Is the Cyprus Residence-by-Investment Good for Americans?

Is Cyprus Residence-by-Investment Good for Americans?

Is the Cyprus Residence by Investment Good for Americans?

Out of all the different Residence-by-Investment programs, the Cyprus RBI (Golden Visa) is one of the more popular destinations due to its location and cost. The Cyprus Golden Visa costs around 300,000 EUR, although there are additional fees to complete the program and become a resident – and some investments will have a net cost above that amount. While the program has many benefits, U.S. persons need to know that as long as they are considered U.S. persons for tax purposes, the IRS will tax them on their investment earnings. This is especially true with Cyrpus because oftentimes the investment will consist of purchasing investment/pooled funds – which can result in PFIC tax complications. Let’s take an introductory look at how the Cyprus RBI works.

About the Cyprus Residence by Investment Visa

Cyprus is one of about 20 different countries that offer Residence-by-Investment opportunities. The application process for the Cyprus Permanent Residency program is relatively straightforward – and Cyprus has a reputation for moving the process along relatively quickly. However, one important component of the investment protocol is deciding which type of investment to make. While applicants can acquire either residential or non-residential property, most opt for either investing in a company or investing in funds. Noting, these two types of investment opportunities can be fraught with peril for taxpayers who are considered U.S. persons for tax purposes — which includes U.S. citizens, lawful permanent residents, and foreign nationals who meet the Substantial Presence Test.

U.S. Taxes On Worldwide Income

The United States follows a worldwide income taxation model. That means that taxpayers who are considered U.S. persons for tax purposes are subject to U.S. tax on their worldwide income. Therefore, whether the taxpayer lives in the United States or abroad and whether any of the investment income generated from the foreign investment makes its way back to the United States or not, the income is still taxable. And, depending on the type of income it may be taxed at a higher rate than it would have been taxed if it was domestically sourced income.

PFIC (Investment Funds) Investments in Funds

PFIC refers to Passive Foreign Investment Companies, but unfortunately, it also includes investments such as foreign mutual funds and foreign investment funds. Since one of the more popular investment protocols for the Cyprus golden visa is to acquire investment funds, taxpayers have to be cautious that if they are acquiring funds that are considered PFIC, they may be taxed at a 37%+ percent tax rate/interest rate on income that may otherwise qualify as long term capital gain or qualified dividends if it was US-sourced.

In addition, by acquiring these types of investment funds, taxpayers will have to file several additional international information reporting forms, such as the FBAR, Form 8938, and Form 8621.

Foreign Corporation Investments

Likewise, if the taxpayer is going to invest in a physical company and they have at least 10% ownership between themselves and their family members (attribution and constructive ownership rules apply), then the taxpayer may be required to file an annual Form 5471- depending on what level of ownership they ultimately have. And if it turns out that U.S. persons own more than 50% of the company, U.S. taxpayers may become subject to the controlled foreign corporation rules and tax complications involving subpart F income and GILTI.

Americans Should be Careful When Investing in a Golden Cyprus Visa

While there can be some benefits to having a Golden Visa in Cyprus, the tax implications can be many and severe. Therefore, taxpayers will want to understand what the tax implications are before investing in a Golden Visa.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.