The tax benefits of Cyprus, along with its exceptionally beautiful landscape, warm sunny climate and rich culture, have the island growing in popularity among British expatriates.
Are you thinking of moving to Cyprus? There are many benefits to living on this Mediterranean island and, while taxation may not be top of your priorities when looking for a new home, it’s certainly encouraging to know that the local tax regime is relatively attractive.
Income tax
As a resident of Cyprus, you are taxable on your worldwide income. Certain income, such as bank interest and dividends, is taxable in the form of ‘defence contributions’ (see below). Rental income is subject to both income tax and defence contributions.
Your first €19,500 of income is tax free. Tax rates then start at 20% and rise progressively to 35% for income over €60,000.
Beneficial taxation of pension income
If you’re planning to spend your retirement in Cyprus, you’ll be pleased to know that foreign pension income receives special treatment t/here. You choose how it is taxed each year, as follows:
- At a flat rate of 5% on the excess of €3,420 (this sum being exempt), or
- At the normal scale rates of income tax.
Under the UK/Cyprus double tax treaty, most pension income is taxable solely in Cyprus. The exception is pension income paid in respect of government service. Since 2019 this is taxable in the country which pays the income – so UK government service pensions are taxed in the UK, not Cyprus. However, if you’re already living in Cyprus or will move soon, note that you have the option to elect to pay tax in Cyprus on any UK government service pensions until 2024.
A pension commencement lump sum from a UK pension can be taken free of tax in both Cyprus and UK.
Defence contributions – potential 17 years tax exemption interest and dividends
Interest and dividends are subject to ‘defence contributions’ instead of income tax (rental income is subject to both) – but the good news is that non-Cyprus domiciles are exempt. Generally, you will be considered Cyprus-domiciled if you were born there or you have been resident for 17 out of the last 20 years. Most UK expatriates therefore escape tax on interest and dividends for their first 17 years of residence.
The defence tax applies to worldwide investment income of individuals who are resident and domiciled in Cyprus will pay this defence tax on their worldwide investment income at the following rates.
- Interest – 30% (reduced to 3% if your income is less than €12,000)
- Dividends 17%
- Rental income – 3% (on 75% of gross income)
Note that this claiming to be non-domicile of Cyprus could affect a claim to be non-UK domiciled for UK inheritance tax purposes (see below). If necessary, seek advice on tax-efficient ways of holding your investment capital.
Cyprus capital gains tax advantages
If you are resident in Cyprus, you are only liable to local capital gains tax on gains arising on the sale of real estate located in Cyprus – property in the UK or elsewhere is exempt. The rate is 20%.
And when it comes to your capital investments, gains made on the sale of shares are generally not taxed in Cyprus. (Unlisted shares of companies which own real estate in Cyprus are taxable).
There is no capital gains tax on death, or on the transfer of assets between spouses and family members up to the third degree.
Inheritance tax
There is more good tax news for Cyprus – there is no inheritance or succession tax here. Your assets can pass to your heirs without them having to pay any local tax.
Unfortunately, this does not mean that British expatriates escape death taxes completely. If you remain UK domiciled, as many do in spite of living abroad for years, you remain liable for UK inheritance tax. Assets in the UK are always liable (if above the threshold) regardless of domicile. Seek specialist advice on how to avoid or mitigate this tax for your family.
Estate planning
One thing you need to be careful about is Cyprus’ succession law, which imposes ‘forced heirship’ rules. The bulk of your estate will be divided among direct family members and cannot be left feely to whomever you like.
However, there is an EU succession regulation that allows foreign nationals to opt, through their will, for the succession law of their country of nationality to apply on their death, instead of that of their country of residence. This means that UK nationals can generally avoid Cyprus’ forced heirship rules. Take specialist advice first to establish what would work best for your family and heirs.
Understanding the tax benefits of Cyprus
While Cyprus taxation appears relatively straightforward, do take specialist advice to make sure you understand how all the rules affect you and to make sure you are paying tax in the right country, particularly if you continue to own assets and earn income in the UK. You also want to confirm you are holding your assets in the most tax-efficient way for Cyprus as well as to achieve your objectives for yourself and your heirs. If you have not yet left the UK, take advice before you dispose of UK assets to ensure you do that as tax-efficiently as possible.
Blevins Franks has been advising UK nationals moving and living in Europe for over 45 years. Besides its UK office, it has had an established office in Paphos for 20 years now. We can help you plan your move to the island, or, if you already live there, review your wealth management to help make sure you take advantage of all the tax benefits Cyprus to offer.