Tax evasion in real estate

Lack of controls by authorities enables illegalities

The system of taxation of real estate seems to leave enough room for exploitation and tax avoidance, due to loopholes in the legislation or failure to carry out controls in its application.

The interest in the real estate market shown by foreigners, especially from neighbouring countries, is to some extent due to this fact. They are able to obtain profit in a short time and with a relatively small investment. The system allows them to buy an old as a secondary residence or an old house to be demolished and replaced by an apartment building, ie for investment.

It is obvious that they do not intend to use the property as a residence, possibly illegally renting it out for a period of time and then reselling it for more or double the money.

The conditions prevailing in neighbouring countries are known and the profit migrates easily, undeclared and tax-free. Participating in this activity are also some intermediaries, such as real estate agents, both licensed and not, Cypriots or foreigners, who also collect their share, tax-free and undeclared.

There is no control at all and this theft from the state increases over time. The problem is serious and should concern the authorities, especially the Ministry of Finance. Meanwhile, the Ministry of the Interior, through district officers, grant permits easily and quickly, without any substantial control or criteria.

It is noteworthy that after a purchase no control is carried out to establish the use of the property and whether it is used for the purpose it was acquired for and in accordance with the permit granted. The migration department does not have the time or the staff to check, at least not when someone arrived in Cyprus and when they left.

The state losses significant revenue as well as credibility.

There is the loss on the capital gains tax of 20 per cent on the profit that is not declared, 19 per cent VAT on the undeclared commission of intermediaries, plus the loss of income tax of 20-30 per cent on the undeclared income, loss of the 2.65 per cent Gesy contribution for natural persons and 2.25 per cent special defence contribution on gross rents for natural persons and companies, less VAT, as well as the loss of the 0.4 per cent contribution for the equal distribution of burdens on the actual price that is not declared and not paid.

Cyprus does not need such investors who, through agents, ostensibly ‘invest’, by buying and re-selling real estate without declaring the income or profit they make.

It seems that the state is absent and does not implement policies or plan ways to combat the phenomenon of increased illegal transactions.

The capital gains tax law does not contain any provision that introduces and applies objective criteria of value by the land registry, so as not to allow any person to re-sell at higher or double the price and evade tax by declaring a lower price. In the meantime, district officers grant approvals for the acquisition of property to foreigners to gain residence in a very short time, applying formal rather than substantive controls, without any subsequent control.

To date, no foreigner has been brought to court for aforementioned actions, nor has the permit granted to them been cancelled or revoked. In fact, many rent out their properties on an annual basis and the only impact on them have when they decide to sell is having to pay the Gesy contribution from 2019 onwards. Fortunately, the tax commissioner requests a statement of electricity consumption through EAC and checks whether the property was rented or not.

In addition to the illegality being committed, a very serious problem is also created with the constant increase in the price of real estate due to the lack of available properties, especially in cities and suburbs. In addition, rents are also increasing as a result of the lack of housing creating a social problem.

The state must control the situation with substantial and continuous controls, by amending the legislation, cancelling permits, increasing penalties and imposing administrative fines and sanctions.

George Coucounis is a lawyer practicing in Larnaca and the founder of GEORGE COUCOUNIS LLC, Advocates & Legal Consultants, www.coucounis.law, [email protected]