If you have purchased a second home abroad in Cyprus with the purpose of renting it out when you are not using it then you should be prepared to pay tax in the income that you receive from the property. There is no way around paying taxes on income from property rentals in Cyprus as you cannot even legally rent out your home in Cyprus without special permission. Remember that non resident foreigners are not allowed to rent out property in Cyprus on a short term basis unless permission to do so has been given. Only the Cyprus Tourism Organization (CTO) can inspect the property of a non resident foreigner for short term rentals. If approved the property is certified by the Cyprus Tourism Organization and the property owner is assessed a three percent tax on the expected income of the property rental. This three percent is due even if the property does not meet the income projections of the Cyprus Tourism Organization.
Non resident foreigners are not the only parties responsible for tax on property income in Cyprus. Both residents and non residents of Cyprus are held liable for tax on property income in Cyprus. All property income in Cyprus is taxed at standard income tax rates. Since it is taxed at the standard rate it is mandatory that property income is included on your annual income tax declaration that you submit each year to the tax authorities in Cyprus.
You should know that there is a small bit of reprieve available to property owners that are earning rental income from their property. Each tax year you are allowed to take up to a 20 percent deduction from your property rental income. You are also allowed to deduct any interest from a loan that was taken out to either purchase the property or to improve the property. This is similar to a mortgage interest deduction that is allowed on income tax declarations in the United States. Property owners are also allowed one other deduction on their tax declaration from their rental income. You are entitled to take a three percent deduction for depreciation of the property.
If you are a resident of Cyprus you have an additional tax to pay on your property income. Residents of Cyprus are required to pay an additional three percent tax on 75 percent of total property income. This additional three percent tax is known as the Special Contribution for Defense and is only assessed on residents of Cyprus.
For example, on property income of CYP 15,000 there would be an allowable exemption of 10,000 leaving taxable income of only 5,000. After the allowable 23 percent deduction the net taxable income would be 3,850. Standard income tax due would be 770, which is 20 percent. This CYP 770 is all that non residents would have to pay. However this is not the case for residents. Residents also have to pay the Special Contribution for Defense (SCD). For that, we have the rental income of CYP 15,000 minus the 25 percent allowance since the SCD is only on 75 percent. That leaves the net taxable income at 11,250. The SCD tax of three percent is 337.50. This means that residents would have to pay a total of CYP 1,107.50 in tax where non residents would only have to pay CYP 770.