Capital Gains Tax
As a rule, Capital Gains Tax is imposed at 20% on all gains (regardless of the tax residence of the owner/seller) arising from: Direct Disposals and Indirect Disposals i.e. Disposals of shares of companies holding immovable property situated in Cyprus.
The gain is calculated by deducting from the sales proceeds the cost of acquisition (adjusted for inflation), any lifetime exemptions (see below) and any allowable expenses directly related to the disposal of the property such as interest on loan, advertising, legal expenses and real estate agent fee.
It should be noted that if the property is purchased prior to 1980, the cost used in the calculation is the market value of the asset as at 1.1.1980.
Badges of Trade
The gains that are subject to capital gains tax are gains of any person (individual or company) accruing on a disposal of chargeable property, which are not gains falling within the provisions of the Income Tax Law. This means that if a company, that has as its trading activity the purchase and subsequent sale of immovable properties, the disposition of a property by such company at a profit will be taxed under the income tax provisions, as the profit is of a trading nature and therefore such gain will not be subject to capital gains tax. The question of whether a disposal of a property is of a trading nature or not is resolved by applying the “badges of trade”; these are mainly criteria of trading that have been established over the years by case law.
The following factors should be considered in deciding whether a transaction is a trading or of capital nature:
- The subject matter of the transaction;
- Interval of time between purchase and sale (a transaction where the property is owned for a short period of time is more likely to be considered as a transaction of a trading nature);
- Number and frequency of similar transactions;
- Additional work/ changes to the property;
- Circumstances responsible for sale;
- Profit seeking motive;
- Method of financing the cost;
- Profession, experience and knowledge of the seller;
- Method of acquisition (properties acquired by way of inheritance or gift are less likely to be the subject matter of a trading transaction);
- Source of finance;
- Whether the sale proceeds are reinvested.
- A transfer of the title deed of a property. The consideration can be monetary, love (gift according and subject to the provisions of the Contract Law (Cap. 149)), or exchange with another property;
- A lease constitutes chargeable property if is registered at the district lands office. A transfer of such registered lease of over 15 years constitutes chargeable disposal;
- Receiving consideration for giving up of any rights, or, for not exercising them in respect of a property;
- There might be situations where an agreement is signed for the purchase of a property but the consideration is only paid at a later stage. The purchase agreement is deposited at the district lands office but the transfer of the title deeds will only be recorded upon payment by the purchaser, in full of the total consideration. However, for capital gains tax purposes the date of disposal is the date of the sale agreement and not the date of the transfer of the title deeds at the district lands office.
- A transfer by reason of death;
- A gift between spouses, parents and children and relatives up to third degree of kindred (brothers, sisters, grand-children, grand-parents, uncles, aunties, nephews and nieces, great grandparents and great grandchildren);
- An exchange in respect of properties which pass to each of the parties involved in the exchange of properties;
- Transfer of immovable property under a company reorganisation.
Life Time Exemptions
These exemptions apply only for natural persons (not for legal entities). All the exemptions are life-time exemptions and an individual is entitled to one exemption subject to some exceptions. An individual that is claiming more than one exemption is only allowed to claim whichever is the greater.
The life time exemptions are as follows:
• General Exemptions (any kind of disposal): Maximum €17.086
• Agricultural land (if main occupation is agriculture): Maximum €25.629
• Disposal of the principal private residence: Maximum €85.430.
To be eligible for the exemption on the disposal of the principal private residence the following criteria should be satisfied:
- The residence should be used by the owner exclusively for his own habitation for at least 5 years (10 years if the exemption is used for a second time);
- The period of use does not necessarily have to be continuous;
- The residence should be built in piece of land not exceeding 1.500 square meters. Where the residence is built on a piece of land exceeding 1.500 square meters, then the calculation of the gain is made pro-rata i.e. capital gains tax is payable in full (not subject to the lifetime exemption) on the proportion of the gain accruing from the disposal of the land in excess of the 1.500 square meters;
- No exemption is given where the residence is disposed if more than 1 year has passed since it has ceased to be used by the owner.