As of September 1, the tax treatment of real estate transactions, commissions and fees received by real estate agents, as well as the services they provide for the purchase and sale of real estate located in the Republic, will change. The Tax Department, in its circular, provides clarifications in relation to the handling of commissions paid for the conduct of real estate brokerage. The changes focus mainly on commissions received by real estate agents, both inside and outside Cyprus, fees for the provision of advisory services for transactions that are not considered real estate brokerage, other procedural services of a low added value, as well as supporting elements for real estate services.
Real estate transactions are not limited only to the sale, purchase, exchange, lease or exchange of immovable property, but also concern transactions of sale, purchase or exchange of immovable property made through the transfer of shares.
Therefore, the clarifications provided by the Tax Department also apply to transactions of transfer of shares of a company that does not carry on a business or that carries on a non-essential business, with the result that the value of its shares is represented and derived from the market value of the immovable property.
Who does it concern
According to the circular, signed by the Commissioner of Taxation, Sotiris Markides, commissions received by registered real estate agents for operations in Cyprus are allowed as a deduction for income tax or capital gains tax purposes, as the case may be.
On the contrary, commissions received by persons who are not professional real estate agents and are not allowed to carry out real estate brokerage in the Republic, under the Real Estate Agents Law, will not receive any discount.
In fact, in the event that a commission is paid to a real estate agent for whom there is a prohibition, it is possible that 10% of his fee will be withheld, in accordance with the Income Tax Law and depending on each double taxation agreement.
What about the partners?
At the same time, in the event that a real estate agent pays a commission to an employee or associate, after a purchase or lease, etc., the former will receive a deduction from income tax, provided that this fee does not exceed 50% of the total commission from the specific transaction.
In the event that the fee exceeds 50%, then it will not be allowed as a deduction for the real estate agent's income tax purposes.
Based on the circular, the fees of natural or legal persons will be deducted from taxable income, for income tax or capital gains tax purposes, when the real estate brokerage takes place entirely outside the Republic.
Consulting services
With regard to the fees paid for the provision of advisory services for real estate transactions, which do not concern real estate brokerage, the acquisition or disposal of an active business is deductible from the income tax of the buyer or seller, to the extent that the business generates taxable income and provided that the transaction took place and the buyer acquired or the seller disposed of the active business.
According to the circular, in case of acquisition or disposal of company shares of an active company, the relevant remuneration will not be deductible from income tax for the buyer, in case of future disposal of the company shares, or for the seller.
In addition, they will not be deductible from capital gains tax if the buyers dispose of the company shares, as they concern the acquisition and disposal of company shares of an active business and not of real estate.
Supporting Elements and Other Services
With regard to other services of a procedural nature of low added value that are real estate transactions, such as the drafting of purchase and sale contracts and the completion and submission of forms or declarations to government departments, these are not covered by this circular.
In relation to the expenses incurred by buyers or sellers for the remuneration of such services, these are deductible from taxable income for capital gains tax purposes, if they have been incurred entirely and exclusively for the acquisition of profit.
Regarding the supporting elements in relation to real estate services, according to the circular, a discount will be granted for the expenses incurred in relation to the commissions, when they are supported by invoices.
