European Union: Extension Of Tax Benefit For UK Nationals Receiving A Government Service Pension

Overview

UK Nationals residing in Cyprus and receiving a pension from the UK have benefited by the original Double Tax Treaty signed between Cyprus and the UK in 1974 and amended in 1980 ("the original Treaty"), as a result of which they were being taxed in Cyprus at a significantly lower tax rate than that of the UK.

The 2018 tax treaty between Cyprus and the UK ("the new Treaty") replaced the original Treaty and – amongst others – introduced a separation between state pensions and government service pensions. Effectively this lead to more taxes to be paid by UK nationals residents of Cyprus who are receiving government service pensions (from a political subdivision or a local authority) including civil servants, armed forces etc. Per the new Treaty, these individuals would be taxed in the UK whereas the ones receiving state pension would continue to be taxed in Cyprus. The new Treaty also provided that an individual who received pension from the UK but is both resident and national of Cyprus would be taxed in Cyprus, thus encouraging UK nationals to apply for Cyprus citizenship.

The latest amendment to the treaty comes with the signing of a Protocol in December 2018. The protocol basically extends the right of UK nationals residing in Cyprus and receiving government service pension from the UK to continue to be taxed in Cyprus for a period up to 2024.

Detailed analysis

History of the treaties signed between Cyprus and UK

What did the original Treaty provide in regards to taxation on pensions?

Article 19 on Pensions of the original Treaty provided that:

"any pension derived from sources within one of the Contracting States by an individual who is a resident of the other Contracting State and subject to tax in that other State in respect thereof shall be exempt from tax in the first-mentioned Contracting State".

i.e a UK national who is a resident of Cyprus and receives pension from UK, will be taxed in Cyprus and exempt from tax in the UK.

What the new Treaty actually provides for Government Service Pensions

As per Article 18 on Government Service of the new Treaty:

"..pensions and other similar remuneration paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State".

i.e a UK national who is now a resident of Cyprus and receives government pension from the UK will be taxed in the UK.

The Article continues to read as follows:

"However, such pensions and other similar remuneration shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State".

i.e an individual who is a resident of Cyprus and receives his government pension from the UK but becomes a Cyprus national, will be taxed in Cyprus.

How the new Protocol and specifically Article "Entry into Force" affects the taxation of Government Service Pension as per the new Treaty?

A new paragraph, paragraph 5 was added under Article 29 "Entry into Force" in which:

An individual, who was entitled to the benefits of the original Treaty as mentioned above, may elect that the provisions of that Article shall continue to apply for calendar years ending on or before 31 December 2024, and not the provisions of the new Treaty.

For example, a UK national, resident of Cyprus who was receiving government pension from the UK as at 18 July 2018, can choose to continue to be taxed in Cyprus according to the provisions of the original Treaty, up to and including 31 December 2024.

Alternatively, a UK national, resident of Cyprus entitled of government pension from the UK in 2019, will be taxed in the UK, according to the provisions of the new Treaty, unless he is also a Cyprus citizen.

Are you affected by the new Treaty?

Our international team includes experts from different countries, ready to provide you with latest information about citizenship and residency programs in Cyprus, but also Greece, Bulgaria, Montenegro and Moldova. All these countries are popular investment destinations and attractive for business, tourism, recreation and not only.

If you wish for your government service pension to be taxed in Cyprus, we are here to help you secure such benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.