Finance Tips - the Taxation of Foreign Pensions in Cyprus

If you are thinking about moving abroad to retire on the Mediterranean island of Cyprus and will be drawing income from a pension you may want to know how your pension is likely to be taxed in Cyprus. Remember that income from pensions is not on the list of income that is exempt from taxes in Cyprus. And if you will be making Cyprus your primary residence when you retire then you will be liable for taxes on the pension income that you have each month.

If you are living overseas in Cyprus and will be receiving a pension while you are living there then you will be taxed on that as income but you will have two choices as to how you want to have your pension income taxed. The tax system that you choose for having your pension income taxed is completely up to you which means that you are not prevented from choosing the tax system that benefits you in the best possible way.

The first option that you have is to choose the tax system that will tax your pension at the standard Cypriot income tax rates. If you are not familiar with what the standard income tax rates are in Cyprus then that is also something that you will want to familiarize your self with before moving to the country. Under current income tax law in Cyprus the standard income tax rate states that your first CYP 10,000 is to be tax free with any remaining pension income over that initial CYP 10,000 being fully taxed. The second option available to pensioners living in Cyprus is to have all of the pension income taxed at a rate of five percent after the first CYP 2,000 which is to be tax exempt, or tax free.

In evaluating the two available tax systems available for taxing pensions it is easy to see that each option has an advantage depending on your yearly income from your pension. So, if the yearly amount that you earn from your pension while in Cyprus is less than CYP 12,750 then you would get the best tax advantage from choosing option one and being taxed at the normal Cypriot income tax rate. But if you expect to earn more than CYP 12,750 each year from your pension then the best tax rate for you is the second option.

Tax laws often change so it is advisable to seek an experiences tax professional's advice in Cyprus before declaring to the tax authorities what your preference is for taxation. You may also want to check in with the tax authorities in your home country. At a minimum you should let them know that you will be a resident of Cyprus as you may end up with a tax refund from your home country. You will also want to check and see if your home country has a double taxation agreement with Cyprus, otherwise your income from you pension may be taxed twice! Also there are some countries that have an agreement set up with Cyprus to allow state pensions to remain linked when the pensioners are residing in Cyprus. Canada and the United Kingdom are two such countries that currently have agreements like this with Cyprus. Your local tax authorities should be able to tell you if your country has a similar agreement with Cyprus.