Tax issues with real estate in Cyprus

“The lack of controls by the Authorities enables para-economy"

The system of taxation of real estate and the income from it, due to loopholes in the legislation or due to the failure to carry out controls in its application, seems to leave enough room for exploitation and tax avoidance. The interest shown by foreigners in the real estate market, especially from neighbouring countries, is to some extent due to this fact. They are driven opportunistically to obtain profit, in a short time and with a relatively small investment. The system allows them to buy an old or second-hand apartment for a secondary residence or an old house for demolition and reconstruction of an apartment building, i.e. for investment. It is obvious that they do not intend to use the property they bought as a residence, possibly illegally renting it out for a period of time and then reselling it for more or double. At the time of sale, the price they bought it for is declared plus the tax-free capital gains and the difference from the final sale price, they receive it in cash, undeclared and tax-free.

The conditions prevailing in the neighbouring countries are known and easily the profit migrates undeclared and tax-free. Participating in this activity are also some intermediaries, licensed and non-real estate agents, Cypriots or foreigners from these countries, who also collect their share, tax-free and undeclared. There is no control at all since the system is unable to prevent this illegality, which increases over time. In short, they steal from the state which, due to weakness, does not control them.

The problem is serious and should concern the Authorities, especially the Ministry of Finance - taxation and combating tax evasion and the Ministry of the Interior - through District Officers grant permits easily and quickly, without any substantial control or criteria. It is noteworthy that after the purchase no control is carried out to establish the use of the property and whether it is used for the purpose acquired and within the framework of the permit granted. The Migration Department does not have the time or the staff to check, at least not when someone arrived in Cyprus and when they left. The state has a significant loss of revenue, it loses its credibility due to a lack of controls, in addition to the illegality that is being committed.

It is understandable that there is a significant loss of revenue for the state, capital gains tax of 20% on the profit that is not declared, VAT 19% on the undeclared commission for intermediaries, plus the loss of income tax of 20% - 30% on the undeclared income, loss of 2.65% GESY contribution (natural persons) and 2.25% special defence contribution on gross rents (natural persons and companies less VAT), as well as loss of the 0.4% contribution for the equal distribution of burdens on the actual price that is not declared and not paid.

Cyprus does not need such investors who, through agents, ostensibly "invest", buy and re-sell real estate without declaring the income or profit they make. It seems that the state is absent and does not implement policies or plan ways to combat the phenomenon of the increased para-economy. The capital gains tax law does not contain any provision that introduces and applies objective criteria of value or assessment by the Land Registry, so as not to allow any person to sell at higher or double price and evade tax by declaring half or lower price. On the other hand, the District Officers grant approvals for the acquisition of property to foreigners for residence, in a very short time applying formal rather than substantive controls, without any subsequent control.

While many foreigners are exploiting the property they acquired with permission from the District Officer, no control is carried out by it. To date, no foreigner has been brought to Court, nor has the permit granted to him been cancelled or revoked. In fact, many rent their property on an annual basis and the only impact they have when they decide to sell it is that they pay the GESY contribution from 2019 onwards. Fortunately, the Tax Commissioner requests a statement of electricity consumption through EAC and checks whether the property was rented or not.

In addition to the illegality that is being committed, a very serious problem is also created with the constant increase in the price of real estate due to the lack of available properties, especially in the cities and suburbs. In addition, rents are also increasing as a result of the lack of housing, with a consequent social problem. The state must control the situation with substantial and continuous controls, by amending the legislation, cancelling permits, increasing penalties, imposing administrative fines and sanctions.