Cyprus’s tax reform has changed capital gains tax rules for property sales, property exchanges and share transactions in moves expected to boost competitiveness, strengthen the tax framework and improve tax collection.
Under the recent amendment to the Capital Gains Law, the exemption that applies to property exchanges has been extended to property exchange arrangements.
Property owners who give their property as part of an exchange will not pay capital gains tax at that point but will pay it when they receive the new property from the exchange. They will benefit from the same tax exemptions granted for property exchanges.
The reform widened tax-free thresholds for property sales. Under the new legal framework, the tax-free profit amount increases to €30,000 (previously £10,000), to €50,000 (previously £15,000) and to €150,000 (previously £50,000). The total capital gains tax exemptions are as follows:
€30,000 exemption from tax on general property and share sales. This is the general exemption.
€50,000 exemption from tax on profit from the sale of agricultural land by a farmer.
€150,000 exemption from tax on profit from the sale of a primary residence.
Under the legislation, the exemptions granted do not apply to each individual sale but to all sales the taxpayer makes during their lifetime. If a taxpayer uses the general property or share sale exemption, the primary residence exemption is reduced from €150,000 to €120,000.
Meanwhile, the value of a primary residence increased from €350,000 to €450,000 regarding tax exemptions on primary residence loan restructuring. Primary residence loans that underwent restructuring include those that were non-performing on 31 December 2020.
The tax exemptions for primary residences will remain in force until 2030.
The new legal framework also amended the definition of immovable property. Specifically, the percentage subject to taxation for disposal of shares in companies whose market value derives indirectly by 20% from immovable property in the Republic was reduced to address tax avoidance.
If shares are sold in a company that does not own property itself but holds shares in another company that owns property, and the value of the shares being sold is represented by 20% of the property’s value in Cyprus, it is considered property.
Therefore, the sale of shares that indirectly hold property will be subject to 20% capital gains tax on the profit based on the property’s value.
Meanwhile, specific measures were taken to combat tax evasion and protect public revenue. In the case of disposal of shares in a company whose market value is substantially represented by the market value of immovable property, the disposal proceeds as declared by the contracting parties are adjusted with the market value of other assets and liabilities.
To prevent abuse of the capital gains tax exemption provision, the law stipulates that the sale of shares in companies that own property and are listed on a non-regulated stock exchange will now be subject to capital gains tax based on the value of the properties.
The tax will apply to transactions exceeding €50,000, whilst transitional provisions were included for shareholders before the law change.
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