George Coucounis explains the tax advantages for transferring Cyprus property to a company, and that in cases of transfer of property to a family company by way of gift the transfer fees are refundable.
There are major advantages to forming a limited company in Cyprus from the tax point of view, and for buying Cyprus property in the company's name. The tax payable is only on net profit earned at the rate of 10% and in case of income earned from rents there is an allowance of 3% on the building cost additionally to any other expenses.
When a company issues dividends to the shareholders who are not Cyprus residents, there is no defense tax payable and for the Cypriots who receive dividends there is a defense tax payable at 15%.
A company which owns property can transfer its shares instead of transferring the property. In such a case, there are no transfer fees payable, though there will be capital gains tax payable on the profit made by selling the shares.
There are also cases where there is a need not only to form a company to register immovable property in its name, but to transfer to it the property by way of a gift. This happens when the property is owned by members of the same family and they decide to transfer their property for development purposes into their company’s name. In such a case, the company is liable for the payment of transfer fees which can be refunded minus a small deduction after the lapse of 5 years, provided the shareholders of the company remain members of the same family up to 3rd degree of relation. Furthermore, such a donation is excluded from the payment of capital gains tax.
The relevant law regarding capital gains tax, 70(I)/94, defines the term “family” to include the spouse and the relatives of up to 3rd degree, whether they are married or not. The same term is also found in the law regarding the payment of transfer fees for the transfer of an immovable property jointly owned by members of the same family to their company. Article 10 of Law 70(I)/94 provides that the disposal of property includes sale…but it does not include donation which is made to a company of limited liability where all the shareholders are members and continue for a period of 5 years after the donation is made to be members of the donator’s family.
Relatives of up to 3rd degree relation are considered by the law to be the parents, the children, the grandchildren, the great grandchildren, the brothers and sisters, uncles and aunts, the nephews and nieces, the grandparents and the great grandparents. The cousins even though they are relatives, they are considered to be relatives of 4th degree and therefore are not entitled to the relevant tax allowance from the capital gains tax and to the return of the transfer fees paid.
The provision for the return of the transfer fees when an immovable property is transferred by way of a gift to a family company is found in article 9(2) of the law, Cap.219 which provides that when an immovable property is transferred to a company of which the only shareholders are any of the following, i.e. the donator who made the transfer and his relatives, and at any time thereafter sufficient proof is submitted to the Director that during a period of 5 years from the day of the transfer, no other person except the donator who made the transfer and his close relatives acquired shares in the company, the Director returns to the company the amount of the transfer fees paid at the day of the transfer, minus the sum of 4% on the assessed value of the property. It is understood that the transfer fees are refundable provided that at the time when they are to be returned, the immovable property continues to be registered in the company’s name.
The aforesaid provision of the law was examined by the Supreme Court of Cyprus in a case where two sisters owned a piece of land, ½ each, which they transferred by way of a gift to their company that claimed the return of the transfer fees. The Director of the Land Registry refused to return the transfer fees and turned down the application on the grounds that there was no close family relation between the donators and the company shareholders, because at the time of the transfer the shareholders in the company were the donators and the husband of one of them.
The Director of the Land Registry considered that there was no close family relation between the donator and her brother-in-law.
The Supreme Court upheld the decision of the Director stating that the criterion set by the law for the return of the transfer fees is the close family relation between the donators and the shareholders and that the shareholders remain as such for the next 5 years. There was no close family relation between the one of the donators and her brother-in-law and therefore, the company was not entitled to the refund of the transfer fees, although the shareholders remained the same for a period of 5 years and the property remained registered in the company’s name.
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.