The bill submitted to the House of Representatives by the MP for Famagusta of Disy, Nikos Georgiou, with the aim of amending the legislation governing the acquisition of real estate by aliens, opened the dialogue for study and views in order to make the necessary amendment and modernisation.
The experience gained since the time of implementation of the current legislation, Cap.109, including the amendment that took place in 2003 for the accession of Cyprus to the EU, as well as the reasons that push aliens to invest by acquiring real estate should be studied.
The primary concern should be to ensure growth by continuing the interest of foreigners in acquiring real estate in Cyprus, which strengthens the economy and sectors such as services, construction and banking. Due diligence carried out by banking institutions on the origin of foreign buyers’ money contributes to preventing and combating money laundering, as well as determining the identity of the foreigner.
Tax avoidance
It is known that a large number of foreigners buy real estate for income purposes, rather than for own residence or as a secondary residence. They rent it out and have income from the rentals, which they do not declare and avoid tax on. Because they are foreigners and not permanent residents of Cyprus, they are exempt from the obligation to pay the special contribution for defence and a contribution to Gesy. The amount of the defence deduction is 3 per cent on 75 per cent of the rent, which is equivalent to 2.25 per cent on the gross rent and the Gesy contribution is 2.65 per cent.
Therefore, the relevant question that arises is whether the use of the property by foreigners for income should be allowed? If it is allowed, it is likely that the interest of foreigners to invest in real estate will increase further and their prices will increase even more. The permit granted also determines the purpose of the use of the property. If use for rental is allowed, then there is no reason for the foreign buyer to apply for a permit from the Council of Ministers.
The non-application of the legislation in the case of a foreign physical person registering a company in Cyprus is another issue that needs to be examined. Based on the current situation, a foreigner registering a company can acquire any real estate, without any restrictions regarding the area, type and purpose. The foreigner, through the Cypriot company, uses the property purchased for income and again evades tax.
The purchase of a property under construction by a foreigner for residential purposes should also be examined. Foreigners declare that they intend to use the property as a residence and benefit from the reduced VAT rate of 5 per cent instead of 19 per cent. Why should this benefit be provided solely on the basis of the foreigner’s intention? The reduced VAT rate should be provided gradually, after two to three years from the start of use of the property. Depending on the duration of use of the residence, the possibility of refunding the reduced VAT rate should be provided on an annual basis for a period of 10 years. The foreigner should provide evidence to prove the use of the residence.
Tax discrimination
Tax discrimination between land development companies controlled by Cypriots and companies controlled by foreigners, without the state knowing their identity, is another issue that needs to be examined.
When Cypriot shareholders receive dividends from the company, they are deducted a special contribution for defence of 17 per cent and 2.65 per cent for Gesy contribution. Foreign land developers, because they do not have permanent residence in the Republic, benefit and do not pay the state either of these. If they declare that they reside in Cyprus, then they only pay Gesy contribution. There is substantial tax discrimination between Cypriots and foreign land developers and Cypriots are rightly complaining.
The question arises as to whether or not the stamp duty on sales contracts will be refunded when foreigners’ applications are rejected by the Council of Ministers.
Furthermore, why not consider the possibility of imposing a fee for examining foreigners’ applications, so that the Republic can collect part of the costs of examining their applications.
George Coucounis is a lawyer specialising in Immovable Property Law, based in Larnaca. E-mail: [email protected], tel: 24818288
