The Auditor General, Andreas Papaconstantinou, has raised serious concerns about how a property sale between 2015 and 2017 was handled. His comments appear in the introduction to a Special Report by the Audit Office titled “Audit of the Tax Department in Relation to the Sale of Immovable Property“.
The Auditor General’s comments translated from the Special Report:
This Special Report was prepared following an anonymous complaint concerning the sale of property belonging to a well-known businessman during the period 2015–2017.
An examination of the relevant tax files indicates that, although there were multiple warning signs at various stages suggesting potential non-compliance with legislation, the Tax Department does not appear to have identified and/or properly examined the transactions in question so as to take appropriate corrective action.
(a) Significant Reduction in Sale Price
The original sale agreement (2015) valued the property at approximately €19.35 million. Six months later, in 2016, the agreements were cancelled and replaced with new ones, reducing the sale price by €8.5 million (around 44%). As a result, it appears that this amount was effectively “forgone” by the sellers without logical or adequate explanation.
Following this amendment, a loss of €7.7 million was ultimately recorded, whereas a profit would otherwise have arisen. The €7.7 million loss was subsequently utilised for accounting purposes to offset taxable profits for 2016.
(b) Inconsistencies in Cost Reporting
While the Tax File recorded land and construction costs of approximately €9.3 million for 2013, the financial statements recognised corresponding costs of €15.8 million. At the time of sale in 2016, the total cost of the property was recorded at €18.6 million, resulting in a loss on disposal.
The €18.6 million cost attributed to the sale of the incomplete property included significantly increased capitalised interest, as well as interest capitalised during a period of inactivity.
Furthermore, the total project cost upon completion in 2018 was calculated at approximately €47.7 million. By contrast, another comparable project in the same area, involving the same businessman, of similar quality and nearly double the size, completed four years later (2022), was reported to have cost approximately €42.9 million — nearly €5 million less.
These facts reasonably raise questions as to the realism of the recognised costs and the correctness of their tax treatment.
(c) Transactions with Related Parties
The majority of transactions relating to the sale, construction and exploitation of the property were conducted between related parties. Such transactions should, by their very nature, have been regarded by the Tax Department as high risk and subject to thorough tax scrutiny.
(d) Preference Shares at Elevated Valuations
Under the Cyprus Investment Programme, approximately €62 million was raised through the issuance of preference shares. The valuation implied by these investment transactions appears inconsistent with the loss-making sale of the property, giving rise to reasonable questions regarding the authenticity of the transactions and the overall valuation of the asset.
(e) Reacquisition by Related Parties
The property ultimately reverted, through complex corporate structures and financing from related entities, to individuals within the immediate family circle of the original owner. This development further strengthens concerns regarding the authenticity, commercial substance, independence and arm’s-length basis of the transactions.
Final Considerations
In our view, there were multiple indications of heightened risk surrounding the totality of transactions relating to this property.
The Tax Department is called upon to reflect on how such an extensive pattern of warning signs, involving transactions amounting to millions of euros, was neither identified nor adequately examined, potentially resulting in significant implications.
A million here, a million there, and soon you’ll be talking real money.