Expatriates Taxation while Living Abroad

Just what if any are the opportunities for tax planning now that Cyprus has

joined the EU? Are there any advantages to be gained by people relocating to

Cyprus to pay less tax? What is the impact for the tax harmonization being

implemented by the EU and OECD? Surely a level playing field means no tax

saving benefit is to be gained by individuals moving countries?

Like sex for the first time, we have been anticipating the coming of the EU for

so long that when it finally happened it was all a bit of a damp squib and we

woke up next morning wondering what all the fuss was about. But the impact

on our lives will be immense and the changes started happening within days

Globalisation
Within a week we saw the arrival of international big business in the form of

the worlds biggest mobile phone company Vodaphone in partnership with CYTA

while prices of imported chocolate, whiskey, spirits and beers all fell. The EU

single market has required the Cyprus Government drop its import duties on

‘luxury’ foreign goods and it’s constrained its ability to prevent cross border

business mergers. Meanwhile EU food tariffs have been imposed on local

produce to fund the Common Agricultural Policy payments to Cypriot farmers.

Common Tongue
So just what does the EU mean to do to us all? We have all heard of that

Gallic mouthful the ‘Acquis Communautaire’ but how many understand it’s

meaning of ‘common language’. Readers of Tolkien will understand this

concept. The French phrase came into common use when EU was dominated

by the French-German axis in its infancy. French was the dominant language

then, but not now.

Although the expanded EU has 25 official languages, 70%

of new documents are now published in English first. Not least because in a

global economy the ‘common language’ of business, the arts, politics and

sport is English.

The principle that drives the EU machine is to align the different member

states into a common legal system. This is based on the Community Law as

established by EU Treaties such as the Treaty of Rome, Maastricht and Nice.

The EU court of Justice establishes case law that interprets how things work

fairly, readers will be aware of the workings of this Court through the headline

‘Human Rights’ cases. While this concept can be abused or involve emotive

issues the objective is to produce equality. Equality of treatment in tax

matters can bring hugh benefits in tax planning as we will see later.

Not so Common
The EU Commission then produces the recommendations and resolutions to

put policies into practice on a day to day basis. While equal treatment under a

common language is the objective, the system does allow for existing

conventions between member states to apply. This opens up opportunities for

tax efficiency planning when two different member states have different rules

on tax matters. Suddenly where you are from and which member state you live

in can have a significant impact on you wealth.
 

Long Winded

Not for the EU the short, simple and concise style of the American

Constitution. Massive tomes are used define at length the EU principles which

have at their heart 4 basic freedoms. All EU nationals have the right to move

freely between member states, the freedom to work without discrimination,

set up business or reside, the freedom to provide services or to freely move

money within the EU.

The enforcement of these rules will ultimately be through the EU court which

would ask is an EU Treaty is applicable? Which Treaty Rules apply? These are

then compared to the National rules of the member state to ensure equal and

fair treatment of individuals. These principles have all been applied during the

Cyprus tax reforms in the many new laws introduced at the end of April.
Freedom
Gone are the restrictions of exchange control and moving money.

Gone are

the official terms of Alien, and the need for permission to stay in Cyprus

under visa. Residency is now available to all EU citizens as a matter of course.

EU nationals can now set up business as self employed or a company to work

without restriction. EU nationals now have the option to be treated as Cypriot

Residents……

If there are two comparable situations within the EU and the only difference is

nationality the European Court will rule that it is discrimination. There can be

special provisions in a member state; the most common of which is in public

service – EU law does not apply to employment in public services for example.

No doubt a rule introduced by the French who are masters at protecting their

national interests.

No Discrimination
This means that the tax laws of Cyprus, as a Member State of the EU, cannot

discriminate against other EU nationals. An important point here is the

discrimination rule is against other EU Nationals – a member state can

discriminate against its own people. So we can clarify an important point of

concern. The 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. We will look at tax competition between

member states later.

State Control
aArticle 95 of the EU harmonization rules is directly relevant for member

states. This article details quite clearly that the EU cannot interfere in direct

taxation policy. This status quo is unlikely to change as policy issues in the EU

change can only be made by unanimous council of ministers decision.

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. EU treaties

enshrine the freedom of the Cyprus government to decide its own level of

taxes.

Exchange
The enforcement of these new rules comes through exchange of information.

Every bank and investment company must 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 a discrete

offshore holding.

Certain countries like Guernsey, Austria, Luxembourg and Switzerland prize

banking secrecy and so will apply a tax at source instead from January 2005.

This starts at 15% for those that don’t declare and trap themselves in a web

of deceit, but rises to 35% over the next 5 years. The idea being to flush out

all the die hards who don’t do a clean tax return now, forcing them to pay the

price 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, utilising the new EU &

Cyprus rules you can pay little or no investment or income tax.

Indexed Pensions
Joining the EU means that greater freedoms regarding pensions are available

to people moving country within the EU. The migrant is entitled to receive

Social Benefits due in from his home member state in a new country of

residence within the EU – without penalty. Coupled with Double Taxation

treaties this allows Expats to receive indexed pensions and full tax

assessment in Cyprus – avoiding UK taxes. It is a concession and but if you

don’t do an accurate tax returns in Cyprus the UK inland revenue has the right

to review your case at any time.
No Tax
The objective in all tax planning is to pay as little tax as possible without

breaking the rules. Expats now need more care and a review of their tax

efficiency in the EU due to exchange of information. Past practice of putting

income or capital in an offshore bank account, like Guernsey, will not work

anymore because the bank will send the account holders tax information to

Cyprus.

Paradise
The EU inspired tax changes mean you could pay more tax if you do nothing.

But the rules are there with an objective of allowing Expats to pay no more

than 5 to 10% tax. By organizing your affairs in the right manner you can

minimize the tax you pay. Remembering, that the cost of action must always

be less than the tax saving in order to offer good value for money. We 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 in and tax you at UK rates. Stay legitimate

in a world of exchanged information in your Cyprus tax paradise and you can

enjoy your time 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 to pay tax.

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, then more

tax and these are the people affected by changing tax rules. The people in the

middle get caught because they are the majority and easy for the taxman to

catch.

Simple
Simple cost effective tax planning can help you buck this trend. Cyprus is a

tax paradise that offers the tools to uniquely provide a cost effective service

for the majority allowing Expats in Cyprus to pay less tax. The new tax rules in

EU Cyprus mean that if people do nothing the many will start paying tax. 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 and legally to pay lower taxes in the Cyprus tax

paradise.

All the time you retain access to professional advice when you need it - based

in Cyprus, the UK or elsewhere and you have the reassurance that you have

people locally who can provide assistance to you and your family.

Straight
ProACT Partnership is a fee based business permanently established Cyprus

and a Family Office to look after individual, their spouse, their business, their

property, down the generations all tailored to an individual need. 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 judgment is that 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 service for Expats that is unrivalled

by any of the Private client services of the Banks, Accountants, Solicitors or

financial advisers in the UK or Cyprus.

This information is provided by ProACT Partnership, for more information visit.

                    www.proactpartnership.com