Tax treatment of rental income in Cyprus.

December 20, 2023, Deloitte Cyprus

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If you are a tax resident of Cyprus and receive income from renting out property, it is important to know your tax and VAT obligations. In this article, we will discuss the main tax and VAT aspects that a tax resident of Cyprus should be aware of when renting out their property.

How does renting out property affect my tax position?

Earnings from renting property located in Cyprus may result in the following direct taxes and contributions for a tax resident of Cyprus:

• Income Tax
• Special Defence Contribution
• Contributions to the General Healthcare System
• Value Added Tax (VAT)
• Stamp Duty

What needs to be taken into account

Direct taxation of rental income in Cyprus depends on the following factors:

• tax residency and domicile status of the property owner
• Are their audited financial statements prepared?
• like (for example, land or a building) and the age of the property

What are my direct tax obligations when renting out property in Cyprus?

Regarding the direct taxes and contributions applicable to the income earned by a tax resident of Cyprus from renting out property in Cyprus.

Income Tax

Rental income is combined with other taxable sources of income and is taxed at progressive personal income tax rates, ranging from zero to 35%, after accounting for the relevant tax deductions. Several tax deductions may be available to reduce the amount of rental income subject to income tax. More details will be provided later.

Special Defence Contribution (SDC)

The Special Defense Contribution (SDC) is mandatory on the entire amount of rent (without any possible deductions) at an effective tax rate of 2.25% (=75% x 3%). SDC is payable only by tax residents of Cyprus who are also tax residents of Cyprus. Tax residents of Cyprus who are not tax residents of Cyprus are exempt from paying SDC.

Contributions to the General Healthcare System (GHSC)

Contributions to the General Health System (GHSC) are mandatory for the entire amount of rent (without any possible deductions) at a rate of 2.65%. Contributions to the General Health System are subject to an annual limit and must be paid by all tax residents of Cyprus, regardless of domicile status.

Stamp Duty

In general, lease agreements are subject to a limited stamp duty, calculated using progressive rates of stamp duty ranging from 0% to 0.2%.

Available tax deductions for income tax purposes

The amount (net) of rental income subject to tax is calculated by deducting the following items (if applicable) from the total rental income:

• Depreciation (Wear and Tear, W&T): Annual depreciation is calculated as a percentage of the acquisition cost of the asset and is taken into account when determining taxable income. For example, the applicable percentage for commercial buildings is 3% per year. Depreciation is not calculated for leased land or buildings that have exceeded their useful life.
• Expenses estimated at 20%: Estimated expenses amounting to 20% of the total rent for the maintenance and repair of buildings. There are no such expenses when renting land.
• Interest on loans: Interest on loans incurred when acquiring property that generates rental income.
• Contributions to the General Healthcare System (GHSC): Contributions payable on the total amount of rent can be deductible for income tax purposes.

VAT aspects

Real estate rental is defined as the relationship between the landlord and the tenant, where the latter receives exclusive rights to possess the property.

The advantage of receiving rental income subject to VAT is that it allows the owner to claim a refund of the VAT paid when acquiring/constructing the real estate or on expenses incurred during its renovation. It should be noted that the owner has the right to opt out of taxation on leased/rented property under certain conditions. To exercise this option, the owner must notify the Cyprus tax authorities accordingly by submitting VAT form TD1220. However, if this option is implemented, the rental income will be considered exempt from VAT, and therefore, the VAT paid by the owner will remain as their expense. It is also important to consider that once this option is exercised, the opt-out from taxation cannot be revoked, except in cases of selling the property to a new owner.

What needs to be taken into account

When analyzing VAT taxation of rental income and how it affects the owner/landlord, the following should be taken into account:

• Type of property intended for rent/lease (commercial or residential)
• Activities carried out by the tenant (taxable or exempt from taxation)
• Actual start date of the lease/rental agreement

What actions should an individual taxpayer take?

Individuals receiving income from rental properties in Cyprus should keep in mind the following key tax obligations:

• Registration with the Cypriot tax authorities if not already registered.
• Filing the annual tax return for rental income
• Payment of the relevant taxes and contributions
• Informing the employer (if necessary) about rental income (by providing form TD59), so that the appropriate income tax is withheld through the PAYE system (see inquiry No. 54 issued by CTA).
• VAT registration if the relevant VAT registration thresholds are exceeded, as well as the submission of quarterly tax reports and payment of any VAT liabilities, in the event that rental income is subject to VAT.

It is important to note that in order to conduct a conclusive tax assessment, it is necessary to carefully consider all relevant facts and circumstances. Therefore, it is essential to obtain personalized tax advice.

The content of this article is intended for general familiarization with the topic. It is recommended to consult specialists for detailed advice, taking into account your specific situation.