DIRECT HOLDING OF REAL ESTATE
This section discusses the most important tax implications of the direct holding of real estate. Firstly, it discusses the impact for resident individuals and non-resident individuals. Thereafter it discusses the impact for resident companies and non-resident companies.
Resident individuals
Personal income tax
Income derived from the real estate such as rental income is subject to personal income tax up to 35%, Special Defence Contribution (if the resident individual is also domiciled in Cyprus) with a rate of 3% on the 75% of rental income and contributions to General Health System at the rate of 2.65%.
Deductibility of costs, interest, and depreciation
A discount of 20% of the gross rental income, capital allowance costs, interest costs and maintenance costs are deductible from rental income. Capital allowances are fixed rates of depreciation prescribed; 3% straight line for commercial buildings, 4% straight line for industrial buildings. Land is excluded.
Repairs and renovation on private residences
The repairs and renovations on private residences enjoy a reduced 5% of VAT and it applies to all the residences that necessarily need to be repaired or renovated. There is a condition though, that a period of 3 years has lapsed from the first day the residence was used. In cases where the value of the materials intended to be used in the renovation and repair works exceed by more than 50% the value of the services, then the value of these materials is subject to the standard VAT rate.
As from 20 August 2020 it also applies to such services provided for the purposes of making additions to private residences.
Losses – carry back/forward
There is no possibility for carry back/forward.
Non-resident individuals
Non-resident individuals are treated in the same way as resident individuals.
Resident companies
Corporate income tax
Business income such as rental income is subject to corporate income tax. Profits are taxed at the corporate income tax rate of 12.5%.
Deductibility of costs, interest and depreciation
Capital allowances are granted, and interest paid on the acquisition of the rented property is also allowed. A company can deduct all expenses attributed to the generation of the rental income to the extent that such expenses are related to the rental income (i.e. repairs and maintenance).
Anti-tax avoidance directive
The Anti-Tax Avoidance Directive (ATAD) is a Directive published by the OECD and will be implemented by the European Countries. Cyprus also incorporated the Directive in its domestic legislation. Cyprus already implemented interest limitation rules for loans from low tax jurisdictions. During 2020, Cyprus voted into law the Exit Taxation rules and Hybrid Mismatch Rules, as part of the Country’s harmonisation with OECD’s Anti-Tax Avoidance Directive.
Losses – carry back/forward
Losses that cannot be set off against other income in a tax year, are carried forward and set off against tax adjusted profits for the next 5 years. Losses cannot be carried back.
The loss of one company can be set off against the profits of another company, provided the two companies are Cyprus tax residents of a “tax group”. A group is formed if:
A Cyprus tax resident company directly or indirectly holds at least 75% of the voting rights of another Cyprus tax resident company, or
Both companies are at least 75% owned by a third company
As from 1 January 2015, the interposition of a non-Cyprus tax resident company will not affect its eligibility for group relief if such company remains tax resident in either an EU state or in a country with which Cyprus maintains a tax treaty or a bilateral or multilateral agreement for information exchange.
Non-resident companies
Non-resident companies are taxed on their Cyprus-source income only. Rental income received in Cyprus for a non-resident company is computed in the same way as for resident companies. It is also taxed at the same rate of corporation tax as the income of the resident companies i.e. 12.5%.
INDIRECT HOLDING OF REAL ESTATE
This paragraph discusses the most important tax implications of the indirect (shares) holding of real estate. Firstly, it discusses the impact for resident individuals and non-resident individuals. Thereafter it discusses the impact for resident companies and non-resident companies.
Resident individuals
Personal income tax
Individuals who hold shares in a Cyprus company may receive dividend income. Dividend income is not taxable for personal income tax.
Special Defence Contribution
Dividends are subject to Special Defence Contribution at 17%.
Non-resident individuals
Personal income tax
No personal income tax applies for non-resident individuals. The dividend income is not taxable in Cyprus.
Special Defence Contribution
Special Defence Contribution applies only when taxpayers are both tax residents and domiciled in Cyprus. The non-resident individual is thus not subjected to Special Defence Contribution.
Resident companies
Corporate income tax
As well as resident individuals, the dividend income for resident companies is not taxable for corporate income tax.
Special Defence Contribution
In general, actual dividend income received from another Cyprus tax resident company is not subject to Special Defence Contribution. The same applies in case dividend income is received from a non-resident company. However, if the dividend falls under the non-exemption rule, Special Defence Contribution applies.
The non-exemption rule is as follows
Exemption from Special Defence Contribution does not apply if:
- The paying company, engages directly or indirectly, more than 50% in activities that lead to investment income, and
- The foreign tax burden is significantly lower than that of Cyprus. Significantly lower means an effective tax rate lower than 6.25% on the profit distributed
Anti-tax avoidance directive
The Anti-Tax Avoidance Directive (ATAD) is a Directive published by the OECD and will be implemented by the European Countries. Cyprus also incorporated the Directive in its domestic legislation. Cyprus already implemented interest limitation rules for loans from low tax jurisdictions. During 2020, Cyprus voted into law the Exit Taxation rules and Hybrid Mismatch Rules, as part of the Country’s harmonisation with OECD’s Anti-Tax Avoidance Directive.
Fiscal unity
The loss of one company can be set off against the profits of another company, provided the two companies are Cyprus tax residents of a “tax group”. A group is formed if:
- A Cyprus tax resident company directly or indirectly holds at least 75% of the voting rights of another Cyprus tax resident company, or
- Both companies are at least 75% owned by a third company
As from 1 January 2015, the interposition of a non-Cyprus tax resident company will not affect its eligibility for group relief if such company remains tax resident in either an EU state or in a country with which Cyprus maintains a tax treaty or a bilateral or multilateral agreement for information exchange.
Non-resident companies.
Non-resident companies are taxed on their Cyprus-source income only. Rental income received in Cyprus for a non-resident company is computed in the same way as for resident companies. It is also taxed at the same rate of corporation tax as the income of the resident companies i.e. 12.5%.
