The costs and expenses for additions to a residential property in Cyprus are deducted provided proper receipts are kept, as George Coucounis explains.
The disposal of a residential property is much more frequent nowadays than it used to be. Even though the owner proceeds with costly additions, such as repairs, extensions and maintenance which add to the value of the property, he is deprived of the right to claim the deduction of these costs from the capital gain tax, because, during the making of these additions, the owner did not find it necessary to obtain and save proper receipts.
Therefore, many people feel that they are treated unfairly by the Inland Revenue Department when seeking to obtain the relevant tax release in case of selling their property, because they are not in a position to present proper receipts for the costs and expenses they have made concerning their residence property or any other property - building. Consequently, in this case the income tax office is benefited, since it does not accept such expenses in assessing the capital gain tax payable, although these costs were actually made but cannot be proved; thus the owner has to pay more tax of what he really owes.
This occurs almost daily and the public is unjustly treated because no factor is provided for discount for additions, similar to the factor applied for the inflation. Such a factor should be introduced for additions, repairs and maintenance of the property, residence or other building, which are inevitably made, without the owner having to present any such receipts, except in the case where these costs and expenses are higher.
This suggestion is a social measure that must be examined by the responsible authorities so that to amend the law accordingly. The need for such a discount is real and existing.
Article 6 (b) of the capital gain tax law, in the case of sale or disposal of a property subject to the aforesaid tax, provides for the deduction of any expenses entirely made on the property for profit. The general provision in the law referring to expenses made entirely for making profit, without any further interpretation of the words used, gives the tax officer the discretionary power to evaluate and define which expenses are deductible or not when assessing the tax.
Of course, although there are internal circulars assisting the tax officer, the cases are so many and different that it is impossible to regulate them all. So, the matter is always left to the Director of the Inland Revenue Department, when there is a dispute, to exercise correctly his discretionally power to resolve the matter at issue. The tax payer affected has always the right to object to any such tax imposed and to have his case being re-examined. However, there are cases, like the repair or the restoration of old houses which are later sold, where the matter of assessing the profit made can only be resolved when making an evaluation by an expert valuer of the initial price and the selling price.
The expenses which are exempted from capital gain tax are related not only to the residential house which is exclusively used for residence purposes, but to any other disposal of any other property - building. Article 5(2) of the relevant law provides that no tax is payable for any profit made from the disposal of the primary residential house which is used by its owner for a complete period of five years exclusively for residential purposes and it is situated in a land in extend of up to 1,500 square metres, not exceeding the sum of 50,000 CYP.
Over the aforesaid amount, capital gain tax is payable for any further profit made, at the rate of 20%.
It is obvious that the law emphasises the term "primary residence" and "residing in" for the minimum period of five years. The exemption of the amount of 50,000 CYP profit made is given for the residence house and not per person. Therefore, if the residence belongs to more than one person, the aforesaid exemption is allocated equally between them. For example, when the residence belongs to a couple, each one of them is entitled to 25,000 CYP. When the disposal or sale is not related to the primary residence, the law provides for an exemption from capital gain tax up to the total sum of 10,000 CYP.
No person is entitled to both exemptions given, but is only entitled to one of the two, whichever is the higher.
George Coucounis is an experienced lawyer practicing in Larnaca, Cyprus.
Educated at University College (London) and Thessaloniki University (Greece), George is fluent in English and has been practicing law in Cyprus since 1982.