Buying a new property in Cyprus is subject to VAT (Value Added Tax). Acquisition of secondary real estate, as well as new real estate, the construction permit of which was received before May 1, 2004, is not subject to value added tax. However, this does not mean that the acquisition of secondary real estate is more profitable, all other things being equal – quite the contrary.
The VAT rate on the territory of the Republic of Cyprus is 19%.
On June 8, 2012, the Law of the Republic of Cyprus No. 73(1)/2012 amending the tax legislation entered into force. According to the new law, at the acquisition of real estate, a preferential VAT rate of 5% is charged instead of the current rate of 19% if certain conditions are met. Thus, the buyer of new real estate is given the opportunity of substantial savings. On November 18, 2016, Law No. 119(I)/2016 was published with further amendments, which are reflected below.
Requirements for real estate and the applicant to receive a preferential VAT rate
The preferential VAT rate is provided if the following requirements are met:
- The buyer must be an individual (not a company) over the age of 18.
- The property purchased must be the main place of residence of the applicant in the Republic of Cyprus (during his stay in Cyprus).
- The applicant should not have other property in Cyprus, previously purchased at the preferential VAT rate.
- Real estate should be used exclusively for living, and not for the purpose of generating income (for example, for renting).
The 5% preferential rate applies to the first 200 square meters of residential real estate, according to architectural plans approved by official bodies of the Republic of Cyprus. The calculation is carried out in proportion to the area in the price of real estate (see the example of the calculation below).
Note: On November 18, 2016, the previously existing rule, according to which the preferential VAT rate did not apply if the total covered area of residential real estate exceeded 275 sq.m., was canceled. Now there is no such restriction: whatever the area of real estate, the 5% preferential rate applies to the first 200 sq.m. anyway.
VAT calculation example
Suppose the area of the property is 350 sq.m. and its cost is EUR 1.500.000. VAT will be:
- 1,500,000 x 5% x 200/350 = EUR 42,857 +
- 1,500,000 x 19% x 150/350 = EUR 122,143
Total VAT is EUR 165,000, and the total value of the property is EUR 1,665,000
If the buyer purchased a new property, paid the VAT, and did not use it, then upon subsequent sale he has the right to receive the full amount of previously paid VAT back from the state. In this case, the next buyer will pay VAT to the state at current rates.
Real estate is considered used if there is the consumption of running water and electricity, as well as the use of household appliances, sanitary ware, etc
If the applicant, to whom the authorities approved the preferential VAT rate, refuses to own real estate as his first and main place of residence in Cyprus earlier than 10 years from the moment he took possession (for example, by selling the property or renting it out), he is obliged within 30 days notify the VAT department of this and proportionally pay the difference between the preferential and standard VAT rates in effect at the time of signing the contract, except in cases of the applicant’s death or transfer of his property to his child of age, provided that the child of age has not previously used preferential VAT rate.
The applicant purchased an apartment worth EUR 600,000 + VAT and used the benefit by paying VAT 5% instead of 19%. He decided to sell his property three years after taking over the actual ownership. In this case, he will have to pay VAT to the State when selling his real estate according to the following formula:
600,000 x 5% = EUR 30,000 – VAT initially paid.
600,000 x 19% = EUR 114,000 – full VAT that should have been paid without benefits.
114,000 – 30,000 = EUR 84,000 – the amount of savings.
84,000 x 7/10 = EUR 58,800 – the amount that the applicant will have to reimburse to the State, in case he decides to sell his property in 3 years. Thus, 3 years out of 10 seem to be “depreciated,” since the applicant used the property himself for 3 years, and for the remaining 7 years out of 10 he must pay the difference – hence the factor 7/10 in this example.
If the applicant, who used the benefit, does not sell and/or does not lease his property, but uses it as his personal residence for at least 10 years, then he saves on the purchase, in this example, the amount of EUR 84,000, in full volume.
The list of documents for obtaining the preferential VAT rate
The applicant applying for a tax rebate submits an application for the VAT exemption to the VAT department. Together with the application, a declaration is submitted that the applicant has not previously acquired any other property in Cyprus using the preferential VAT rate. In cases where the applicant is married, the spouse must also file a similar application and declaration.
The following documents must be attached to the application:
- Real Estate Purchase Contract
- Copy of the passport. Copy of the passport of the spouse, if the applicant is married
- Marriage certificate, if the applicant is married
- Architectural plans for real estate
- Certified copy of building permits
- ДDeclaration confirming the appropriate size of the property, signed by the architect or civil engineer
- Documentary evidence that the applicant is using immovable property as his residence in Cyprus, such as:
- Copies of electricity bills
- Copies of water bills
- Copies of phone bills
- Copies of local or municipal taxes bills
- Any other documents confirming that this property is used by the applicant for its intended purpose as the main accommodation in Cyprus.
The above documents must be submitted within six months from the date of transfer and acceptance of real estate to the applicant and are part of the application for the VAT exemption.
Comments to the Law on the preferential VAT rate
According to the Law on the preferential VAT rate, the property purchased must be the main place of residence of the applicant in the Republic of Cyprus. Does this mean that the Applicant will have to live in the purchased property most of his time?
The answer is no, it doesn’t. The applicant can buy recreational property in Cyprus, and still receive the VAT exemption. The main thing is that during his visits to Cyprus (as rare as he wants), the applicant would stay in this particular property.
In order to receive VAT benefits, the Applicant must provide utility bills (see the section above). Does this mean that the buyer must first buy the property, paying the VAT at the rate of 19%, live in it for several months and only then, after receiving the first utility bills, submit documents for the benefit and reimbursement of part of the previously paid VAT?
The answer is no, it doesn’t. The buyer can immediately buy a house and pay VAT at the rate of 5%. As for utility bills, they can be transferred to the VAT department later (within 6 months) as they are received.
Let us explain this with an example. Let the buyer acquire the finished apartment worth € 200.000 plus VAT. Simultaneously with the signing of the contract, the buyer pays a 30% deposit in the amount of € 60,000 plus VAT at a rate of 19% (the value of VAT will be € 11,400). The contract is deposited with the Land District Office. Immediately after this, the application for VAT exemption is submitted, which is approved for two to three weeks. After approval of the exemption, the buyer pays the remaining 70% of the apartment value – EUR 140,000 plus the remaining VAT payable. VAT (5% of EUR 200,000) is EUR 10,000. However, the buyer has already paid VAT in the amount of EUR 11,400. Thus, the second payment will be only EUR 138,600 (140,000 – 1,400). A few months after the purchase, when he gets the first utility bills, the buyer transfers their copies to the VAT department.
NON-RECURRING CHARGES ASSOCIATED WITH REAL ESTATE PURCHASE
The buyer becomes the registered owner of the property after the state issues a Title Deed for the purchased property and transfers it to the name of the buyer.
This process is accompanied by the payment of tax to the state, which is called Transfer Fee. The basis for the transfer Fee is the contract value of the property (excluding VAT).
|Property Value, €||Tax Rate, %|
|up to 85,000||1,5%|
|85,001 to 170,000||2,5%|
|more than 170,001||4,0%|
Transfer Fee is not charged on property subject to VAT (i.e. primary property). Tax is payable only when buying a secondary real estate
Let us consider an example. You purchased a property for € 500.000. Transfer Fee, which you have to pay the state, will be the sum of three components:
85.000*1,5% + 85.000*2,5% + 330.000*4% = €16.600
How can you save? You can arrange the purchase for two persons. It turns out that each has to pay € 250.000 according to the contract. In this case, the calculation will be as follows.
(85.000*1,5% + 85.000*2,5% + 80.000*4%)*2 = €13.200
If you arrange the purchase for a larger number of persons, then, accordingly, you can save even more.
You can also optimize the tax by excluding the cost of some works and materials from the framework of the main sales contract, processing them as additional works (“extras”). It must be borne in mind that this should not be abused, because when calculating Transfer Fee, the Land District Office takes into account not only the contract value of your property but also the cost of similar objects sold in the same area at about the same time as yours. They may not agree with your figures if they see that the value of your object is clearly understated compared to similar ones.
After signing the sales contract, it is deposited in the Land Office and the Stamp Duty is paid.
Stamp Duty is a state duty when purchasing real estate. It is paid once within thirty days from the date of conclusion of the contract for the purchase of the real estate. Stamp Duty is 0.15% of the amount of the sales contract (excluding VAT) if not exceeding € 170,000, and 0.2% of the amount exceeding € 170,000. The first € 5,000 are not subject to Stamp Duty.
Thus, if you purchased a property worth € 500,000, the stamp duty will be:
5.000*0% + 165.000*0,15% + 330.000*0,2% = €907,5
Let’s sum up. When buying property in Cyprus you pay two taxes, Transfer Fee and Stamp Duties. In our example, when acquiring and registering apartments with a contract value of € 500,000 for the two-person property, you pay about € 14,100 on a nonrecurring basis.
In some cases, developers practice the sale of real estate, registered for a legal entity. In this case, you acquire shares of the company that owns this property. Here you do not have to pay taxes when purchasing real estate.
NON-RECURRING CHARGES ASSOCIATED WITH THE SALE OR TRANSFER OF REAL ESTATE
Capital Gain Tax
If you decide to sell your property in Cyprus, then you pay Capital Gains Tax at a rate of 20% of the profits (the difference between the sale and purchase prices). It should be borne in mind that in fact, the actual tax rate is significantly less since the legislation of Cyprus provides a significant exemption for this tax.
Firstly, when a property is alienated, the first € 17,086 for each owner is not taxed.
Further, if the seller has exploited the property for sale for at least five years and sells the property in Cyprus for the first time, the first € 85,430 of capital gains is not taxed.
Moreover, the confirmed expenses for the operation of the object, such as repairs, other material costs, etc., are excluded from the taxable base.
If a property purchased was registered for a local Cyprus company, the sale can be arranged as a sale of shares of the company. In this case, the buyer does not have to pay Transfer Fee. When dealing with large real estate complexes, this is a serious argument for the buyer.
In short, the proper organization of all components leads to effective real estate transactions.
Property in Cyprus is not subject to inheritance tax.
Annual Property Tax
Starting from 2017, the annual property tax is abolished completely.