The United Kingdom and Cyprus signed a new double taxation convention on 22 March 2018. That convention is now in force and will take effect in 2019. One of the main substantive changes it makes relates to the taxation of pensions paid in respect of employment in the public service.
Under the 1974 agreement which the new convention replaced, all pensions were taxable only in the country of residence of the recipient. In order to achieve consistency with the United Kingdom's other double tax agreements, the new convention provides that pensions payable in respect of national or local government service (for example pensions paid to retired civil servants or military personnel) are taxable only in the country from which they are paid, unless the recipient is both a national and a resident of the other country, in which case the pension continues to be taxable only in his or her country of residence. The changes do not affect state pensions, which continue to be taxable only in the recipient's country of residence.
There are substantial numbers of retired British military personnel living in Cyprus, due to the presence of British military bases on the island, who would be significantly disadvantaged by the new arrangements, since taxation of pensions in Cyprus is generally much lower than in the United Kingdom.
The United Kingdom government has now agreed with the government of Cyprus to amend the 2018 agreement to allow a six-year transition period during which recipients of government service pensions will be able to choose which basis of taxation they want to apply to their pension. The changes were implemented by an additional protocol to the convention, which was signed on 19 December 2018.
In order to choose their country of taxation, recipients of government service pensions must write to the tax authority of the country that is paying the pension. The election will apply to all pension payments received during the calendar year in which it is made, as well as to pension payments received in every year afterwards until 31 December 2024.
The United Kingdom government has issued guidance for those concerned, which is accessible via this link.
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