Low taxation and straight forward bureaucratic procedures attract business people and investors from all over the world to invest in the Republic of Cyprus. Cyprus’ low taxation regime facilitates the expansion of business activities in the island. In the current article, I will present some useful information about capital gains and immovable property taxation schemes in Cyprus. The recent amendments of the Law 119(I)/2013 and the Law 120(I)/2013 aim at encouraging economic activity, attract more investors and simplify even more the Cyprus tax regime. According to the amendments of the legislations mentioned above, more capital gains are not taxed in Cyprus. The only capital gains that are taxed are those associated with the disposal of real estate located in Cyprus. Following the amendments of the Law 119 (I)/2013 and the Law 120(I)/2013, real estate owners will be taxed based on the value of their property.
Capital Gains Taxation:
Subject to certain exceptions (see the list below), the capital gain tax is charged on profits arising after the 1st January 1980, from the sale or transfer of immovable property in the Republic of Cyprus or company’s shares, located in Cyprus, that owns immovable property (Reference 1). Briefly, the net profit derived from the sale or transfer of real estate is taxed at the rate of 20%. The calculation of the net profit derived from the disposal embeds the inflation rate. Inflation is calculated based on the official Retail Price Index. Moreover, according to the amendments of the Law 119 (I)/2013 and the Law 120(I)/2013 the value of the real estate is calculated following the related provisions of the Immovable Property Law.
List of Exemptions:
- Transfer of property due to death.
- Gifts to children, spouses and any other relative up to the third degree.
- Gift to a company. The shareholders of the particular company are and continue to be members of the donor’s family for five years after the offer of the gift.
- Gift offered by a firm to its shareholders, given that the particular property was originally donated to the company. Moreover, the recipient is obliged to keep the immovable property for at least three years.
- Gift to the government or to local authorities of the Republic of Cyprus for educational or other charitable purposes.
- Exchange or sale based on the Agricultural Land (Consolidation) Laws.
- Exchange of properties. In this case, the values of the real estate properties that have been exchanged must be the same.
- Gain derived from the disposal of shares, listed on any Stock Exchange.
- Transfers resulted by reorganisation.
Lifetime exemptions for individuals:
- Disposal of own residence: Gain (85.430 euro)
- Disposal of agricultural land by a farmer: Gain (25.629 euro)
- Any other disposal of real estate: Gain (17.086 euro)
Immovable Property Taxation:
In Cyprus, the annual immovable property tax is imposed on every individual or legal person who owns immovable property in the island regardless of whether they are or not residents of the Republic of Cyprus. The tax they are obliged to pay is based on the total value of the whole immovable property registered in their name (Reference 2).
The immovable property tax is estimated according to the market value of the immovable property as at 1st January 1980 and is payable by the 30th September of every year at the Inland Revenue Department. In this point, it should be clarified that individual owners are exempt from this tax in case the 1980 value of their property is less than €12.500.
The relevant tax bands as revised in 2013:
- If the assessed 1980 property value is less than 12.500 euro the annual tax rate is 0 (%) and the accumulated tax is zero.
- If the assessed 1980 property value is between 12.500-40.000 euro the annual tax rate is 0.60 (%) and the accumulated tax is 240 euro.
- If the assessed 1980 property value is between 40.001-120.000 euro the annual tax rate is 0.80 (%) and the accumulated tax is 880 euro.
- If the assessed 1980 property value is between 120.001-170.000 euro the annual tax rate is 0.90 (%) and the accumulated tax is 1.330 euro.
- If the assessed 1980 property value is between 170.001-300.000 euro the annual tax rate is 1.10 (%) and the accumulated tax is 2.760 euro.
- If the assessed 1980 property value is between 300.001-500.000 euro the annual tax rate is 1.30 (%) and the accumulated tax is 5.360 euro.
- If the assessed 1980 property value is between 500.001-800.000 euro the annual tax rate is 1.50 (%) and the accumulated tax is 9.860 euro.
- If the assessed 1980 property value is between 800.001-3.000.000 euro the annual tax rate is 1.70 (%) and the accumulated tax is 47.260 euro.
- If the assessed 1980 property value is more than 3.000.000 euro the annual tax rate is 1.90 (%).
Note: Every registered owner whose immovable property is more than €120.000 is obliged to submit a Declaration of Immovable Property (IR 301 and IR302) and pay the equivalent annual tax before the 30th of September.
Because of the delays in issuing Title Deeds, some developers are the registered owners of real estate property. In accordance with the law, the “registered owners” (in our case the developers) are obliged to pay annual declarations of their immovable property to the relevant authorities and pay the Immovable Property Tax, plus any late payment penalties.
Until Title Deeds are issued purchaser is obliged to pay only Property Transfer Fees so that to secure ownership of the property he or she has bought, which will then be registered in his or her name.
Nevertheless, in some Contracts of Sales, developers request the buyers to pay the immovable property tax by the time they take delivery of a property. In many cases, some developers charge purchasers outrageous sums of money based on the price the property was sold. Moreover, in some cases, the developers add to the whole amount the late payment penalties.
I would advise buyers to ask the developers to provide them with the adequate proofs that demonstrate that the immovable property tax that has been paid to the Inland Revenue corresponds to the land where the development has been constructed.
As a result, I am advising purchasers NOT to pay a developer any Immovable Property Tax unless the developer:
- Provides a written proof of the amount of Immovable Property Tax that the developer has paid to the Inland Revenue for the land where the development has been constructed.
- Provides buyer a written statement clarifying buyer’s shares of the aforementioned land.
- Issue a written invoice on the company’s letterhead that states the agreed amount to be paid.
- Issue a written company receipt for the amount that had been paid.
Invest in Cyprus: Have a proper legal support
As it was explained above, the amendments of the Law 119 (I)/2013 and the Law 120(I)/2013 together with the tax friendly regimes give more incentives to international investors and business people to expand their business activities in Cyprus. However, investors and business people should take into account that investing in real estate requires a proper legal guidance.
Reference 1: TAX DEPARTMENT: DIRECT TAXATION: Capital Gains Taxation http://www.mof.gov.cy/mof/ird/ird.nsf/dmlfaq_en/dmlfaq_en?OpenDocument#3
Reference 2: TAX DEPARTMENT: DIRECT TAXATION: Immovable Property http://www.mof.gov.cy/mof/ird/ird.nsf/dmlfaq_en/dmlfaq_en?OpenDocument#5