professional advice
 
Do ensure that the trust is in written form.
 
Do consider being a trustee so as to have some control over the administration of the trust.
 
Do decide precisely who is to benefit, when and to what extent – in other words what are the ‘plain English’ objectives of the involved parties, in particular the settler.
 
Do remember that if the trust is to be effective for inheritance tax purposes you will be unable to benefit from income and capital of the trust.
 
Do give the trustees wide powers of investment.
 
Do make the trust as flexible as possible.
 
Do take care before appointing a beneficiary as trustee because this could lead to a conflict of interest in the future.
 
Do remember that if you or your spouse is a beneficiary, any income will be assessed on you.
 
Do remember that someone will have to be responsible for dealing with the Inland Revenue authorities and that is most likely to be the trustees or their professional advisers.
 
Do remember (if you are a trustee) to ensure that the trust has an appropriate charging clause. There could be a problem in charging for services if there is no such clause. {Where the settler is a trustee, it is normally not advisable for him/her to be able to charge for services}.
 
Do ensure there is wide power to delegate.
 
Do ensure that as a trustee you have full and complete knowledge of what the trust property is.
 
Do consider the tax implications of different trusts before deciding on a particular trust.
 
Do remember the special rules applying to settlements for your own minor unmarried children.
 
DON’T’S
 
Don’t Choose trustees lightly
 
Don’t appoint trustees without their consent and without discussing their fees.
 
 
OPTIONS
 
Lifetime Gifts
Use of Nil Rate Band Tax Planning and Discretionary Trusts
Whole of Life Assurance written in Trust
Investments written in Trust
Lifetime Interest Settlement

N.B. Tax laws can and do frequently change and as such, with all of these types of arrangements, the Inland Revenue retains the right to challenge or alter any such arrangement or device. They also retain the right in any future legislation to change the tax treatment of any existing arrangements or investments.