Question: I was working in Russia until June 2010 after which I came and started full-time employment in Cyprus. I have paid 13% Russian income tax on my remuneration in Russia. Will I have to declare and pay any income tax in Cyprus on my Russian income and on what basis my Cyprus remuneration will be taxed?
Answer: Thank you for your question. Since you have accumulated over 183 days in Cyprus during 2010, you are de facto Cyprus tax resident and will be taxed on your worldwide income according to Cyprus Income Tax Law. Furthermore, you will have to file your Income Tax Return with the Cyprus Inland Revenue Department (IRD) by 30th April 2011. Applicable to your case are the Cyprus Income Tax Law 118(I)/2002 and the 1998 Treaty between Cyprus and Russia.
Now, let's move to the practical side of your situation by going through what you have to declare and what will be taxed.
Firstly, when filling in your Income Tax Return form IR.1, Part 4(A1) you will have to declare the name of your Russian employer, state that the income you received was from sources outside Cyprus (while working for a non-resident employer), the number of months in Russia, the gross income received and the tax withheld. Likewise, you will have to complete the same type of information for your Cyprus employment, this time indicating that income was derived from source in Cyprus and that you were non-Cyprus-tax-resident before. Finally, in completing Part 4(A2) you will have to indicate the date when you came in Cyprus, the date when you started your employment and the aggregate number of days you resided outside Cyprus before starting employment.
Secondly, there are two income elements in your case: income from employment in Russia, which was already taxed at 13% and income from employment in Cyprus. The first element of your income, the employment income in Russia, will be tax exempt as per Art.36(5) of the Cyprus Income Tax Law (i.e. the “90-days rule”). That is to say, it will not be taken into consideration when computing your tax liability and you will not pay Cyprus tax on the Russian employment income element. As regards the Cyprus employment income, it will be taxed at the progressive tax rates as per Art.25, Schedule 2 of the Income Tax Law.
We need to make a side note here, and say that if the income you received from Russia was not from employment but from other non-employment services, then you will be allowed to claim tax credit in Cyprus for the amount of tax paid in Russia, according to the 1998 Tax Treaty between Cyprus and Russia (Art.23(2)) and subject to the provisions of the Cyprus Income Tax Law.
Finally, those taking employment or office in Cyprus for a first time should remember that the Income Tax Law provides 20% exemption (with a maximum of €8,550) on the remuneration received in Cyprus for a period of three years starting 1st January following the year when employment commenced.