North Cyprus Property Taxes
The purchaser should be aware of the additional costs of taxes when buying a North Cyprus Property.
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There are four main taxes involved in any property sale and purchase transaction These taxes are-
1 The Transfer Fee
UPDATE OF 1 NOVEMBER 2011
From this date, a transfer to a foreign person attracts tax at 6%, while a TRNC national still enjoys the 3% tax band on the first lifetime transfer. This change has attracted criticism from the expatriate community as discriminatory, but it should be mentioned that most expatriates will only purchase a single TRNC property.
2 VAT or KDV
This is currently set at 5% and is paid to the Tax Office. It is based on either the assessed value or the sale price. Please note that some vendors require the VAT to be paid on the actual sale value of the property as stated in the Contract of Sale on the date that possession of the property is delivered to the purchaser. You should check the terms of your contract of sale on this point.
3 Capital Gains Tax
Although the use of the term 'Capital Gains' is popularly used to refer to this tax, the correct name is Stopaj. The notion of a capital gain when a builder buys land and then increases the value by constructing a property has led to the use of this expression.
This tax is levied on property developers and/or builders, but can also be charged to resales where the Vendor is deemed to be a 'professional person'. Although it is the Vendor's responsibility to pay the tax, a sales contract may stipulate that it is paid by the purchaser. Under the present tax law, at November 2011, 25% of the selling price or market value, whichever one is higher, is deemed to be the builder's profit on disposal. The total tax payable by a corporate body is 23.50% of this deemed profit. The amount of tax payable as per this computation is equal to 5.875% of the selling price or market value as accepted by the Land Registry Officer.
The Minister of Finance has submitted an amendment to the tax law in November 2011, whereby the present deemed profit level of 25% on the selling price or the market value, whichever one is higher, will be reduced to 20%. This means after the 4% stopaj tax, instead of the additional 1.875% tax of selling price or market value, a builder will pay 0.70% tax.
Regardless of what is said in the Contract of Sale, there are numerous instances where purchasers have been obliged to pay the Capital Gains tax in order to clear the way for the issue of a Title Deed. This is because builders go bankrupt, change their trading names, disappear off the scene, or simply plead poverty.
4 Stamp Duty
This tax is paid to the Tax Office. The rate is 0.5% of the contract price provided this is paid within 1 month of the date of the contract. If it is not paid within this time, the rate increases in stages until after 6 months it becomes 1.5%. This means that if contracts are exchanged in the UK, then the purchaser should request that his solicitor registers the contract in TRNC within1 month in order to secure the lowest tax rate.
These points have the effect of encouraging some developers / builders to place the ownership of land in the name of their wife, children or 'donkey'. However, the tax authorities are well aware of this ruse and the taxes are becoming more difficult to avoid or mitigate. Also, the fact that land may be held in the name of a third party who is separate from the developer / builder should be a cause for alarm on behalf of the buyer. This is because it is difficult to compel a third party who is separate from the developer / builder to discharge their obligations as per contract, namely, transfer the Title Deeds of the completed property to a purchaser.
In North Cyprus, some estate agents require customers to enter into a Sales Contract with themselves and not the developer / builder. This makes matters worse as it is now possible that the purchaser is contracting with an estate agent and yet he, the estate agent, is not building the property, and in addition, a third party owns the land. This is often a recipe for disaster. Wellington Estates only builds on land which we own, and that land is normally free of any loans or other encumbrances and this is a most important point. All construction workers are directly under our control and there are only two parties named in the Contract of Sale, namely, ourselves and the purchaser.
VAT, Capital Gains and Stamp Duty are normally paid when the customer is issued with Title Deeds. The Vendor is unable to do this until the customer is in possession of a 'Permission to Purchase' certificate, which is issued by the Council of Ministers. The purchaser's solicitor will normally make the application. It often takes up to two years for the certificate to be issued. This means that these taxes, unless they are demanded earlier by the Vendor, will fall due at a future date. Indeed, it is quite normal for the developer / builder to construct a property in say 10 months and for the purchaser to be in residence for over one year before these taxes fall due.
These taxes are based on the value of the property. This can be determined in several ways. Firstly, the value is assessed by the Land Registry when the tax falls due, or they can be based on the declared sales price. Both of these options offer significant opportunities to deflate the notional value of the property, and hence the taxes due. From early 2008, the assessment of taxes is based on the stated price in the Contract of Sale. This contract is normally registered at the Land Office by the purchaser's solicitor. As and when taxes need to be paid, this value will be used. This regime provides an opportunity for tax planning by way of having two contracts in place. Say, for example, a purchaser had agreed to buy a house for £120,000. This price could be split into two tranches, Firstly, the house itself at £80,000 and a range of extras, possibly including a pool, at £40,000. The first contract, in the sum of £80,000 is registered and therefore taxes will be calculated on that amount.
However, during 2010 the Tax Office has begun to question the implicit property valuation, as stated on the Contract of Sale. This is perhaps due to the fact that many Contracts of Sale may deliberately and artificially depress the actual price. Valuation factors such as location, floor space and plot size amy well be taken into account by the Tax Office. It would appear that their valuation is final and there does not seem to be an opportunity for appeal.
A customer buys a property at £90,000.
On exchange of contracts
The solicitor will request part or all of his fees. This can be up to £1,000. The Stamp Duty is 0.5%, namely, £450.
On issue of Title Deeds
The assessed or declared price is say £60,000. VAT at 5% will be £3,000 and the Transfer Fee is 3%, namely, £1,800. Capital Gains, if payable by the purchaser at 6.25%, will be £3,750.
UPDATE OF 5 AUGUST 2012
We have received several enquiries from customers who are reselling their property, and who have not as yet received Title Deeds in their own name. In this case, the Title Deed will be held in the name of the original owner of the land. This Title Deed is likely to comprise the land on which a number of properties have been built. It is a common occurrence in TRNC as taxes need to be paid before separate Title Deeds can be issued. Indeed, we have heard that one Lawyer advises his customers that they do not need to secure an individual Title Deed for their property, and that they should rely on the registration of the Contract of Sale for protection. This has the financial advantage that they will only pay the Stamp Duty at 0.5%. However, we do not recommend this strategy as any adverse legal rulings against the original landowner can be registered and charged against his assets, including the land which has been developed. There have been several well publicised cases where a bank has been granted legal ownership of the land in the event of a landowner defaulting on his debts. The fact that this bank charged staggering rates of interest, in the sum of 80% per annum or more, makes landowners vulnerable to usurpation of their land assets. Also, landowners, either individuals or TRNC companies, can go bankrupt or go out of business, and in these cases the status of the land and any registered Contract of Sale becomes questionable.
SELLING A RESALE PROPERTY
As stated above, many property owners want to sell their property before they have received individual or shared Title Deeds. A customer may wish to sell his property either before he has moved in, or say several years after he has moved in. In these cases, the original Contract of Sale is assigned to the new prospective owner, and the consent of the registered landowner will assist. This means that there is no need for a new Contract of Sale, as the new owner assumes the rights and responsibilties of the original purchaser. As no taxes have been paid, apart from Stamp Duty, then the Tax Office will assess the value of the property at the date when an application for a Title Deed takes place. If this is some considerable time after the original Contract of Sale, and the Assignment, then the amount of tax due could have risen significantly. For this reason, a new owner may wish to insist that the previous owner places funds in a secure account in preparation for the settlement of taxes.