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Personal taxation and defence contributions

Cyprus residents are taxed on their income derived from all sources worldwide. They are also subject to ‘Defence Contributions’ on certain areas of income, including bank interest and dividends. If you receive income from rental properties, this will be assessed for both income tax and defence contributions.

No tax is payable on the first €19,500 of income. Tax is then charged progressively from 20% to a maximum of 35% for income in excess of €60,000.

Favourable treatment of pension income

Cyprus offers many benefits to those looking to retire abroad, as income derived from foreign pensions is treated differently to other income. You can choose whichever of the following options is most favourable to you in any tax year:

1)    €3,420 tax-free income and then a flat rate of 5%, or

2)    Taxation as ordinary income as per scale rates of income tax.

The UK and Cyprus operate a double tax treaty under the terms of which most pension income is liable for tax only in Cyprus. However, since 2019 any pension income paid in respect of government service has been liable for taxation in the country in which the pension is paid. There does remain the option for Cyprus residents to elect to have their UK government service pensions taxed in Cyprus up until 2024.

Lump sums taken from UK pensions are not subject to taxation in either Cyprus or the UK.

Application of defence contributions to worldwide investment income

If you are domiciled in Cyprus, then defence contributions are levied in place of income tax on both interest and dividends received. To be considered Cyprus-domiciled, you need either to have been born there, or to have been resident there for 17 out of the previous 20 years. This means that most UK expatriates are potentially able to take advantage of 17 years of tax exemption on both interest and dividends generated worldwide.

If you are resident and domiciled in Cyprus, then defence contributions will be levied on your world-wide investment income at the following rates:

·       30% on interest received (reduced to 3% if your income is less than €12,000)

·       17% on dividends

·       3% on rental income (applies to 75% of gross income)

Capital gains tax for Cyprus residents

There are several tax advantages applicable to UK expatriates who are resident in Cyprus. Capital gains tax, paid at a rate of 20%, is liable only when selling property located in Cyprus – property elsewhere in the world is exempt.

With capital investments, gains made on share sales are not usually taxable: an exception is the unlisted shares of companies owning real estate in Cyprus.

Capital gains tax does not apply to your estate on death nor when transferring assets between spouses or third-degree family members.

Inheritance tax 

Inheritance tax does not apply if you are Cyprus-domiciled, which means that you can pass on your assets without being liable for taxes locally. However, you must bear in mind that if you remain UK-domiciled, whilst resident in Cyprus, you will remain liable for inheritance tax in the UK. In addition, all UK assets above the inheritance tax threshold remain liable to inheritance tax in the UK.

Be sure to seek specialist advice on this subject in order to minimise the impact of these taxes on your family.

Forced heirship and estate planning

It is important to be  aware that Cyprus, in common with several other EU countries, operates ‘forced heirship’ rules which control the division of your estate on your death. Under Cypriot succession law, direct family members including your spouse and your natural children cannot be excluded from inheriting a share of your assets.

UK nationals, however, are able to take advantage of EU regulations which allow foreign nationals to specify in their wills that they would like the succession laws in their country of nationality to override local laws.

It is well worth taking specialist advice to make sure that you understand, not just succession law, but how all Cypriot tax regulations affect you, especially if you are holding assets in the UK or earning income there. You need to be sure that you are managing your affairs in the most tax-advantageous fashion, allowing you to maximise the benefits to both you and your family.

Jason Porter is a Director of specialist expat financial advisers Blevins Franks and head of the company’s European Emigration Advisory Service. Blevins Franks has been advising Britons moving and living in Europe for over 45 years and has had an established office in Paphos, Cyprus for 20 years.

You can read his article on Spain here, on France here and on Portugal here.