Moving to Cyprus – Leading Europe on Tax Freedom Day

02.11.21

Moving to Cyprus looks even more attractive as the 2021 report issued by the Institut Économique Molinari reveals that Cyprus still holds the top rank for “Tax Freedom Day” in all of Europe.

Cyprus has once again beat the competition in Europe this year, with its tax freedom day falling as early as 14 April – proof that moving to Cyprus can offer significant financial benefits from a tax perspective.

Taxes are a key consideration for anybody considering a move abroad. The combination of income tax, national insurance/social security, capital gains tax, VAT, council tax, excise duties and so on, amounts to a significant amount of money being paid to the taxman every year.

Tax freedom (or ‘liberation’) day represents how much of your time goes into ensuring your annual taxes are paid. It effectively divides the year in two. Until tax freedom day, a typical employee will be working solely to cover their annual taxes, and it’s only after that when your income is entirely your own.

The rank of each country included in the report is based on how early in the year its Tax Freedom Day occurs, which is determined by the overall national tax burden.

In this article, we will examine reasons why the tax regime of Cyprus is such an attractive prospect for people looking for their place in the sun.

Income tax and exemption from defence tax while living in Cyprus

Your first €19,500 of general worldwide income is tax free in Cyprus. Tax rates then start at 20% and rise progressively to 35% for income over €60,000.

Certain investment income is instead subject to a ‘defence contribution’ if you are considered resident and domiciled in Cyprus. The rates are:

  • Interest – 30% (reduced to 3% if your income is less than €12,000)
  • Dividends 17%
  • Rental income – 3%, on 75% of gross income (as well as income tax in this case)

Even as a tax resident of Cyprus, you would usually only be considered domiciled if you were born there or have lived in the country for at least 17 years. For this reason, many British expatriates do not pay any tax on interest or dividends for almost two decades of residence.

Note that this could affect a claim to be non-UK domiciled for UK inheritance tax purposes. If necessary, seek advice on tax-efficient ways of holding your investment capital

Download our free Guide to Taxes in Cyprus

More options for pensions

There are several options available to you, so if you’re considering movng to Cyprus to retire, it is always advisable to seek independent expert advice to ensure you choose the ones that suit you best.

To give an example of these; by choosing to have your pension taxed at the scale rates, you will not be required to pay any tax on income under €19,500 (when added to your other income). Then again, you can opt for your pension income to be taxed at a fixed rate of just 5%, with the first €3,420 completely tax free.

There is also a particular benefit offered by the UK/Cyprus double tax treaty that allows any pension – apart from UK government service pensions – to be taxed only in Cyprus. However, British retirees can still elect to have income derived from UK government service pensions to be taxed in Cyprus until 2024.

Transferring your pension funds out of the UK into a Qualifying Recognised Overseas Pension Scheme (QROPS) is also an attractive option as can provides various benefits, depending on your circumstances and objectives. Take personalised advice.

Download our ‘Pensions and the implications for your retirement in Europe’ guide

Leaving inheritance or an estate

One taxation rule that sets Cyprus apart from many European countries is that there are no inheritance, gift or succession levies. You are free to pass on your assets, safe in the knowledge that your loved ones will not be burdened by any local taxes.

Your domicile status is an important factor to consider here. Many British expatriates have incurred ‘death taxes’ imposed by the UK because they had remained UK domiciled, despite having lived in Cyprus for several years.

Also noteworthy, is that Cyprus applies ‘forced heirship’ rules on your estate. Effectively, this places some restriction on your freedom for writing a will, as a large percentage of your estate must be divided between direct family members, even if your will stated otherwise. Cypriot law dictates that the estate is split between a statutory portion and a disposable portion, and generally breaks down like this:

  • If there is a surviving spouse and/or descendants
    They will receive two thirds of the deceased’s estate, split into equal shares.
  • If there is a surviving spouse but no direct descendants
    If you are survived by your spouse but have no direct descendants, half your estate will be split equally between your spouse and parent/s. If there is no living parent, the entire estate can be disposed of by will.

However, the EU Succession Regulation (also known as ‘Brussels IV’) allows any foreign national residing in Cyprus to elect for the succession law of their country of birth rather than the country of residence, so UK nationals can opt for their home succession law. Take advice first, as there are pros and cons.

Complex matters such these must be handled properly. Receiving expert advice that is tailored to your circumstances is an important step to help navigate financial laws that differ between countries and mitigate any taxes your family may be held responsible for.

Financial planning for a life in Cyprus

If you have not yet moved to Cyprus, you should seek guidance from a specialist cross-border financial consultant. Getting the right advice will present you with all options related to your estate planning and pension, and help in managing investments and worldwide assets.

If you have already settled in Cyprus, you could still benefit greatly from advice. Whatever your situation, it is best to stay informed to ensure you maximise your retirement savings without any unnecessary risk taking, so you can enjoy your new life in Cyprus with financial peace of mind.

 

Get in touch with our advisers for advice on living in or moving to Cyprus

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; individuals should seek personalised advice.

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