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Taxation and VAT in Cyprus

Implications

An individual earning income in the Republic of Cyprus (Cyprus) or just having purchased property in Cyprus, will need to be aware of the following tax and VAT implications.

VAT in relation to immovable property

The percentage of VAT applicable on the purchase of immovable property in Cyprus may vary from 0% (no VAT), 5% or 19%. Land, if purchased from a physical person or entity selling immovable property as a part of a business activity, is subject to 19% VAT.

Re-sale properties are not subject to VAT. First sale properties are usually subject to 19% VAT. If the building permit of said property was acquired before 1st of May 2004, the property is VAT exempt.

The VAT on the property may be reduced to 5% if the following conditions are met:

  • the property is the main residence of the purchaser;
  • the property is not rented for 10 years;
  • the property is not sold for 10 years.

It should be noted that the 5% VAT rate will only be applied on 200m2 of the total surface of the property. On the remainder of the surface, 19% VAT will need to be paid. This reduction cannot be applied to land.

In the event that the owner wishes to sell or rent the property before the lapse of 10 years, the difference in VAT between 19% and 5%, will need to be paid on a pro-rata basis (for the remainder of the 10 years).

For example: a residence of 200m2 is bought in 2018 for EUR 100,000. The purchaser intents to keep this residence as the purchaser’s main residence. The purchaser has therefore paid 5% VAT, being an amount of EUR 5,000. In 2020 the purchaser has decided to either sell the residence or rent it. The residence was kept for 2 years and will be rented or sold before the remainder 8 years lapse. The purchaser will therefore need to pay 14% VAT (difference between 19% and 5%), divided by 10 (the 10 years condition of the 5% VAT), multiplied by 8 (the amount of years the condition of the 5% VAT is not fulfilled), equals EUR 11,200:

(EUR 14,000 (EUR 19,000 – EUR 5,000) : 10) x (8 (10-2)) = EUR 11,200.

In the event that the purchaser has bought more than 1 property, the purchaser can change the main residence from one property to the other before this second residence has been delivered.

The above VAT rules apply both in cases where the purchaser is an individual or a legal entity (the reduction of the VAT to 5% is only available to individuals). In the event that the purchaser is a legal entity, this legal entity can only claim back the VAT paid on the purchase if the activities of this legal entity encompass trading in real estate or if the property is used as the entities offices.

Note that the above refers to the purchase of the property itself. In the event that the property is furnished or will be furnished, 19% VAT will be payable on the amount dedicated to this furniture.

Stamp duty in relation to immovable property

Stamp duty is duty paid on an agreement for, amongst other, the purchase of property situated in Cyprus, irrespective of where this agreement is drafted or executed. The amount of the stamp duty is calculated on the following sliding sale:

Purchase Price Rate Example of a Purchase Price of EUR 200,000
EUR 0 – EUR 5,000 0% EUR 0
EUR 5,001 – EUR 170,000 0.15% EUR 247.50
EUR 170,001 – Purchase Price 0.2% EUR 60
Total payable stamp duty EUR 307.50

The height of the stamp duty is capped at EUR 20,000 for agreements in respect to the sale of property.

Transfer fees in relation to immovable property

When property has been purchased in Cyprus without the payment of VAT and the title deed is ready to be transferred into the purchaser’s name, transfer fees become due. These fees are payable by the purchaser directly to the District Land Office (DLO).

The fees are calculated on the market value of the property as indicated by the DLO. Bear in mind that the purchase price of the property and the market value as indicated by the DLO may differ: the market value according to the DLO being higher than the purchase price

The transfer fees are calculated on the following sliding scale:

Market Value DLO Rate Example of a Market Value of EUR 200,000
EUR 0 – EUR 85,000 3% EUR 2,550
EUR 85,001 – EUR 170,000 5% EUR 4,250
EUR 170,001 – Market Value DLO 8% EUR 2,400
Total payable transfer fee EUR 9,200

Bear in mind that in 2018 a 50% discount is provided on the transfer fees and therefore in our example of above the payable transfer fee will be EUR 4,600.

When VAT has been paid on the purchase of the property, transfer fees will not be payable.

In the event of free transfer of the property the transfer fees are calculated on the following scale:

Transfer Rate on the value of the property as at 1 January 2013
From parents to children 0%
Between spouses 0.1%
Between third degree relatives 0.1%
To trustees EUR 50
 

Local Authorities Fees/Municipality Tax/Sewerage Tax

As an owner of immovable property in the Cyprus certain small taxes are payable.

  • Local Authority Fee: this fee is charged per annum for regular refuse, street lighting, sewerage, etc.;
  • Municipality Tax: This tax is calculated on the value of the property as at 1 January 1980 with a rate between 0.1%-0.2%;
  • Sewerage Tax: This tax is also calculated on the value of the property as at 1 January 1980 with a rate between 0.3%-0.35%;

Both the Local Authority Fee and the Sewerage Tax could be transferred to the tenant if the property is rented.

VAT in relation to rent

In line with new legislation, 19% VAT is payable by the tenant on the rent of property if the tenant exercises a business activity in the rented property. This new rule is applied on rental contracts which have been signed as per November of 2017. Any rental agreement which was signed before this date is excluded. Renewals of rental agreements which were first signed before November 2017 are also excluded.

Exemptions on this new rule can of course be obtained. This exemption will allow the property owner to not charge and subsequently pay VAT. However, this will also prohibit the property owner from claiming back VAT on any renovation expenses.

Non-Doms (non-Cyprus domiciled individuals)

An individual has their domicile in Cyprus, according to the Special Defence Contribution Law, if:

  1. this individual has a domicile of origin in Cyprus, as defined in the Wills and Succession Law; or
  2. this individual is a resident of Cyprus as per the Income Tax Law for a period of at least 17 years out of the last 20 years prior to the tax year being assessed.

Exemptions on this rule are:

  • individuals who have acquired and maintain a domicile of choice outside of Cyprus based on the provisions of the Wills and Succession Law and such individuals were not tax residents of Cyprus as per the Income Tax Law for any period of at least 20 consecutive years prior to the tax year being assessed; or
  • individuals who were not residents of Cyprus as per the Income Tax Law for a period of at least 20 consecutive years immediately before these amending provisions enter into force, being 16 July 2015.

The Wills and Succession Law indicates that domicile of origin is acquired at birth and as a rule is the same as the domicile of the father at the time of birth and in exceptional cases of the mother. The Wills and Succession Law provide that a domicile of origin may be changed with a domicile of choice if in actual fact an individual “permanently” establishes their selves in another country with the intention to permanently live and die there.

The Income Tax Law indicates that an individual is a resident if the below mentioned criteria, under the heading “Tax Residency”, are met.

These amending provisions introduce anti-avoidance provisions which restrict its application in cases where domiciled individuals transfer assets to non-doms in order to take advantage of these provisions of the law.

Non-Doms are exempted of payment of Special Defence Contribution on personal investment income, such as dividends (being 17%) and “passive” interest (being 30%), irrespective of whether such is earned in Cyprus or abroad.

Tax Residency

Where an individual is a resident of Cyprus, such individual is taxed on the individual’s worldwide income. Where an individual is not a resident of Cyprus, such individual is taxed on the individual’s income arising in Cyprus.

A resident of Cyprus is an individual who:

  1. is present in Cyprus for a period exceeding 183 days in a tax year (which is the same as a calendar year); or
  2. does not remain in any other country for one or more periods accumulatively exceeding 183 days in the same tax year and who is not a tax resident in any other country for the same tax year, provided that:
  • this individual remains in Cyprus for at least 60 days during the tax year; and
  • this individual pursues business/works in Cyprus or is a director in a company which is tax resident in Cyprus at any time during the tax year, provided that such business is not terminated during the year; and
  • this individual maintains a rented/owned permanent residence in Cyprus.

Any day in which this individual arrives in Cyprus, this individual is a resident of Cyprus, irrespective if this individual leaves Cyprus again on the same day. Any day on which this individual departs from Cyprus, this individual is not a resident of Cyprus, irrespective if this individual enters Cyprus again on the same day.

Income Tax

Cyprus sourced income is subject to Personal Income Tax. The tax is applied on the following sliding scale:

Taxable Income Rate as per 2018 Taxed amount
EUR 0 – EUR 19,500 0% EUR 0
EUR 19,501 – EUR 28,000 20% EUR 1,700
EUR 28,001 – EUR 36,300 25% EUR 3,775
EUR 36,301 – EUR 60,000 30% EUR 10,885
EUR 60,001 – < 35%

Rental income is considered Cyprus sourced income and its therefore taxable. There is however a statutory reduction of 20% of the rental income and in the event that the property is commercial property, there is an entitlement to claim an annual deduction of 3% against the cost of construction of the building (not including the cost of the land) for the first 33 years starting from the date of construction of the property.

Special Contribution for Defence (on rental income)

Domiciled tax residents are subject to 3% on 75% of the gross rental income. In the event that the tenant is a legal entity, the tenant is obligated to withhold Special Contribution for Defence and settle such with the Tax Office on a monthly basis.

Non-doms and non-Cyprus tax residents are exempted from payment of Special Contribution for Defence on rental income from immovable property in Cyprus. If the tenant of the property is a legal entity, the owner must provide the tenant with the relevant declarations confirming the exemption from Special Contribution for Defence.

Tax compliance

Individuals earning rental income are obligated to file on an annual basis income tax returns. As such they should firstly request a Tax Identification Code and register with the electronic system of the tax authorities.

The deadline for submitting the tax returns is on 30 September of the year following the tax year. In the event that the annual rental income exceeds EUR 70,000 the individual will require to maintain books and records on the basis of which annual accounts must be prepared in accordance with IFRS, which must be audited by a licensed auditor in Cyprus. For Cyprus tax residents, tax losses incurred over 5 years can be carried forward to be offset against taxable income.

Books and records will also need to be maintained if this individual is a Cyprus tax resident and has (worldwide) income over EUR 70,000.

Any taxes arising from the tax returns will need to be paid through provisional tax declarations in 2 stages: 31 July and 31 December.

Capital Gains Tax

Capital Gains Tax is imposed:

i)       when the disposal of immovable property takes place and;

ii)      when this disposal is not subject to income tax (if immovable property is sold or purchased in the exercise of a business activity, such disposal or acquisition is subject to income tax).

Capital Gains Tax is also imposed on the disposal of shares (not listed) of a company which directly owns immovable property. Moreover, Capital Gains Tax is payable on the sale of shares (not listed) of a company which indirectly owns immovable property and at least 50% of the market value of the said shares derives from such immovable property.

The tax payable is 20% on the gains of the disposal. For the purposes of this tax, disposal includes: exchange, leasing, gifting, abandoning use of rights, granting right to purchase and any sums received upon cancellation of disposal of property.

Exemptions to the payment of Capital Gains Tax are:

  • In certain cases, land as well as land with buildings which were purchased between 16.7.2015-31.12.2016. Certain anti-avoidance provisions will apply;
  • Transfers arising on death;
  • Gifts from parent to child/between spouse/between relatives up to the third degree (for example great-grandparent/great-grandchild, aunt/uncle-nephew/niece);
  • Gifts to a company, where the shareholders of the company are members of the donor’s family and continue to be so for at least 5 years;
  • Gifts by a family company to its shareholders, if the property was given to the company as a gift and was kept by such for at least 3 years;
  • Exchange of property, if the gain made was used to acquire the new property. The gain which is not taxable is deducted from the cost of the new property and therefore the payment of tax is deferred until the disposal of this new property;
  • Etc.

In order to determine the amount over which Capital Gains Tax will arise, the value of the property as at 1.1.1980 or the cost of acquisition and cost of the improvements made on the property, if such is acquired after 1.1.1980, should be known. An adjustment is made for inflation up to the date of disposal of the property on the basis of the consumer price index in Cyprus.

Moreover, expenses that are related to the acquisition and disposal of the property, such as legal fees, transfer fees, etc. are, subject to conditions, also deducted from the amount over which Capital Gains Tax will be payable.

Lastly, a lifetime exemption may be deducted from the amount over which Capital Gains Tax should be paid. This lifetime exemption is EUR 85,430 for private principal residences (certain conditions apply) and EUR 14,086 for other disposal, with an overall lifetime maximum of EUR 85,430.

Important to note

All (non-)Cypriot tax residents are exempted from income tax on the disposal of securities (bonds, shares, etc.), on the receipt of dividends and interest in Cyprus (except for interest arising from ordinary business activity or activity closely related thereto).

Bear in mind that even though non-Cyprus tax residents are exempted from certain taxes in Cyprus, they may be subject to tax on these exempted sources in the country where they are tax residents.

This memo is meant as a guideline. Any changes in procedure or law may not be incorporated herein. We advise that you contact Maritsa Chatzichristodoulou & Associates LLC at info@attorneycy.com for further information and custom advise to your particular circumstances.


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