Low taxes and straight bureaucratic procedures attract business people and investors from all over the world to invest in the Republic of Cyprus. Cyprus’ low tax regime facilitates the expansion of business activities on 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 to Law 119(I)/2013 and Law 120(I)/2013 aim to stimulate economic activity, attract more investors, and simplify Cyprus’ tax regime even more. According to the above-mentioned amendments to the law, 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 to Law 119(I)/2013 and Law 120(I)/2013, real estate owners will be taxed based on the value of their property.
Capital Gains Tax:
Subject to certain exceptions (see list below), capital gains tax is charged on gains arising after January 1, 1980, from the sale or transfer of immovable property in the Republic of Cyprus or shares of companies, located in Cyprus, that own the Property (Reference 1). In short, net income earned on the sale or transfer of real estate is taxed at 20%. The calculation of net income derived from the disposal includes the inflation rate. Inflation is calculated based on the official Retail Price Index. In addition, according to the amendments to Law 119(I)/2013 and Law 120(I)/2013, the value of real estate is calculated according to the provisions related to the Immovable Goods Law.
Exception List:
- Transfer of property due to death.
- Gifts for children, spouses and other relatives up to the third degree.
- A gift for a company. The shareholders of certain companies were and continue to be members of the donor’s family for five years following the award of the gift.
- A gift offered by a company to its shareholders, given that certain property was originally donated to the company. In addition, the recipient is obliged to keep the immovable property for at least three years.
- Gifts to the government or local authorities of the Republic of Cyprus for educational or other charitable purposes.
- Exchange or sale under Agricultural Land Law (Consolidation).
- Property exchange. In this case, the value of the real estate properties exchanged must be the same.
- Profits derived from the disposal of shares listed on any Stock Exchange.
- Transfers generated by the reorganization.
Lifetime exception for individuals:
- Disposal of own residence: Advantages (85,430 euros)
- Disposal of farmland by farmers: Profits (25,629 euros)
- Disposal of other real estate: Profit (17,086 euros)
Immovable Property Tax:
In Cyprus, an annual immovable property tax is levied on any individual or legal entity who owns immovable property on the island regardless of whether they are residents of the Republic of Cyprus or not. The tax they are obliged to pay is based on the value of all immovable property registered in their name (Reference 2).
The immovable property tax is estimated at the market value of immovable property on January 1, 1980 and is payable by September 30 each year at the Department of Home Affairs. At this point, it should be clarified that individual owners are exempt from this tax if the 1980 value of their property is less than €12,500.
Relevant tax bands as revised in 2013:
- If the appraised value of the 1980 property is less than 12,500 euros, the annual tax rate is 0 (%) and the accumulated tax is zero.
- If the appraised value of the 1980 property is between 12,500-40,000 euros, the annual tax rate is 0.60 (%) and the accumulated tax is 240 euros.
- If the appraised value of the 1980 property is between 40,001-120,000 euros, the annual tax rate is 0.80 (%) and the accumulated tax is 880 euros.
- If the assessed value of the 1980 property is between 120,001-170,000 euros, the annual tax rate is 0.90 (%) and the accumulated tax is 1,330 euros.
- If the appraised value of the 1980 property is between 170.001-300,000 euros, the annual tax rate is 1.10 (%) and the accumulated tax is 2.760 euros.
- If the appraised value of the 1980 property is between 300,001-500,000 euros, the annual tax rate is 1.30 (%) and the accumulated tax is 5,360 euros.
- If the appraised value of the 1980 property is between 500,001-800,000 euros, the annual tax rate is 1.50 (%) and the accumulated tax is 9,860 euros.
- If the appraised value of the 1980 property is between 800,001-3,000,000 euros, the annual tax rate is 1.70 (%) and the accumulated tax is 47,260 euros.
- If the appraised value of the 1980 property is more than 3,000,000 euros, the annual tax rate is 1.90 (%).
Notes: Each registered owner whose immovable property exceeds €120,000 is required to submit a Declaration of Immovable Property (IR 301 and IR302) and pay the equivalent annual tax by 30 September.
Important Warning:
Due to delays in issuing Certificates of Ownership, some developers are registered as real estate property owners. In accordance with the law, “registered owners” (in our case the developers) are obliged to pay an annual declaration of their immovable property to the relevant authorities and pay Immovable Property Tax, plus late payment penalties.
Until the issuance of the Certificate of Ownership, the buyer is only obliged to pay the Property Transfer Fee to secure ownership of the property he has purchased, which will then be registered in his name.
However, in some Sales Contracts, the developer requires the buyer to pay immovable property tax when they receive delivery of the property. In many cases, some developers charge buyers a sum of money based on the price the property is sold for. In addition, in some cases, the developer increases the entire amount of the late payment penalty.
I would advise the buyer to ask the developer to provide them with sufficient evidence showing that the immovable property tax that has been paid to Domestic Revenue matches the land on which the development has been built.
Therefore, I advise the buyer NOT to pay any Immovable Property Tax to the developer except the developer:
- Provide written evidence of the amount of Immovable Property Tax that has been paid by the developer to Domestic Revenue on the land where the construction is built.
- Provide the buyer with a written statement explaining the buyer’s share of the land mentioned above.
- Issue a written invoice on company letterhead stating the agreed amount to be paid.
- Issue a written company receipt for the amount paid.
Investing in Cyprus: Get the right legal support
As explained above, the amendments to Law 119(I)/2013 and Law 120(I)/2013 together with the tax-friendly regime provide more incentives to international investors and businessmen to expand their business activities in Cyprus. However, investors and business people should consider that investing in real estate requires proper legal guidance.
Reference 1: DEPARTMENT OF TAXES: DIRECT TAX: Taxation of Capital Gains http://www.mof.gov.cy/mof/ird/ird.nsf/dmlfaq_en/dmlfaq_en?OpenDocument#3
Reference 2: DEPARTMENT OF TAXES: DIRECT TAX: Immovable Property http://www.mof.gov.cy/mof/ird/ird.nsf/dmlfaq_en/dmlfaq_en?OpenDocument#5