Understanding the intricacies of capital gains tax (CGT) in Cyprus, particularly in relation to income tax, is pivotal for individuals and entities engaging in property transactions or holding shares in companies with immovable properties within Cyprus. This guide aims to clarify Cyprus’ CGT regulations, covering calculations, deductions, lifetime allowances, exemptions, and the expertise our law firm offers in this domain.
Calculation of Taxable Gain
When selling an immovable property in Cyprus or selling shares in companies holding such property, Capital Gains Tax in Cyprus is imposed at a rate of 20% on the profit (subject to double taxation provisions) regardless of the tax residence of a company or an individual. The tax is applicable to gains from disposals of immovable property situated in Cyprus.
The taxable gain is calculated by deducting the original purchase price, adjusted for inflation, from the current selling price. This calculation also includes any post-purchase renovation expenses, along with additional expenses as explained below.
The market value of the property is used in calculating the taxable gain, ensuring accurate financial assessments and compliance with regulatory requirements.
The total cost of the immovable property should be adjusted to include the increase in value from its purchase date, which must be on or after 01/01/1980, using the Cyprus consumer price index.
Example:
Selling price of the property (on 01/04/2024): €400.000
Cost of purchasing the property (on 01/01/2000): €250.000
Less inflation (01/01/2000 – 01/04/2024): €250.000 x (251,17/167,89) = €374.009,75
Taxable profit: €400.000 – €374.009,75 = €25.990,25
Deductions
There are various deductions available, that may reduce or eliminate the tax liability for such immovable property:
a) The amount an individual paid to the Land Registry for the transfer fees (to get the deed transferred into their name);
b) Extras or additional works done to the property may be taken into consideration by the Tax Department, provided that proper invoices and receipts are submitted. Acceptable extras include structural or permanent alterations, such as a swimming pool, garage/car port, or central heating, provided that these have the correct permissions. However, decorative works (such as painting) or costs for furnishing the property are not accepted by the Tax Department.
c) Commission paid to a registered estate agent in Cyprus. Any amount paid to a non-registered estate agent for marketing fees or otherwise is not CGT deductible; and
d) Legal fees paid to the legal representative.
Lifetime allowances
Currently, there are three lifetime exemptions subject to an overall maximum limit which can be deducted from the taxable capital gains. It is important to note that an individual is entitled to the allowance only for his first sale of property, but if he has previously sold property in Cyprus but has not used up all of his allowance the balance of the allowance carries over onto the next sale. Here is a breakdown of the three main allowances:
1. First allowance: Each individual is entitled to a personal tax-free allowance of €17,086 for the sale of a property. In cases of joint ownership, this allowance applies to each owner individually.
Example:
Taxable profit (1 owner): €25.990,25 – €17.086 x 20% = €1.780,85
Taxable profit (2 owners): €25.990,25 – €34.172 x 20% = No profit
2. Second allowance: The €17,086 allowance can increase to €85,430 if it can be proven that the property has been the individual’s private principal residence for at least the last 5 years. Substantial evidence must be submitted to the Tax Department to support this claim.
Example:
Taxable profit: €25.990,25 – €85,430 x 20% = No profit
Note: In cases where an individual qualifies for the maximum allowance of €85.430 but co-owns the property with others, it is essential to divide this allowance by the respective shares owned by each party. For instance, if an individual holds ½ share of the property, each co-owner would be eligible for €42.715 of the allowance.
3. Third allowance: Farmers selling their agricultural land are entitled to a personal tax-free allowance of €25,629. This allowance can be deducted from the taxable capital gain associated with the sale.
Exemptions
The following dispositions of immovable property are exempt from capital gains tax in Cyprus:
Transfer due to death (inheritance succession);
Gift and/or donation between relatives up to third degree kindship;
Gift and/or donation to a company where the company’s shareholders are members of the donor’s family, and the shareholders continue to be members of the family for five years after the day of the transfer;
Gift and/or donation from a family company to its shareholders if the company had acquired the object of the gift also by way of a gift, subject to conditions;
Gift and/or donation to charitable institutions or to the Republic or to a political party;
Transfer of immovable property between persons who have dissolved their marriage;
Transfer due to loan restructuring (under certain conditions);
Transfer in the event of reorganization of companies; and
Expropriations.
Additionally, shares listed on a recognised stock exchange are exempt from capital gains tax.
Conclusion
In conclusion, our law firm offers comprehensive expertise in navigating Capital Gains Tax in Cyprus, providing personalized guidance to help clients maximize their financial outcomes. From calculating taxable gains to utilize available exemptions and allowances, our team is committed to ensuring that clients minimize their CGT liabilities while remaining fully compliant with legal requirements.
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