What real property taxes are paid by foreigners applying for citizenship by investments in Cyprus

Buying property in Cyprus is not just a fancy trend followed by wealthy people, but also a profitable investment tool. By acquiring residential or commercial property a foreign investor may qualify for obtaining the citizenship of Cyprus.
Today’s article is mainly for those who are planning to buy property in Cyprus in order to obtain citizenship by investment. We will give the insights on which additional duties and taxes must be paid when buying the property and what would be the cost of the further maintenance of real estate.

VAT charged in case of buying real property in Cyprus

Today, acquisition of real property in Cyprus is subject to VAT at the rate of 19%. Since June 2012 a reduced rate of 5% is applied in case of purchase of a new property.

Conditions under which the reduced rate applies:

• A buyer is a natural person of full age.
• Acquired property is the applicant’s principal place of residence in the territory of the island state.
• The applicant does not own any other real estate item previously acquired with a 5% VAT rate.
• Real estate is used only as a place of residence, and not as a source of income (for example, by leasing out to third parties).

Peculiarities of a reduced VAT rate:

• The reduced rate applies to the first 200 sq.m. of real estate item. The size is determined by architectural plans approved by the official authorities in the Republic of Cyprus.
• If a buyer purchased a new property, paid VAT and was not using the housing, then in the case of the sale of property, he can get back the full amount of the tax paid.
• In the event where the buyer took advantage of the reduced rate when purchasing a housing, but is not using this real property as his main place of residence in the country for ten years or abandons his ownership (either by leasing out or by reselling), he must compensate for the gap between tax rates. The 10-year period is calculated starting from the date when the owner of the real property enters into the actual possession. Within 30 days after the change of the main place of residence or abandonment of ownership in the real property the owner of the real property is obliged to apply to the tax service for calculation of the gap to be paid. When calculating the rates effective at the time of the transaction are taken into account. Exceptions: the applicant’s death; transfer of real property to a child over 18 years of age, provided that he had not previously acquired real estate at a reduced VAT rate.

VAT is not charged if the buyer:

• purchases secondary real estate;
• purchases a real estate item for which the town planning permit was issued before May 1, 2004.

Other types of taxes

Apart from VAT, there are a number of other taxes provided by the tax legislation of the Republic of Cyprus which are subject to one-time payment when concluding a contract.

Property Transfer Fee

This fiscal fee shall be paid to the Land Department to ensure that the free ownership is assigned to the buyer. The tax is paid at the final stage of the transaction, when the buyer has paid for the purchase in full and received permission from the local municipality for the transfer of ownership in the specified building.
Transfer fee is not charged on a purchase of a new property and is only paid in respect to real estate purchased in the secondary market. The interest rate is calculated according to the scheme below. According to the current Cypriot legislation, the property transfer fee is reduced by 50%.

Important note! One may reduce the amount of tax by having the ownership documents executed in the name of several persons. Taxable value is distributed proportionally among all owners, and hence the tax rate decreases.

Stamp Duty

The fiscal fee is paid when real estate is bought in the primary and secondary markets. This is a one-time payment. The amount of the tax depends on the value of the property:

• 15% of the tax if the property costs less than €171,000 ;
• 2% tax, if the property costs more than €171,000.

Annual Tax on Real Estate

Since 2017, the persons who own real estate in Cyprus are not required to pay real property tax.

Municipality Tax

It is an annual tax which is charged by the local municipality for rendering public services and amenities (refuse collection, arrangement of recreational facilities, street lighting). The amount of tax is calculated in each individual case and depends on the size of the property.

Capital Gains Tax

The tax is charged on the income received by an individual from the sale of real property in Cyprus. Also, the taxable items include the income received from the sale of shares of a legal entity that owns real property on the territory of the republic. The tax rate is fixed and amounts to 20%.
The taxable base is calculated after the deduction of sales income, purchase price and additional expenses, which are subject to adjustment for inflation. In addition, other incomes are considered that are not subject to taxation but are directly related to the sale of real property (for example, marketing expenses, interest on the loan).
If the property was purchased before 1980, the market price is taken for calculation, which was relevant for the asset as of January 01, 1980.

Cost of maintaining a property in Cyprus

The costs associated with the maintenance of real estate within the country include:

• municipal tax (paid annually);
• sewage tax (paid annually);
• payment for water supply and electricity;
• household expenses for maintenance of the complex;
• associated costs for the maintenance of the swimming pool and gardener’s services (in case of owning a private house).

The cost of household expenses in Cyprus is associated with the maintenance of the complex. The amount of monthly payment varies from €30 to €200. The amount is calculated in each individual case and depends on the amount of work related to keeping of the territory of the complex in proper condition. The household expenses include cleaning the adjacent territory, garden works, supply of water and electricity to common facilities, pool cleaning, concierge and security services (if any).

Examples of calculation considering all expenses for several investment options

For illustrative purposes, let us consider several items that qualify for the citizenship by investment program in Cyprus. According to the terms of the passport program, the minimum amount of investment in real estate should be €2 million. There are options of investment in residential or commercial real property. In addition, the investor must own residential property worth at least €500,000.
Important note! The total amount of investment in case of the purchase of commercial real estate is €2.5 million, and €2 million in case of buying residential property.

1. Purchase of commercial property

A modern two-storey office in the center of Limassol costs €1,100,000. It is offered in the secondary market.
The accompanying expenses for the transaction are as follows:

• VAT is not charged, since the property is for sale in the secondary market;
• Stamp Duty is calculated based on the price of the property:

at a rate of 0.15% for the first €170,860;
at a rate of 0.2% – on the balance of the amount.
The approximate amount is €2,114.

• Property Transfer Fee. The fee is paid not in the period of closing a transaction, but upon transferring the title of ownership to the buyer. This fee will amount to approximately €40,582. The amount can be reduced if the ownership is registered in the name of 2 persons.

2. Purchase of residential property

A modern new penthouse with three bedrooms, a swimming pool and a garden in Limassol costs €1,055,000.
The accompanying expenses for the transaction are as follows:

• VAT (reduced rate of 5% applies) – €52,750;
• Stamp Duty – €2,024;
• Property Transfer Fee is not charged since this is a new object.

A modern penthouse with two bedrooms in Limassol costs €570,000.
The accompanying expenses for the transaction are as follows:

• VAT (since this is the second real property item, the VAT rate of 19% applies) – €108,300;
• Stamp Duty –  €1,055;
• Property Transfer Fee is not charged, since the object is offered for sale in the primary market.

3. Other costs

Legal support for the transaction and naturalization. The present case involves naturalization, therefore, all costs related to legal support for the transaction are included in a single package (usually legal support of the transaction makes 1% of the contract amount, but not less than €2,000 and not more than €10,000) – €50,000.
Accompanying costs (official fees) are about €10,000 per family (about €8,000 per one adult and about €500 per child).

Total cost:
– €2,725,000 – the cost of the general contract;
– €206,825 – transaction-related costs, including VAT and naturalization costs.
Total: €2,931,825.

The cost of citizenship after divestiture

The investment retention period is 3 years. Rental of a property or selling is possible only after a three-year period. However, you can sell the property before the expiration of a three-year period, provided that the funds are fully reinvested and remain in Cyprus for at least three years.
The expenses that are imposed on the seller of real estate after divestiture are considered individually (in terms of VAT refund, a tax on profits from the sale of real property, etc.). But in any event, in case of divestiture one must either keep or purchase a property worth at least €500,000 for personal use.
Thus, to cover the costs of participation in the passport program of Cyprus, a foreign investor needs to have at least €3 million. In return, he acquires an expensive asset in one of the most developed and tourist-friendly countries of the EU and the citizenship of Cyprus with all its related benefits.