CYPRUS TAXATION CONNECTED TO THE ACQUISITION & HOLDING OF IMMOVABLE PROPERTY
A. TAXES IN RELATION TO ACQUISITION OF PROPERTY
The following taxes/fees are applicable upon the acquisition of immovable property in Cyprus:
1) Land transfer fees:
The above transfer fees do not apply if the transaction is subject to VAT (refer to section A.3 below).
2) Stamp Duty
Stamp duty is payable on any document which relates to any property situated in Cyprus or to any matter or thing to be performed or done therein, irrespective of the place where the document is executed.
The rates of stamp duty on agreements the subject matter of which relates to property situated in Cyprus or to matters or things to be executed in Cyprus are as follows:
- Consideration up to €5,000, at 0%.
- Consideration from €5,001 to €170,000, at 0.15%
- Consideration over €170,000, at 0.2%.
A maximum cap of €20,000 of stamp duty per document is applicable.
New properties are subject to VAT at 19% on their sale irrespective if the purchaser is a legal entity or a natural person.
The only exception to this rule is if the building permit was granted before 1st May 2004, then the said new property is exempt from VAT. Nowadays, very few such new properties exist in the market.
Resale properties are exempt from VAT, hence subject to Land Transfer Fees as described in section A.1 above.
In the case where the purchaser of a new property (which is subject to VAT) is a legal entity, then the legal entity can only reclaim back the VAT suffered only if the activities of the said legal entity are the trading of real estate or the renting of the real estate where the rental income would be subject to VAT (refer to section C below for further details). As you can appreciate, the former (i.e. trading of real estate business) would not meet the requirements of the CIP program since the said legal entity would not be able to hold the real estate for the minimum required holding period.
In the case of the buyer’s main residence (assuming that this is not rented out), the buyer can apply for a reduced VAT of 5%, subject to the following conditions:
- The reduced rate of VAT is 5% and is applied only if the property will be the buyer’s main residence in the Republic of Cyprus.
- If the owner disposes of the property within 10 years from the date of purchase, then the part of the VAT benefit enjoyed will need to be refunded to the authorities, on a pro-rata basis.
- The reduced rate of VAT is applied only on the first 200m2 whereas for the remaining square meters, as determined based on the building coefficient, the standard VAT rate (i.e. 19%) is imposed.
Furthermore, as from 2 January 2018, the purchase of non-developed building land may be subject to VAT at the standard rate of 19% if the sale was deemed as a business activity by the seller (i.e. was not an “one-off” transaction by the seller). In the case where the seller of the non-developed building land is a legal entity, VAT is always applicable.
B. TAXES IN RELATION TO OWNING PROPERTY
The owners of immovable property in Cyprus are subject to various taxes arising from the mere ownership of immovable property in Cyprus.
1) Local Authority Fees
Depending on the size of the property, the local authorities charge between €85 to €256 per annum for regular refuse collection, street lighting, sewerage and similar community services. Communal Services fees are payable to the local municipal authorities on annual basis during the period from October to December.
2) Municipality tax
Municipality taxes are applied by each local municipality to the owners of the immovable property. The municipality tax is calculated on the value of the property as at 1 January 1980 and the rates vary from 0.1% to 0.2%. The municipality taxes are payable to the local municipal authorities on annual basis during the period from October to December.
3) Sewerage Tax
The sewerage taxes are applied by each local Sewerage Board to the owners of the immovable property. The sewerage tax is calculated on the value of the property as at 1 January 1980 and the rates vary from 0.3% to 0.35%. The sewerage taxes are payable to the local Sewerage Board on an annual basis during the period from October to December.
Kindly note that the Cyprus government is currently considering combining all three of the above taxes (i.e. 1 to 3 above) in order to simplify matters for property owners and have in place a more transparent tax regime relating to the ownership of immovable property.
C. TAXES IN RELATION TO RENTING PROPERTY
Rental income received in Cyprus (from immovable property situated in Cyprus) is considered, for Cyprus tax purposes, as “Cyprus-sourced income” and as a result is subject to Personal Income Tax and General Healthcare System contributions, irrespective if the owner is tax resident in Cyprus. Depending on the tax residency and domicile status of the owner, rental income may also be subject to Special Defence Contribution.
If the property is being rented out, the local authority fees and the sewerage tax (described in section B above) can be potentially passed on to the tenant.
The earning of rental income from properties located in Cyprus will give rise to the following tax implications:
As from 13 November 2017, the renting/leasing of immovable property to a taxable person who will carry out taxable activities from the property is subject to VAT at the standard rate of 19%, provided that the said rental income surpasses the VAT registration threshold (currently at EUR 15,600 over a 12-month period).
The rental of residential properties and properties where the tenant will not use them to carry out taxable activities are exempt from VAT.
The owner of the property has the option to irrevocably exempt (by submitting the relevant form to the Tax Authorities) a specific property’s rents from VAT, however in such a case the owner will not be able to reclaim any input VAT suffered on the purchase of the said property or on any ongoing maintenance expenses.
2) Special Defence Contribution (“SDC”) on rental income
Any rental income earned by domiciled Cyprus tax residents will be subject to SDC at the rate of 3% on 75% of the gross rental income (i.e. effective rate of 2.25%). In the case where the tenant is a legal entity, the tenant is obliged to withhold at source the SDC amount and pay it to the Tax Department on a monthly basis.
Non-domiciled Cyprus tax residents and non-Cyprus tax residents are exempt from SDC on any rental income earned from immovable property in Cyprus. In such a case and when the tenant of the property is a legal entity (who has an obligation to deduct SDC at source), the owner must provide the tenant, on an annual basis, the relevant declarations via forms IR614A DECL and IR614A Q, confirming exemption from SDC.
3) Income tax
As mentioned above, rental income received in Cyprus (from immovable property situated in Cyprus) is considered, for Cyprus tax purposes, as “Cyprus-sourced income” and hence subject to Personal Income Tax (PIT).
Out of the gross rental income received:
- There is a statutory reduction of this income by 20%, and
- The owner is entitled to claim an annual deduction of 3% against the cost of acquisition/construction of the building (excluding the cost of the land) for a period up to 33 years from the year the property was constructed.
The net amount is taxable under PIT at the following rates:
4) General Healthcare System (“GHS”)
As mentioned above, rental income received in Cyprus (from immovable property situated in Cyprus) is considered, for Cyprus tax purposes, as “Cyprus-sourced income” and hence, from 1st March 2019, is subject to GHS contributions at 1.70% on the gross amount of rents (2.65% from 1st March 2020 onwards).
In the case where the tenant is a legal entity, the tenant is obliged to withhold at source the GHS amount and pay it to the Tax Department on a monthly basis.
5) Personal tax compliance
Individuals earning rental income must register to the tax authorities and submit their annual personal income tax returns and where applicable their quarterly VAT returns. The following is a short summary of the actions required:
- Registration with the tax authorities to obtain Tax Identification Code and also register for VAT purposes (where applicable).
- Submission of quarterly VAT returns and payment of any related VAT liability, in the case where the rents received are subject to VAT (as per section C.1 above).
- Submission of the annual personal income tax return (IR1 form). The deadline to submit the IR1 form is 7 months after the year end.
If the annual rental income exceeds EUR 70,000, the individual will have to maintain proper 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, in such a case the deadline for submission of the audited iR1 form is 15 months after the year end.
- Payment of personal income taxes and GHS contributions not withheld at source: the respective liabilities have to be paid to the authorities via provisional tax declarations, submitted on 31 July and 31 December each year.
Our team of highly experienced professionals can advise you further on the implications arising from the acquisition, ownership and rental of properties in Cyprus, on the basis of your particular facts and circumstances. Please feel free to contact Charles Savva at email@example.com to discuss how we can be of assistance to you.