Cyprus and a US Annuity: The 0% Band, the 5% Rate That Probably Does Not Apply, and the Treaty Gap
Written by Hans Goldstein, EA, licensed insurance agent · CA 4273294Admitted to practice before the IRS
Short answer: Cyprus has first right to tax a US life annuity paid to a Cyprus resident (treaty Art. 23(2), checked 18 Oct 2026), and its Income Tax Law lists life annuities as taxable income at 0% to €22,000, then 20%, 25%, 30% and 35% from 2026 (PwC Tax Summaries Cyprus, checked 18 Oct 2026). The 5% rate on foreign pensions above €5,000 is written for pensions for services rendered outside Cyprus, so a purchased annuity probably does not qualify, and Cyprus has no wealth or inheritance tax. The catch is the US side: the treaty has no US-citizen re-sourcing clause, so a US credit for Cyprus tax is not assured. On my $35,000 example Cyprus tax is about $2,056 and US tax $2,200: about $2,200 if Cyprus credits the US tax, $4,256 if nobody gives relief.
Free guide: Moving abroad on a fixed income
Income rules and taxes by country: Norway, Switzerland, Sweden, Italy, Spain, Malta and more, plus how a lifetime annuity fits.
Cyprus draws retirees with a permanent residence permit, a mild climate and a 0% first band. The question here is narrow: what Cyprus does with a US annuity check, and what you can count on. The permit rules are on my Cyprus Category F page. I verified the treaty text and the Cyprus Income Tax Law text itself; where an adviser's view is still needed I say so.
The treaty: Cyprus taxes first, relief is uncertain
Article 23(2) says "alimony and annuities paid to an individual who is a resident of a Contracting State shall be taxable only in that Contracting State", and Art. 23(4) defines annuities as a stated sum paid periodically "during life, or during a specified number of years" for adequate consideration (US-Cyprus treaty Art. 23(2) and (4), checked 18 Oct 2026). Life is covered. The saving clause (Art. 4(3)) lets the US tax its own citizens as if the treaty did not exist.
Relief is Article 5. The US allows a credit for the appropriate amount of Cypriot tax, applying the Article 6 source rules, and Cyprus allows a credit for US tax, limited to the Cypriot tax on that income (US-Cyprus treaty Art. 5(1) and (2), checked 18 Oct 2026). Article 6 has no source rule for annuities, so source falls to each country's own law (Art. 6(9)). And unlike the Italy and Germany treaties, there is no clause saying income the US taxes only because you are a citizen is treated as arising in Cyprus. I could not confirm how the IRS sources an annuity from a US insurer for the foreign tax credit, so I do not assume a US credit. What I can say: Cyprus is the only one of the two that is told by the treaty to give a credit, and I did not confirm that Cyprus applies it to US tax charged only through citizenship. Treat "about the higher of the two" as the good case and "the sum" as the risk until a Cyprus adviser confirms in writing.
How Cyprus taxes the payments
Section 5(1) of the Income Tax Law charges residents on income from inside and outside Cyprus, and its list includes "any pension" and annuities paid for life or for a fixed period (Income Tax Law 118(I)/2002, s. 5(1), checked 18 Oct 2026). I found no rule in that text that removes the premium share from each annuity payment, and I did not find Cyprus Tax Department practice on it. So the example treats the whole check as income and I flag that as an assumption.
For 2026 the bands are 0% to €22,000, 20% to €32,000, 25% to €42,000, 30% to €72,000 and 35% above (PwC Tax Summaries Cyprus, bands as of 1 Jan 2026, checked 18 Oct 2026); the tax-free amount rose from €19,500 (EY Cyprus tax alert, Feb 2026, checked 18 Oct 2026). A resident is someone in Cyprus over 183 days, or under the 60 day rule if other conditions are met (KPMG Cyprus, April 2026, checked 18 Oct 2026).
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Estimates use the September 9, 2026 ImmediateAnnuities.com payout survey (life only) and a 15% cushion. Illustrative, not a quote.
The 5% election: does a purchased annuity qualify?
Section 20 of the law says a resident's income "from pension for services that had been rendered outside the Republic" above €5,000 is taxed at 5%, not added to other income, and you may choose each year between that and the normal bands. The €5,000 replaced €3,420 under Law 244(I)/2025 (Income Tax Law 118(I)/2002, s. 20, checked 18 Oct 2026). PwC states it the same way: pensions from abroad for services rendered outside Cyprus (PwC Tax Summaries Cyprus, income determination, checked 18 Oct 2026).
A pension for services means earned retirement income, such as an employer plan or Social Security. An annuity you bought with after-tax savings is not pay for services. I found nothing from the Tax Department saying a purchased annuity counts, so I do not count the 5% in the example and I would not plan on it. If it did apply, the tax on the example would be 5% of €26,150, about $1,469, but I drop that as a planning number.
SPIA, DIA and MYGA
A DIA is the same as a SPIA once payments start: the same rules apply to each check. Before the first payment there is no annuity income, but wealth-tax and reporting questions can already apply to the contract. For a MYGA or other deferred annuity, I verified no Cyprus rule on accrual versus withdrawal. PwC lists "part of the amount received from a partial surrender of an insurance policy" among items taxable from 1 January 2026 (PwC Tax Summaries Cyprus, income determination, checked 18 Oct 2026), but I could not confirm how that applies to a US contract, so I give no MYGA number. Ask before taking withdrawals.
Wealth tax, inheritance tax and exit tax
Cyprus has no wealth tax and no inheritance or gift tax, according to KPMG Cyprus (KPMG Cyprus, April 2026, checked 18 Oct 2026), which ties that to the non-domicile status most arriving retirees have. Cyprus residents who are not domiciled there are exempt from the defence contribution on dividends and interest, and you become deemed domiciled only after 17 of the last 20 years as a resident (PwC Tax Summaries Cyprus, checked 18 Oct 2026). That exemption is about dividends, interest and rent, not an annuity check. I found no exit tax on an individual's annuity. US tax on a citizen stays wherever you live.
Return of premium and the refund feature
A refund feature cuts the check by about 5% in my model and pays a death benefit. For Cyprus the heirs' side is simple: no inheritance tax and no gift tax (KPMG Cyprus, April 2026, checked 18 Oct 2026), and no wealth tax so the refund adds nothing to a wealth base. Whether the Cyprus Tax Department treats the refund as return of capital for income tax: not settled. On the US side, IRC 72(c)(2) subtracts the value of the refund from your investment before the exclusion ratio is set (IRC 72(c)(2), checked 18 Oct 2026).
The dollar
The annuity pays US dollars; your bills are in euros. Over the 20 years to October 2026 the euro ranged from 0.62 to 1.04 per US dollar (low on 22 Apr 2008, high on 27 Sep 2022), and on 9 Oct 2026 it was 0.89 (Federal Reserve H.10 via FRED, series DEXUSEU, inverted, checked 18 Oct 2026). On a $35,000 check that is about €21,700 at 0.62, €31,150 at 0.89 and €36,400 at 1.04. I do not predict where it goes. A natural hedge is a home or other assets in euros that offset the dollar income, with the annuity as the income floor.
Worked example: $500,000 SPIA at 65
The US side is the same in every country. As a US citizen you still file a US return. For a non-qualified life-only annuity the IRS excludes the part of each check that is your own premium coming back: the exclusion ratio is your investment in the contract divided by the expected return (IRC 72(b)(1), checked 18 Oct 2026). The expected return is the yearly payment times the Table V multiple for your age, which is 20.0 at age 65 and 16.0 at age 70 (IRS Publication 939, Table V, checked 18 Oct 2026). The exclusion stops once you have recovered your premium, and after that every dollar is taxable (IRC 72(b)(2), checked 18 Oct 2026). If the contract has a refund feature, the value of the refund is subtracted first, which lowers the excluded share (IRC 72(c)(2), checked 18 Oct 2026).
Assumptions, all of them mine: a US citizen starts at 65 with a $500,000 non-qualified life-only SPIA. Illustrative payout 7.0%, so $35,000 a year (illustrative, not a quote). Expected return $35,000 times 20.0 = $700,000, so the exclusion ratio is $500,000 / $700,000 = 71.4%: $25,000 a year is excluded and $10,000 is taxable until the $500,000 is recovered, about year 20; after that the full $35,000 is taxable. US tax on the $10,000 gain share at an assumed 22% federal bracket is $2,200; the 2026 22% bracket for a single filer runs from $50,400 to $105,700 of taxable income (IRS Rev. Proc. 2025-32, Table 3, checked 18 Oct 2026). I use EUR 0.89 per US dollar, so the check is about €31,150. I assume no other income unless I say so, and no deductions.
Cyprus: €31,150 less the €22,000 band is €9,150; at 20% that is €1,830, or $2,056 at 0.89. I assume no other income, no deductions, and I leave out the health contribution because I could not confirm it applies to an annuity. PwC lists 2.65% of pensions for pensioners (PwC Tax Summaries Cyprus, other taxes, checked 18 Oct 2026), which on this check would add about $930 if it applied.
| Illustrative, not a quote | Cyprus tax (normal bands) | US tax | Total if nobody credits | Total if Cyprus credits US tax (Art. 5(2)) |
|---|---|---|---|---|
| $35,000 check, start at 65 | $2,056 | $2,200 | $4,256 | $2,200 |
| Same, start at 70 (US gain share $3,750) | $2,056 | $825 | $2,881 | $2,056 |
Cyprus has no age-based share, so only the US column changes at 70. The 70 line holds the $35,000 flat for comparison; a real payout at 70 would be higher. The good case needs Cyprus to credit US tax that exists only because you are a citizen; I could not verify that, which is why both columns are shown.
What changes with other products: a MYGA has no check stream until you annuitize. A DIA behaves like the SPIA once it pays.
How to use this
I am a US-licensed insurance agent and an Enrolled Agent, admitted to practice before the IRS. I can only help with a US annuity while you still live in the US, and I do not give foreign tax advice. Before you buy, get a written view from a local adviser who has seen your actual contract, and keep it with your papers. The sources are listed below.
This is education, not tax advice. Rules change; every rate here carries its source and the date I checked it.
Married? Make the income outlive either of you. In Cyprus the main applicant shows the income and the spouse joins as a family member, so the annuity sits with the main applicant. If a single-life annuity is on one spouse and that spouse dies first, the payments stop, and the surviving spouse may have to show income of their own at the next renewal. A joint and survivor annuity, which keeps paying until the second death, or a separate annuity on each spouse closes that gap. Joint and survivor pays less per dollar than single life, so ask for both quotes and compare.
Frequently asked questions
Related reading
- Moving abroad on a fixed income: the hub
- Where a US annuity is tax-smart abroad
- How Europe taxes a US annuity
- Cyprus Category F permit: the income requirement
- Countries with a wealth tax and whether an annuity helps
- Why a US annuity is tax-favored: the exclusion ratio
- Italy: US annuity tax for a retiree
- Germany: US annuity tax for a retiree
- Greece: US annuity tax for a retiree
Sources
- US-Cyprus income tax treaty, IRS text (Arts. 5, 6, 23)
- CyLaw: Income Tax Law 118(I)/2002, consolidated (s. 5(1), s. 20 as amended by 244(I)/2025)
- PwC Tax Summaries Cyprus: income determination (reviewed 4 Aug 2026)
- PwC Tax Summaries Cyprus: taxes on personal income (2026 bands, reviewed 4 Aug 2026)
- PwC Tax Summaries Cyprus: other taxes (health contributions)
- EY Cyprus tax alert, 26 Feb 2026 (2026 reform: bands, 5% on foreign pensions above EUR 5,000)
- KPMG Cyprus: Tax residency and non-dom rules, April 2026 (183 and 60 day tests; no inheritance, gift or wealth taxes)
- 26 U.S.C. 72 (annuities: exclusion ratio (b)(1) to (b)(3), refund feature (c)(2))
- IRS Publication 939 (12/2025), Table V, ordinary life annuities, one life
- IRS Rev. Proc. 2025-32 (2026 rate tables, Table 3, unmarried individuals; standard deduction)
- Federal Reserve H.10 via FRED: DEXUSEU (US dollars per euro; I invert to euros per dollar)
Goldstein & Co. LLC dba Goldstein Insurance Services · Hans Goldstein, licensed insurance agent, CA lic. #4273294 · NPN 20602398 · 213-414-2808 · hans@hansgoldstein.com
Education, not tax, legal or immigration advice. Rules, thresholds and exchange rates change; confirm with the consulate or immigration authority and a local tax adviser before you act, and get answers in writing. Hans Goldstein is a licensed insurance agent (CA 4273294) and can only offer annuities to residents of states where he is licensed. Annuity payments are guaranteed by the issuing insurer’s claims-paying ability, not by any government. Payout figures are illustrations from a published survey, not quotes. Immediate annuities are generally irrevocable.