Tax exemptions extended to property consideration

Cyprus’ tax reform introduces changes to capital gains tax covering property exchanges, property sales and the disposal of shares linked to real estate.

Amendments to the capital gains law extend existing exemptions beyond traditional property exchanges to cases where real estate is transferred as consideration. In such cases, capital gains tax will no longer be payable at the time of transfer.

Instead, taxation will arise when the property received in return becomes available, placing these transactions on the same tax footing as property exchanges.

At the same time, the reform expands the tax-free thresholds applicable to property sales.

The general exemption on profits from the sale of property and shares has been increased to €30,000, up from £10,000 under the previous, pre-euro framework.

For farmers disposing of agricultural land, the exemption rises to €50,000 from £15,000, while profits from the sale of a main residence are now exempt up to €150,000, compared with £50,000 previously.

These exemptions apply on a lifetime basis rather than per transaction. The legislation clarifies that once a taxpayer has used the general exemption for the sale of property or shares, the exemption available for the disposal of a main residence is reduced accordingly, from €150,000 to €120,000.

Further adjustments affect the treatment of main residences. The value threshold linked to tax exemptions for the restructuring of primary residence loans has been raised to €450,000 from €350,000.

This also covers loans that were non-performing as of December 31, 2020, provided they were subsequently restructured.

The tax exemptions relating to principal residences will remain in force until 2030.

Changes were also introduced to the taxation of share disposals, particularly where real estate value is held indirectly. The definition of real estate has been revised so that capital gains tax applies when at least 20 per cent of a company’s value derives, directly or indirectly, from property located in Cyprus.

As a result, the sale of shares in a company that does not itself own real estate but holds stakes in another property-owning entity will fall within the scope of capital gains tax if the underlying property represents at least one-fifth of the company’s value.

In such cases, profits will be taxed at a rate of 20 per cent, calculated on the value of the property.

Alongside this, the legislation strengthens anti-avoidance provisions. Where shares are disposed of and their market value is effectively driven by real estate assets, the proceeds of disposal will be assessed based on the declared sale price, adjusted to reflect the market value of other assets and liabilities.

This approach is intended to reduce the scope for undervaluation and protect public revenues.

To prevent abuse of capital gains tax exemptions, the sale of shares in property-owning companies listed on unregulated stock markets will now be subject to capital gains tax based on the value of the underlying real estate.

The taxation will apply to transactions exceeding €50,000, while transitional provisions have been included for shareholders who held interests prior to the legislative changes.