Tax optimization when buying property in Cyprus

The level of taxation in the Republic of Cyprus is one of the lowest in Europe. This is why the island is often chosen as a base for holding companies that manage investments around the world. Having bought a villa or an apartment in Cyprus, you can not only find a second home, passport of an EU citizen, but also save a lot. Cypriot legislation provides for exemption from taxes on inheritance, rental income, interest on deposits, dividends, various tax incentives.

Tax exemption for 17 years

Since July 2015, Cyprus has introduced the status of "non-domiciled tax resident" (non-domiciled tax resident). A tax resident of the Republic of Cyprus (foreigner or citizen of Cyprus) who has this status is exempt from paying taxes on dividends, tax on interest on deposits and tax on income earned from renting real estate.

Cyprus Tax Residence is determined by the number of days that the taxpayer spends on the island. A person who has stayed Cyprus for 183 days or more during the calendar year, is considered a tax resident of the Republic of Cyprus.

A non-domicile Cyprus resident is eligible for a person who was not born in Cyprus and who, after moving to Cyprus, has been a tax resident of Cyprus for less than 17 years out of 20 consecutive years.

This innovation is most interesting for investors acquiring Cypriot citizenship. As before, they do not have any obligation to pay taxes in Cyprus, unless they become tax residents of Cyprus, as they pay taxes in their countries. Now they can move to Cyprus, become tax residents of the country, obtain the status of a non-domiciled tax resident and not pay the above taxes.

Tax relief when buying the first property in Cyprus from developers

Currently, the following tax incentives are in force in Cyprus: when buying a primary real estate, they are charged a reduced VAT rate of 5%, instead of 19%.

A preferential rate of VAT (VAT) in the amount of 5% is also charged on the acquisition of subsequent properties purchased from the developer, provided that the previous property was purchased more than 10 years ago. When buying a primary property from a developer, the buyer is exempt from paying tax on the transfer of ownership. There is no annual property tax in the Republic of Cyprus.

Transfer Tax

This tax is paid by buyers of secondary real estate. When buying real estate from developers, buyers are exempt from Transfer Fee , tax on the transfer of ownership. As soon as the buyer of the secondary property becomes the registered owner of the real estate, a Title Deed (Title Deed) for the purchased property is issued in the name of the buyer.

This process is accompanied by the payment of a tax to the state, which is called Transfer Fee. The basis for calculating the Transfer Fee is the value of the real estate specified in the Sales and Purchase Agreement for the secondary real estate, which is not subject to VAT.

Capital Gain Tax

Buying new real estate in the Republic of Cyprus from the developer is subject to VAT. The acquisition of secondary real estate, as well as new real estate, the construction permit for which was obtained before May 1, 2004, is not subject to VAT. However, this does not mean that the acquisition of a secondary property is more profitable, all other things being equal, but rather the opposite. More on this below.

The VAT rate in the Republic of Cyprus is 19%. If the applicant, to whom the VAT Department has approved a preferential VAT rate, refuses to own real estate as his first and main place of residence in Cyprus earlier than 10 years from the date of entry into the actual one, he must notify the VAT Department within 30 days. In this case, it is necessary to proportionally pay the difference between the preferential and standard VAT rate in force at the time of signing the contract, except in cases of the applicant's death or the transfer of real estate to his adult child, provided that this adult child has not previously used the preferential VAT rate.

For example, consider the amount of VAT surcharge for real estate, the area of which is 250 square meters, and its value is € 500,000 + VAT. In this case, the Buyer took advantage of the preferential VAT rate for the first 200 sq. and decided to sell the property 7 years after it took over. In this case, when selling his real estate, he must pay to the VAT Department the amount calculated by the formula:

€ 39,000 - VAT initially paid.

500,000 x 19% = € 95,000 - full VAT, which had to be paid without applying the VAT exemption.

95.000 - 25.000 = € 70.000 - savings amount.

70.000 х 3/10 = €21.000 – сумма, которую Покупатель должен будет уплатить в Департамент НДС в случае, если он решит продать свою собственность через 7 лет. Таким образом, 7 лет из десяти считаются амортизационными, поскольку 7 лет заявитель использовал жилье сам, а за оставшиеся 3 года из 10 ему нужно доплатить разницу – отсюда и коэффициент 3/10 в данном примере.

List of documents required to obtain a preferential VAT rate

A buyer claiming a preferential VAT rate submits an application to the VAT Department for the preferential rate. At the same time, a declaration is submitted that the applicant has not acquired any other property in Cyprus in the past 10 years real estate in Cyprus with a preferential VAT rate.

Attached to the application:

1. Project documentation (provided by the developer)
2. A copy of the passport of the applicant and spouse, if he is married
3. Real estate purchase contract
4. Marriage certificate if the applicant is married
5. Certified copies of construction permits (provided by the developer)
6. A declaration confirming the appropriate size of the property, endorsed by an architect or civil engineering specialist (provided by the developers).