FOR those who have immovable property in Cyprus and are considering to sell it they need to be fully aware that any capital gain which arises from the disposal of their asset may be liable to Capital Gains Tax (CGT).
This is particularly important to individuals who are not well rehearsed in Cyprus property and tax law as for example European citizens of non-Cypriot origin who acquire property in Cyprus and who normally remain ignorant of differences between their country of origin and the Cypriot context.
As an illustration, in the UK under current legislation a property which is used as the main residence (home) is normally relieved from CGT provided certain other conditions are also met. If for instance, part of the home is used for business or there has not been a regular and consistent occupation of the property by its registered owners over a period of time, partial CGT may apply in such circumstances. However, as a general rule whilst in the UK your home may be exempted from CGT, in Cyprus there is not a similar exemption other than in certain specific circumstances referred to below.
For the most part, whether one is selling his/her main residence or other, there is no escape from the fact that any declared gain on the sale may be liable and thus can attract the imposition of CGT.
Capital Gains Tax on gain from the sale of property
In Cyprus the CGT rate is set at 20% of the chargeable gain realized from the sale of a property as adjusted for inflation, certain lifetime exemptions and other allowable expenses.
In general, the profit is calculated as the difference between the sale price and the purchase cost less any interest paid on payments (e.g. housing loans) in the course of acquiring the property, the inflation rate as published by the government, services of registered estate agents, the costs of any approved additions to the property and certain personal allowances.
In certain defined circumstances the disposal of immovable property is fully exempted from CGT. For example, when the asset is transferred by reason of death, or if it is made a gift between relatives up to third degree kindred; a gift made to limited liability companies (but under certain conditions) or a gift made to charitable organizations or where a property is exchanged for another, or where the property is subject to compulsory acquisition.
There are a number of allowable expenses which can be taken into account for a reduction in the amount of CGT paid.
First and foremost, under current rules there are personal allowances which are provided and deducted at the time of calculating the gain made by selling the immovable property. These lifetime personal allowances are basically twofold. On the one hand everyone is entitled to the first €17.086.01 of profit from the sale of any property free of any imposition of CGT. However, under certain conditions if the property was in use by its owner(s) for a continuous and uninterrupted period of five years prior to its disposal and exclusively used for residential purposes and given that it is sited on land which does not exceed 1500 square metres, the maximum lifetime allowance is €85,430.07.
In addition to personal allowances the seller, under normal circumstances, is entitled to an inflation allowance if the property was purchased after 01/01/80. For calculation purposes the consumer price index (CPI) is used for the month preceding the disposal of the asset and the month of acquisition. Inclusion and thus deduction of the relevant inflation allowance is normally done automatically by the tax officer at the time of his/her calculating the liability for CGT.
However there are other allowable expenses which need to be presented to the authorities and be claimed by the seller. These allowable expenses include stamp duty, immovable property tax, interest on loan used for the acquisition of the property, estate agents’ fees/commission (but only registered estate agents), professional charges, additions or improvements to the property after acquisition and before disposal of the asset.
The onus, therefore, is on the seller to present the tax authorities with the above claims for all or some of those expenses. It is not the duty of the tax authorities to ask or remind sellers of their entitlements. Furthermore, any application or claim for any or all of the entitlements must be accompanied by proper receipts and any other evidence as is required to prove expenditure and that such expenditure does indeed provide entitlement to a reduction in CGT. This particular aspect throws up an interesting side to the rights and duties of citizens. More often than not, consumers complain that the state does not provide enough incentives to them for materializing investments and returns. On the contrary, they claim that they are treated unfairly by the authorities.
However as the case of CGT shows, tax payers are ordinarily ignorant or if they are aware of their rights to entitlements, they fail to exploit and use the opportunity offered to save their money from being unfairly and unjustly retained by the Inland Revenue Department. Where they do take up matters, they fail to keep receipts and other evidence required to justify their claim. Rather, they often present the authorities with a list of “shopping items” for exemption when they know very well that their claims, in the absence of evidence, will not be entertained.
From another vantage point, perhaps what is at work here which leads to confusion is not just the apathy or ignorance exhibited by tax payers. There is also a lack of effort on the part of the authorities to inform citizens of their rights and entitlements. A leaflet or simply a table with facts and suggestions pinned on a board at the entrance or at focal points at the district offices of the Inland Revenue Department might be a step in the right direction.
Maximum lifetime allowances permitted
It is important to clarify the matter of lifetime personal allowances referred to above.
The reference to lifetime allowances means that they are granted only once unless they have not been exhausted in which case the balance is carried forward to the next sale. However, further than that, it must be understood that the above lifelong personal allowances are not made available separately and that anyone claiming a combination of entitlements is only permitted to one of the two (€17,086.01 or €85,430.07) to a maximum lifetime allowance of €85,430.07.
The profit allowed to a maximum of €85,430.07 applies to property and not per individual. In other words, if the property is owned by more than one individual the profit exemption from CGT is divided and allocated equally to all concerned. For example in the case of the maximum amount allowed, if the property is owned by a couple their individual share of the profit allowed prior to paying any CGT would be €42,715.04 each.
On calculation of all allowances any gain above the maximum profit allowed attracts 20% CGT.
Discretion in the system
We have drawn attention in previous articles and at various times to the fact that no laws, rules and regulations are ever absolute. They cannot be interpreted, administered and applied in a totally inelastic manner.
There is always a degree of flexibility in the system to make such laws, rules and regulations possible to administer and enforce and thus realistic enough to be practical. As such, at every level and stage of the due process of law there is also a process of discretion which allows the relevant authorities to carry out their functions and duties as consistently as possible. However, that is exactly where discretion can also lead to inconsistency of interpretation and application. It is a given and accepted fact that no individual judges or any type of court anywhere are capable of reaching totally consistent decisions on all cases which appear before them and which share similar characteristics. Given this variation and inconsistency in operation, it is also to be recognized that the same experiences are to be found in the workings of the Inland Revenue Department.
For those readers who are unaware of this variation in practice, it is worth mentioning of our experience that different district Inland Revenue Offices practise differently. In Larnaca for example, you are expected to submit your CGT Form in declaring proceeds from the sale of immovable property in all its detail but for the actual calculations of tax. The officers see it their duty and place it upon themselves to carry out that specific task. In Paphos though, submitting the same form without filling in your own calculations of tax liability, if any, will be refused and returned to you until you provide those figures!
On the whole, Inland Revenue officers have to work through a minefield of laws, rules and regulations and to interpret the meaning and application of those legal parameters in the context of their daily encounters with the public. Therefore, although one assumes and expects certain expenses as listed above to be deductible from proceeds from the sale of the property “for profit”, the discretionary powers enjoyed by those officers allow them to interpret, assess and define what expenses are to be considered and included in calculating any liability for CGT.
Also, it must be remembered, there is always the possibility of human error occurring in any situation. For that matter, it is advisable that on receipt of the Inland Revenue Department’s calculations and tax release, the relevant party(ies) should check such calculations and if in doubt act promptly to clarify matters and correct any errors. Where there is disagreement, the individual affected can challenge the amount demanded for tax payment and refer matters for a re-assessment. In one such case, this Office managed to save a client over €7000 in CGT by merely pointing out to the relevant officer of an omission in his calculations. The matter was quickly and amicably resolved to the client’s full satisfaction. Of course, this example related to a factual error which made resolution of the matter fairly easy and straightforward. In other cases, tax payers must not simply and falsely assume that their claim will lead to quick and satisfactory outcomes.
Notwithstanding this realization, the golden rule can be set once more: always check your tax clearance and ensure that the tax deducted from your proceeds appears correct and that no obvious errors or omissions are evident. If in doubt refer matters back to the relevant officer or seek professional advice.
Professor Dr. Andonis Vassiliades & Maria Chimonides
© Prof. Dr. Andonis Vassiliades, November 2008. No part of this article may be used or reproduced in any form without prior written permission from the authors.
Professor Dr. Andonis Vassiliades is Professor of Law, Criminology & Penal Justice and a Clinical Psychotherapist.
Maria Chimonides is a Lawyer and a Legal Consultant.
They are at The Law Office & Research Centre:
Main Office, Larnaca: Kalogreon 16, Ria Court 19, Office 101, 6016 Larnaca
Branch, Oroklini: George Griva Digeni 16, Office 3, 7040 Oroklini (Close to the Bank of Cyprus)
Tel.: +357 24624449, +357 24654011
Fax. +357 24621336
The article above first appeared in In Touch Magazine, pp. 34-35, issue 24, 2008