Overview Cypriot Real Estate

Introduction

Rental Income is taxed as part of individual’s ordinary private or business income.

Liability to tax

Rental income received by individuals is subject to individual income tax and Special Defence Contribution.

Special Defence Contribution (SDC) is a local tax of Cyprus, applicable to Cyprus tax resident individuals and companies only and applies only on dividend income, passive interest income and rental income. Cyprus tax resident individuals should also be domiciled in Cyprus to be subject to SDC.

The rental income earners are also subject to GHS contributions at 2.65% irrespective if they are Cyprus tax residents or not. In the case of non-resident individuals, they are taxed at Cyprus sourced incomes.

Basis to tax

When the rental income is received either from another individual or a company, for habitation or business purposes, it is subject to individual income tax rates. The Cypriot tax system furnishes the taxpayer with some deductions i.e. 20% of the gross rental income and the whole amount of interest related to the acquisition of the rented property.

Referring to Special Defence Contribution, for rental income generated where the tenant is a Cyprus Company, SDC is withheld at source and it is payable at the end of the month following the month in which the rental income is earned. In all other cases the SDC on rental income is payable by the lessor in 6 monthly intervals on 30 June and 31 December each year. The same conditions apply for GHS contributions.

Introduction
Rental income is taxed as business or as passive income. Rental income can be considered as business income in cases where the taxpayer operates in the industry of immovable properties i.e. developing real estate and rental income is received through subsequent letting of the real estate. Rental income can be considered as passive income in cases where the taxpayer does not receive rental income as part of its main corporate activities.

Liability to tax

Rental income earned by companies is subject to both corporation tax and Special Defence Contribution.

Basis to tax

Business income is taxed at 12.5%.

Passive income is taxed with SDC at the rate of 3% after the deduction of 25% of the gross rental income i.e. effective tax rate is 2.25%.

Introduction

Capital Gains can be generally subject to both personal income tax and Capital Gains Tax, subject to conditions below.

Liability to tax

Capital Gains are subject to personal income tax if the individual is a tax resident in Cyprus and if it is proved that the sale was executed as part of the individual’s regular trading activities.

However, capital gains are subject to Capital Gains Tax if the sale is not part of trading activities. Capital Gains Tax applies irrespective if the individual is a resident or not.

Basis of tax

Capital gains are subject to personal income tax if it can be proved that the transaction is one or a series of trading transactions. In such case, the applicable rates will be from 20%-35%. Incomes up to €19,500 are tax free.

In all other cases, capital gains are subject to Capital Gains Tax at 20% on the gains arising from the disposal of a chargeable property. Chargeable property is a property situated in the Republic of Cyprus or shares in a company owning an immovable property situated in Cyprus.

Introduction

Capital gains can be taxed under corporation tax or under Capital Gains Tax subject to conditions.

Liability to tax

Capital Gains are subject to Corporate tax if the Company is a tax resident in Cyprus and if it is proved that the sale was executed as part of the Company’s regular trading activities.

Basis of tax

Capital gains are subject to Corporate tax if it can be proved that the transaction is one or a series of trading transactions. In such a case, the applicable rate is 12.5%.

In all other cases, capital gains are subject to Capital Gains Tax at 20% on the gains arising from the disposal of a chargeable property.

Introduction

Value-added tax is a tax based on the supply of goods and on the provision of services within Cyprus, as well as on the acquisition of goods from Member States of the EU and importation of goods from third countries.

Through the relevant legislation, taxable persons charge VAT on their taxable supplies (output tax) and are charged by other taxable persons with VAT on goods and services they receive (input tax). Where output tax is in excess of the input tax, a VAT tax liability is created, and a payment is due to the VAT authorities. If the opposite stands, then a credit is created and either it is set off against future VAT tax liabilities or an immediate refund to the taxpayer takes place.

Liability to tax

Rental income and the supply of real estate and non-developed buildable land are subject to Cyprus VAT, subject to conditions.

Basis of tax

Rental income

Generally, the lease of immovable property for residential purposes is exempt from VAT. However, VAT at the standard rate of 19% must be charged on the lease of immovable property when the lessee is a taxable person and is engaged in taxable activities by at least 90%.

Sale of real estate

Normally a sale of real estate which does not qualify as a new immovable property is not subject to VAT. However, VAT is charged when the real estate qualifies as new immovable property, or the risks and rewards of ownership are transferred. “New” immovable properties are those which are supplied for first use. A new immovable property is not:

1. A property that was leased or rented out.
2. Self-occupied.
3. A transformed. converted, renovated building. 
    

Provided that an immovable property is supplied as a “new” immovable property, a reduced VAT rate of 5% is eligible to any citizen (Cypriot or not), who acquires such property with the intention to use this as their primary permanent place of residence in Cyprus. However, this is subject to the following conditions.

1. The reduced rate is imposed only after obtaining a certified confirmation. 
2. The eligible person must submit an application which will state that the house will be used as the primary and permanent place of residence. 
3. The applicant must attach several documents supporting the ownership rights on the property and evidencing the fact that the property will be used as the primary and permanent place of residence. 
4. The application must be filed prior to the actual delivery of the residence to the eligible person. 
    

As of 8 June, 2012 eligible persons include residents of non-EU Member States, provided that the residence will be used as their primary and permanent place of residence in the Republic.

The documents supporting the ownership of the property must be submitted together with the application. The documents supporting the fact that the residence will be used as the primary and permanent place of residence (copy of telephone, water supply, or electricity bill or of municipal taxes) must be submitted within six months from the date on which the eligible person acquires possession of the residence.

In cases where persons who cease using the residence as their primary residence before the lapse of the 10 years, must notify the Tax Commissioner within a period of 30 days. In such cases, the person must pay the difference between the reduced rate and the standard rate of VAT attributable to the remaining period of 10 years of which the property will not be used as primary residence.

The lessor has the right to opt not to impose VAT on the specific property. The option is irrevocable.

Sale of non-developed building land

As of 2 January 2018, the sale of a non-developed building land attracts VAT at the standard rate of 19%. The definition of non-developed land includes land intended for being used in carrying out business activities. VAT does not apply on the purchase or sale of land which is located in livestock zones or areas which are not intended for development.

Leases of immovable property which effectively transfer the risks and rewards of ownership of immovable property

As from 1 January 2019 leases of immovable property which effectively transfer the risks and rewards of ownership of immovable property are considered to be supplies of goods. They also become subject to VAT at the standard rate.

Interaction with transfer tax

On transactions of immovable property on which VAT has been imposed, no transfer fees apply.

On acquisitions of properties that are not subject to VAT, a 50% discount on transfer fees is allowed.

The same rules as for individuals apply.

Introduction

The department of land and surveys charges the acquirer of the immovable property transfer fees on the transfer of the ownership of immovable property.

Liability to tax

The transfer fees are due when the transfer of the Title Deed in the name of the Purchaser takes place. The Purchaser is solely responsible for the payment of the Transfer Fees. The rates are on a graduated scale.

Basis of tax

The value of the immovable property is taxed at 3%/5%/8%, based on the value of the property on a scale. ‘Value’ in these cases refers to market values as of 1 January 2013 as these were estimated by the Department of Land and Surveys.

Exemptions

In the case of companies’ reorganisations, transfers of immovable property are not subject to transfer fees.

Interaction with VAT

On transactions of immovable property on which VAT has been imposed, no transfer fees apply.

On acquisitions of properties that are not subject to VAT, a 50% discount on transfer fees is allowed.

The same rules as individuals apply.

Introduction

In accordance with the amendments of the Central Agency for the Equal Distribution of Burdens Law, a levy of 0,40% is payable to the Tax Department. The Central Agency for the Equal Distribution of Burdens Law was enacted following the acknowledgment of the need to assist Cyprus refugees who were forced to leave their properties following the Turkish invasion of 1974.

Liability to tax
The levy is due when the transfer of real estate takes place. The Seller is solely responsible for the payment of the levy, subject to conditions.

Basis of tax
The levy applies upon:

a)    The transfer of immovable property situated in the Republic, or
b)    Disposal of shares in a Company not listed on a Stock Exchange, which directly or indirectly owns immovable property situated in Cyprus, for which a recorded general valuation exists under a General Valuation and Revaluation Survey.

The calculation of the levy differs, accordingly:
a) In the case of immovable property transfer, the levy is calculated on the sale amount; and
b) In the case of disposal of shares, the levy is calculated on the latest general valuation of the property attributed to the shares disposed.

The same rules as individuals apply.

Limited liability companies are the most frequently used vehicle for the ownership of Cyprus real estate. The equity is divided into shares and the shareholders are not personally liable for business debts. Companies that are considered Cyprus tax residents are taxed on their annual income accrued and derived from all taxable sources in Cyprus and abroad. A company is considered Cyprus tax resident if its management and control are exercised in Cyprus. Corporation tax rate for all companies is 12.5%. In cases where foreign taxes are paid, these can be credited against the ultimate tax liability in Cyprus.

Shareholders are taxed based on their individual tax residency status. In case where the shareholders are Cyprus tax residents, i.e. if they spend more than 183 days in a calendar year, they are subject to personal income tax rates in Cyprus of 20%-35%.

Dividend income is exempted from Cyprus personal income tax. However, such income is taxed under Special Defence Contribution if and only if the shareholder is considered both Cyprus tax resident and domiciled in Cyprus. For Special Defence Contribution purposes, a person is considered domiciled in Cyprus via domicile of origin (acquired at birth) or domicile of choice (indication of an intention of permanent residence). In cases where the taxpayer resides in Cyprus at least 17 out of the 20 years immediately prior to the tax year of assessment, this person is considered domiciled in Cyprus.

Partnerships is not a frequently used vehicle for holding real estate in Cyprus.

The final taxable income which is calculated for such type of business form is attributed to each individual partner in accordance with the partnership agreement regarding the distribution of profits. Therefore, each partner is taxed based on the personal taxation rates as mentioned above.

A Joint Venture can be in the form of a company or partnership and the tax treatment will follow the same principles as its underlying structure. It is normally a cooperative enterprise entered by two or more business entities for the purpose of a specific project or another business activity. The reason for a joint venture is usually some specific construction project. It is not usual in Cyprus to use a Joint Venture to generate rental income.

A legal arrangement whereby the owner (settlor) of an immovable property situated anywhere, place such property under the management and control of a trustee. The trustee administers the said property for the benefit of the beneficiaries in such a way that benefits from the trust belong to the beneficiaries and not the trustee.  The income of a Trust is assessed in the name of the Trustee who acts as a representative of the beneficiaries. Since the beneficiaries are the persons entitled to the income of a Trust, they are also entitled to the tax on that income. Therefore, the trustee is responsible to distribute the incomes to the beneficiaries net of any Cypriot tax.

The taxation of the income of a Trust depends on the tax residency of the beneficiaries and where the income comes from. The beneficiaries are entitled to all the tax exemptions and deductions relating to their income as if they were receiving the income directly. The normal rules of Cyprus taxation apply for all residency status e.g. Cyprus tax resident and domiciled individual, Cyprus tax resident and not domiciled individual, Non-Cyprus tax resident individual, Cyprus tax resident company, Non-Cyprus tax resident company.

The tax residence of the trustee is irrelevant to the determination of the taxability of the Cyprus Trust Income.