Capital Gains Tax (CGT) in Cyprus is a key aspect of the country’s tax system and understanding it is important for individuals and companies investing in real estate or other assets. Cyprus offers a number of favorable regimes for the taxation of capital gains, making it attractive to investors. However, it is important to understand the CGT rules and rates to avoid unexpected tax consequences.

What is capital gains tax in Cyprus?

Capital Gains Tax (CGT) in Cyprus is a form of taxation aimed at taxing profits realized from the sale of certain types of assets. The main object of taxation is real estate located in Cyprus, but other types of assets may also be taken into account if they are subject to regulation under Cypriot law. CGT is a flat rate tax and it is important for individuals and businesses to understand when this tax applies and how to calculate it correctly.

1. Main aspects of capital gains tax

In Cyprus, capital gains tax applies to certain asset transactions. The main provisions relate to:

• Real Estate in Cyprus: Capital Gains Tax is primarily levied on gains from the sale of immovable property located in Cyprus. This includes both residential and commercial real estate.
• Shares in companies with real estate: It is important to note that gains from the sale of shares in companies whose main asset is real estate may also be subject to CGT. This means that if a company owns real estate in Cyprus and its shares are sold at a profit, tax may not be levied on the shares as such, but on the nature of these assets.
• Stock Market Shares: On the other hand, the sale of shares in companies listed on the stock markets is not subject to CGT, making this asset category more attractive to securities oriented investors.

2. Tax rate

Capital gains tax in Cyprus has a flat rate of 20% of taxable income. This means that the tax is levied on the difference between the purchase price of an asset and its sale price less all allowable expenses. The 20% rate is considered one of the moderate rates compared to other European Union countries, where rates can go as high as 30-40%. This makes Cyprus attractive to those interested in acquiring real estate as a long-term investment asset.

In comparison, in countries such as Spain or France, capital gains tax rates for non-residents can range from 19% to 36%, depending on the amount of profit and the length of time the property has been owned. This favorable tax position of Cyprus attracts foreign investors who view real estate as a primary tool for capital preservation and capital appreciation.

3. Who is subject to the tax?

CGT in Cyprus can be levied on both residents and non-residents, depending on the type of asset and its location. The main categories of CGT payers include:

• Individuals: Any individual who sells a property in Cyprus must pay CGT on the profit made. The exception may be if the property sold is the seller’s main residence (see benefits section).
• Legal entities: Companies that sell real estate assets are also liable to pay CGT. However, if the company trades in shares not related to real estate, these transactions are not subject to CGT.
• Non-residents: Even if the seller is not a resident of Cyprus, capital gains tax will be levied on the gain from the sale of Cypriot real estate. This is an important difference between Cyprus and some other jurisdictions where non-residents are exempt from such taxes.

4. CGT exemptions and exemptions

Несмотря на фиксированную ставку в 20%, кипрское налоговое законодательство предусматривает a number of exceptions and exemptions for certain categories of assets and transactions. For example:

• Principal residence: An important exception concerns the sale of real estate that has been the owner’s principal residence for at least five years. In this case, the first gain up to €85,430 is exempt from CGT. This provides a significant benefit to those who sell their own residential property.
• Family transfers: Transfers of assets between close relatives, such as spouses or from parent to child, are exempt from CGT. This avoids taxation in family transactions and ensures efficient transfer of assets within the family.
• Sale of agricultural land: There are also exemptions for farmers selling land that has been used for agricultural purposes. Gains from the sale of land are exempt from CGT on up to €25,629.

These exemptions make the Cypriot tax system more flexible and create opportunities to optimize tax liabilities in certain circumstances.

5. Impact on investment attractiveness

Cyprus’ favorable tax policy, including capital gains tax, makes the country a popular destination for foreign investors. In recent years, the Cyprus real estate market has seen a significant increase in demand from foreign buyers due to the relatively low tax rates and ease of tax regulation. According to statistics, in 2022, the total volume of real estate transactions involving foreign persons increased by 10% compared to the previous year.

In addition, Cyprus has signed more than 65 international double taxation treaties (DTT), which allows investors to avoid paying double capital gains tax if they invest in other jurisdictions. These agreements also contribute to the protection of investors’ interests and reduce the tax burden in international transactions.

Exemptions and exemptions

One of the key aspects of the Cypriot tax system is the numerous capital gains tax exemptions. Let us consider the most important of these:

• Exemption for principal residence: If the property being sold is the seller’s principal residence, CGT may not be charged on the first €85,430 profit.
• Exemption for agricultural land: If agricultural land is sold by a farmer engaged in agriculture, the gain on the sale is also exempt from CGT up to €25,629.
• Transfers within the family: Transfers of property between family members, including between spouses or from parent to child, are not taxable.

Calculation of Capital Gains Tax

The calculation of Capital Gains Tax (CGT) in Cyprus requires the consideration of several key factors, including the original acquisition cost of the property, the cost of improvements as well as various associated costs. These elements can significantly reduce the taxable income on which the tax will ultimately be levied. Let’s look at this process in more detail.

1. Determination of taxable income

Taxable income is the difference between the sales price of a property and the sum of all allowable costs associated with the acquisition and improvement of that asset. The basic steps for calculating taxable income include:

• Sales price: the price at which the property was sold minus any costs associated with the sale (e.g., agent commissions or costs to advertise the sale).
• Acquisition cost: the price at which the asset was originally purchased. If the asset was purchased before the CGT came into effect in Cyprus in 1980, the asset may be valued based on the market value as of January 1, 1980.
• Adjustment for inflation: indexation is applied in Cyprus to adjust the cost of acquisition and improvements to the rate of inflation. This takes into account the change in the purchasing power of money at the time of purchase compared to the time of sale.

2. Allowable expenses

Cypriot tax law allows a number of expenses related to the purchase and improvement of an asset to be deductible. The main allowable expenses include:

• Property purchase costs: this category includes legal costs, stamp duty paid, notary fees, and transaction costs. These costs must be documented for tax purposes.
• Improvement Costs: All costs incurred to improve a property after its acquisition can also be deducted. Examples of such costs include major repairs, renovations, modernizations, and other improvements that increase the market value of the property. However, these expenses must also be supported by appropriate documentation.
• Interest expenses: if the acquisition or improvement of property was financed by a loan, interest payments on this loan may be included in expenses and reduce the taxable base.

3. Example of tax calculation

Let us consider a hypothetical example to help understand the CGT calculation process in practice.

Let’s assume that an individual purchased a property in Cyprus for €200,000 in 2010 and incurred additional legal and stamp duty costs of €10,000. In 2015, the owner invested a further €50,000 to improve the property (e.g. major renovations). In 2023, the property was sold for €350,000 and the selling costs (agent’s commission and advertising) amounted to €5,000.

1. Sales price: €350,000 – €5,000 (selling expenses) = €345,000.
2. Adjusted acquisition cost: €200,000 + €10,000 (related costs) + €50,000 (improvements) = €260,000.
3. Taxable gain: €345,000 – €260,000 = €85,000.

Based on this, the capital gains tax will be:

• CGT: €85,000 * 20% = €17,000.

4. Indexation and inflation adjustment

One of the unique aspects of the Cypriot CGT system is the ability to adjust the value of assets for inflation. This is done by applying the Consumer Price Index, which takes into account the change in the purchasing power of money from the time the property is acquired to the time it is sold.

For example, if inflation averaged 2% per year, the original acquisition cost (together with costs) can be increased by this interest rate for each year of ownership. This helps to lower taxable income and reduce the tax burden.

5. Special cases

There are also special cases in Cyprus which may affect the calculation of CGT:

• Gift or transfer within the family: If property is donated or sold to relatives, the taxable base may be recalculated taking into account the exemptions provided for such transactions. For example, transfers of property between spouses or children may not be subject to CGT.
• Residents and non-residents: Cyprus residents are subject to CGT on gains from the sale of assets located in Cyprus, whereas non-residents are only subject to CGT on assets related to immovable property in Cyprus.

Impact of Cyprus tax policy on investment

In recent years, Cyprus’ tax policies, including favorable capital tax conditions, have contributed to the inflow of foreign investors. In 2022, foreign direct investment inflows in real estate amounted to €1.5 billion, up 10% from the previous year. This is due to the moderate tax regime, including favorable CGT conditions.

Cyprus also actively participates in international double taxation treaties (DTT), which avoids double taxation of capital gains in case of investments outside the country.

Conclusion

The Cypriot capital gains tax system is an effective tool for creating an attractive environment for real estate investment. The low tax rate and the many exemptions and allowances make the country one of the leading centers for capital investment in Europe. However, in order to take full advantage of the system and minimize tax liabilities, investors are advised to calculate carefully and consult with tax specialists.

Almanova Law provides comprehensive tax planning and optimization services for individuals and businesses, helping clients to effectively manage their tax liabilities and maximize the opportunities offered by the Cypriot tax system.

We are ready to assist you with detailed analysis and calculations so that you can plan your investments with confidence, knowing that all tax aspects are taken into account to your maximum benefit.

The lawyers at Almanova Law are ready to offer comprehensive tax services and help you effectively manage your investments in Cyprus, minimizing risks and maximizing tax benefits.