With relatively low income tax, limited capital gains tax and no inheritance tax, Cyprus can offer expatriates a beneficial tax environment for income, investments and UK pensions.  

Are you thinking of moving to Cyprus, or have you recently arrived? There are so many benefits, but you may not realise that taxation can be one of the advantages of living in Cyprus

Income tax in Cyprus

Residents of Cyprus are taxed on worldwide income. Certain income, such as bank interest and dividends, is taxable in the form of ‘defence contributions’. 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.

Foreign pension income receives special treatment here – you choose how it is taxed each year:

  • 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.

One particular advantage for British retirees is that, 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. With effect from January 2019, this is taxable in the country which pays the income – so UK government service pensions are taxed in the UK, not Cyprus. However, there is a transitional period up to December 2024 where you can choose which country this income will be taxed in. If you want to pay tax in Cyprus, you must elect for this in writing

A pension commencement lump sum from a UK pension can be taken free of tax in both Cyprus and the UK. However, if you wish to extract the full amount as a cash lump sum, any excess over the tax-free amount for UK purposes remains taxable in the UK. 

Cyprus defence contributions – 17 years’ exemption 

The defence tax applies to worldwide investment income of individuals who are resident and domiciled in Cyprus, 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)

Since July 2015, non-Cyprus domiciles do not have to pay defence tax. Generally, you will be considered Cyprus-domiciled if you were born here 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.  

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 guide to taxes in Cyprus

Capital gains tax in Cyprus 

In Cyprus, capital gains tax is only payable on gains arising on the sale of real estate located in Cyprus; property in the UK or elsewhere is exempt. The rate is 20%.  

Capital 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.

No inheritance tax in Cyprus

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.

Besides the usual £325,000 nil rate band, there is a now an additional family home allowance which is £150,000 for the 2019/20 tax year. It only applies to residential homes left directly to descendants; higher valued estates do not receive it.

Estate planning for Cyprus

One thing you need to be careful about is Cyprus’ succession law. Expatriates are now subject to the same ‘forced heirship’ rules as other Cypriots. This means that 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. Take specialist advice first to establish what would work best for your family and heirs.

UK pensions in Cyprus

You can benefit from reviewing your pension funds when you move to Cyprus.  

With so many options for your pensions these days, you need to understand how they all work and consider which would be best for you. The Cyprus tax regime can provide opportunities for retired British expatriates, but this is a specialist area so take professional, regulated advice. 

See more about your pension options in Cyprus

Structuring savings and investments for Cyprus

You should also review your savings and investments. A key rule of any investment strategy is that it should be specifically designed around your circumstances, objectives and risk tolerance. Your circumstances change drastically with a move to a new country and retirement, so your strategy needs to be professionally reviewed to establish how it should be adjusted to suit your new life and goals.

See our six tips for protecting and growing your wealth

The sooner you carry out your tax and wealth management planning, the sooner you can get peace of mind to get on with enjoying your new life in Cyprus. 

Find out more about the Cyprus office and contact one of our advisers

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.