Understanding Capital Gains Tax

Capital gains tax in Cyprus at the rate of 20% is only applicable to profits from the sale of property in Cyprus. This also applies to the sale of shares of a company that owns property in Cyprus or indirectly owns property in Cyprus and 50% of its market value is from immovable property.

However, shares listed on any recognised stock exchange are excluded from capital gains tax.

How to Calculate Capital Gains Tax in Cyprus

Since capital gains tax is only applicable on profit, the first step is to find the taxable profit from the sale of a property.

Simply put, the taxable profit is the difference between the price the property is being sold today versus the price the property was originally purchased for, plus any additional costs such as renovation costs, legal fees etc, plus any of the lifetime allowances if requirements are met.

Sale Price - (Purchase Price + Additional Costs + Lifetime Allowance) = Taxable Profit

Taxable Profit x 20% = Capital Gains Tax

Purchase Price (Adjusted for Inflation)

To find the difference between the price a property is being sold for today versus the price it was originally purchased for, you can't simply deduct the purchase price from the current sale price.

If you bought a house for €100,000 in 1985, that amount of money doesn't have the same value today because of inflation.

Inflation makes money lose its purchasing power over time, so €100,000 in 1985 could buy more than €100,000 can today. To find out how much that house would cost in today's money, we must first adjust for inflation, showing the true value in today's terms.

You can find a table of Inflation Rates released and updated by the Tax Department here.

Keep in mind that if you bought your property before the 1st of January 1980, the original cost of that property is considered to be its value as of the 1st of January 1980. That value is based on the valuation of the Land Registry.

To find the the inflation-adjusted purchase price you must:

1. Divide the Inflation Rate in the year of sale by the Inflation Rate in the year of purchase. This gives us the inflation adjustment number.

2. Then, multiply the original purchase price by the inflation adjustment number. This gives you the adjusted purchase price.

   
   

Adding Additional Expenses to Your Taxable Profit

Once you have found the purchase price adjusted for inflation, you should then add to the deductible amount any additional expenses that you incurred in relation to the property that were made exclusively for making a profit, provided that these expenses were not deducted from your then income tax returns.

This can include renovations that increase the value of a house and any expenses related to the sale of a house such as transfer fees, real estate commissions, legal fees, interest on loans and others.

Again, you can adjust these expenses to account for inflation to find the inflation-adjusted expenses:

1. Divide the Inflation Rate in the year of sale by the Inflation Rate in the year the expenses were made. This gives us the inflation adjustment number.

2. Then, multiply the original cost of expenses by the inflation adjustment number. This gives you the adjusted expenses.

   
   

Lifetime Allowances and Their Impact on Capital Gains Tax

Finally, individuals are entitled to lifetime allowances which can also be added to the deductible amount before calculating the amount subject to Capital Gains Tax.

Particularly, there are three types of allowances which an individual can claim:

Although it is possible to combine the above allowances, an individual cannot exceed the combined amount of €85,430. Additionally, you can only claim it once in your life.

Example

Using all variables, we can accurately calculate the capital gains tax payable upon the sale of a property.

Capital Gains Tax Exemptions in Cyprus

There are also a number of instances where the disposal of a property is not subject to Capital Gains Tax.

Key Takeaways on Cyprus Capital Gains Tax

Understanding Capital Gains Tax in Cyprus is essential for anyone involved in the sale of property. By factoring in the purchase price (adjusted for inflation), additional expenses, and lifetime allowances, individuals can accurately calculate their taxable profit.

While the tax rate is generally set at 20%, exemptions and allowances, such as those for primary residences, can significantly reduce the taxable amount so make sure you plan the first of your property wisely.

If you're thinking about selling your property but you worried about the 20% Capital Gains Tax, Contact Us Today for a free consultation and we'll advise you on how you can reduce this amount as much as possible.

FAQ: Common Questions About This Topic

I'm planning to sell multiple properties this year - how do the lifetime allowances work?

While you can sell multiple properties, you can only claim the lifetime allowances once. It's strategic to use them on your highest-value sale. For example, if you're selling both a primary residence and an investment property, consider timing the sales to maximize your €85,430 allowance on the property with the highest potential tax liability.

What happens if I've claimed some renovation expenses on my income tax returns?

If you've previously claimed renovation expenses as deductions on your income tax returns, you cannot use these same expenses to reduce your Capital Gains Tax. Keep detailed records of which improvements were claimed on income tax and which weren't to avoid double-dipping.

I bought my property with a friend - how does Capital Gains Tax work for co-owned properties?

Each co-owner's tax liability is calculated separately based on their ownership share. You each get your own lifetime allowance, and your portion of the purchase price and expenses are adjusted for inflation individually. This means strategic planning is possible if one owner has already used their lifetime allowance.

If I sell my property in installments, when do I pay the Capital Gains Tax?

Capital Gains Tax becomes due when you transfer the property title, not when you receive all payments. However, you might be able to structure the sale to optimize your tax position.

What proof do I need to show for renovation expenses from many years ago?

Keep all receipts, contracts, and bank statements showing payments. If you've lost old receipts, the tax office may accept other evidence like before-and-after photos, contractor statements, or building permits. Document everything thoroughly as you go to avoid future issues.

I'm thinking of transferring my property to a family company - what are the pitfalls?

While transfers to family-owned companies are exempt, you must maintain family ownership for five years after the transfer. Any change in shareholding to non-family members within this period could trigger Capital Gains Tax retrospectively. Plan carefully for potential future business changes.

How do property valuations work for non-cash transactions?

For property exchanges or transfers at below market value, the tax office uses their own valuation methods to determine fair market value. Getting an independent valuation before the transaction can help you anticipate and plan for potential tax implications.

If I reinvest my property sale profits into another property, do I still pay Capital Gains Tax?

Unlike some countries, Cyprus doesn't have a tax-free rollover relief for reinvesting property profits. You'll still need to pay Capital Gains Tax on your profit even if you immediately use the money to buy another property, unless it's a direct property exchange of equal value.