It is important to review your financial planning when you move to a new country. Besides looking at your investments, you need to understand how the Cyprus tax and succession regime affects you and which arrangements are most suitable for Cyprus.
One important task everyone needs to do when you arrive to live in Cyprus is review your financial planning to make sure it is suitable for your new circumstances and aims. This means looking at your investments, pensions, tax planning and estate planning. With the last two in particular you have to understand how the Cyprus regime affects you and which arrangements are most suitable here.
Once you have completed this exercise, frequent changes, both locally and internationally, mean that you need to review it from time to time. If you have a financial adviser who provides holistic advice on the various aspects of your wealth management they should conduct reviews with you and inform you of key changes. Otherwise you should seek advice to see if you need to make any changes.
Last year in particular saw two significant changes expatriates in Cyprus need to be aware of.
General income and pensions are subject to income tax scales rates from 20% for income over €19,500 (anything below that is tax free) to 35% for income over €60,000.
With pension income arising from an overseas source, you can choose whether it is taxed at scale rates or a flat rate of 5% (with the first €3,420 tax free).
Bank interest and dividends are liable to the ‘special contribution for defence” instead of income tax, at 30% and 17% respectively.
However, in July 2015 Cyprus passed a new law exempting those who are non-Cyprus domiciled from defence contribution.
You are domiciled, or deemed domiciled, in Cyprus if you have a Cyprus domicile of origin (so, generally speaking, a Cyprus national), or you have acquired a domicile of choice in Cyprus, or you have been resident here for 17 of the last 20 Cyprus tax years.
So, if you are a foreign national and have not lived here for 17 years, you should not be liable to pay the defence tax.
This, combined with the fixed tax on pension income, and the lack of inheritance tax or wealth tax in Cyprus, makes the island a very attractive place to live tax wise. That said, it is still important to regularly discuss your tax planning with your financial adviser to ensure you do not get caught out by changes and that you are taking advantage of all local tax rules and opportunities.
Estate planning is increasingly important for expatriates who wish to make sure wealth is passed onto the next generations according to their wishes. It is also getting more complex, particularly cross-border inheritances.
Cyprus imposes a forced heirship regime under its Wills and Succession Law. The majority of an estate must pass to the surviving spouse and children, in defined proportions. Previously, UK and Commonwealth nationals were able to use their will to bypass this restriction and freely dispose of their estate. However, this was removed in July 2015 and Cyprus law now applies to everyone resident here.
This change was made in advance of the new EU succession regulation (‘Brussels IV’) which came into effect in August 2015. This allows expatriates to opt for the law of their country of nationality to apply to their estate on death, as opposed that of their country of residence. UK expatriates can opt to have the law of England and Wales, Scotland or Northern Ireland (depending on their nationality) to apply on their death. This election must be done in your will or similar legal document or Cyprus law will apply.
While this sounds like good news and a simple way round the problem, we urge caution. It is still very unclear how this will work out in practice, and given the cost and delay of the probate process it may be best avoided. This can be achieved in a number of ways but it varies with individual circumstances so you must take personal, professional advice.
I mentioned earlier that Cyprus does not have any inheritance tax, but most UK nationals remain liable to UK inheritance tax since it is determined by domicile rather than residence.
With careful planning and specialist advice it is possible to lose your UK domicile by adopting a domicile of choice in Cyprus. Note, however, that if you choose to be non-Cyprus domicile so that you do not have to pay defence contribution, for most UK nationals this would most likely mean you are a UK domicile and so firmly within the UK inheritance tax net. You need to take specialist advice on your specific situation and to learn about the other arrangements available in Cyprus that offer significant tax advantages.
Any questions? Ask our financial advisers for help.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.