Cyprus’ recent tax reform introduces significant changes to capital gains tax, particularly impacting property transactions and the disposal of shares linked to real estate.
- Cyprus’ recent tax reform introduces significant changes to capital gains tax, particularly impacting property transactions and the disposal of shares linked to real estate.
- In these instances, profits will be taxed at a rate of 20 per cent, calculated based on the value of the property.
Tax exemptions: New Exemptions for Property Exchanges
Under the amended capital gains law, exemptions previously limited to conventional property exchanges now extend to cases where real estate is transferred as consideration. This means that capital gains tax will not be payable at the time of transfer, aligning these transactions with traditional exchanges.
Increased Tax-Free Thresholds
The reforms also bolster the tax-free thresholds applicable to property sales. The exemption on profits from property and share sales has increased to €30,000, up from £10,000. For farmers disposing of agricultural land, the exemption rises to €50,000 from £15,000, while profits from the sale of a main residence are now exempt up to €150,000, compared to £50,000 previously.
These exemptions are applied on a lifetime basis, not per transaction. It’s important to note that if a taxpayer uses the general exemption for selling property or shares, the exemption available for the disposal of a main residence is adjusted accordingly, dropping from €150,000 to €120,000.
Adjustments for Primary Residences
Further modifications to the tax legislation have been made concerning primary residences. The value threshold for tax exemptions on restructuring primary residence loans has been raised to €450,000 from €350,000. This adjustment includes loans that were classified as non-performing as of December 31, 2020, provided they were restructured thereafter. The tax exemptions related to principal residences are set to remain in effect until 2030.
Changes to Share Disposals
The legislation also revises the treatment of share disposals, especially in cases where real estate value is held indirectly. Capital gains tax will now apply when at least 20 per cent of a company’s value is derived from property located in Cyprus. This means that selling shares in a company that does not directly own real estate but holds stakes in another property-owning entity will incur capital gains tax if the underlying property makes up at least one-fifth of the company’s value.
In these instances, profits will be taxed at a rate of 20 per cent, calculated based on the value of the property.
Strengthening Anti-Avoidance Measures
The new legislation enhances anti-avoidance provisions. When shares are sold, and their market value is influenced by real estate assets, the proceeds will be assessed based on the declared sale price, with adjustments reflecting the market value of other assets and liabilities. This approach aims to mitigate undervaluation and safeguard public revenues.
To further prevent abuse of capital gains tax exemptions, the sale of shares in property-owning companies listed on unregulated stock markets will now be subject to capital gains tax, based on the value of the underlying real estate. This taxation will apply to transactions exceeding €50,000, with transitional provisions for shareholders who held interests before the legislative changes were enacted.
