Cyprus property tax hike attacked

Editorial
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Mr Averof Neophytou

COMMENTING on the intended increase in the tax on property, Cyprus Democratic Rally Party’s (DISY) Vice President, Averof Neophytou talked about a “tax-raid” from the government against 90% of Cypriot citizens.

According to the Cyprus News Agency, Mr Neophytou said that DISY will be a shield of protection of the Cypriot citizens and it will oppose to this “tax-raid”.

“The values of land in 2010 are 20 times higher than those of 1980 and this means that the Cypriot citizen who currently pays a tax on real estate of €1,000, next year he will be called to pay €20,000”, Mr. Neophytou said.

“This policy will not only hit 90% of the Cypriot citizens, since first of all it will hit the employees in the construction industry, who will be the next victims in the “list of unemployment””, he noted.

“The left government of Mr. Christofias and AKEL (the Progressive Party for the Working People) try a class struggle”, he added.

Mr Neophytou was also reported as saying that it is the people’s obligation and decision to oppose this measure.

Cost of owning a home in Cyprus could rise

Nigel Howarth
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THE package of measures presented yesterday to MPs and social partners by Finance Minister Charilaos Stavrakis will introduce higher tax on property other than a home by adjusting real estate valuations which have remained unchanged over the past 30 years.

According to Mr Stavrakis, a reappraisal of property taxes based on current rather than 1980 market values will bring in additional revenue of between €80 and €100 million next year.

Question: But if this higher tax excludes homes, how will it affect home buyers?

Those buying resale (second hand) homes which have Title Deeds should be unaffected by the change in real estate valuations.

However, those who are buying property for which a Title Deed has not been issued may not be so lucky. Their cost of home ownership may increase as a result of the unacceptable delays in issuing Title Deeds, which in some cases exceed 20 years.

During this delay property developers are liable for the Immovable Property Tax on all of the land, buildings and other structures fixed to that land that is registered in their name. Many of them pass on this tax to their buyers (and many ‘scams’ involving overcharging and other fraudulent activities have been reported that you can read about elsewhere in this magazine).

At the present time, Immovable Property Tax is based on the market value as at 1 January 1980. Mr Stavrakis’ intention to reappraise property taxes based on their current rather than their 1980 market values could have a significant impact on the amount of Immovable Property Tax levied by the Inland Revenue due to the escalation in real estate values over the last 30 years.

For example, the Land Registry assessed the 1980 value of my plot of land at €11/m2. There are currently two plots of land similar to mine for sale in the area priced at €509/m2 and €457/m2 respectively.

A simple calculation shows that the market value of land in my area has escalated by approximately 4,400% over the past 30 years – and no doubt similar increases have taken place in many areas of the island.

If the Finance Minister imposes Immovable Property Tax based on current market values rather than 1980 values, property developers are going to receive substantially larger tax bills than they have in the past.

I have no doubt that many of these developers will pass these larger tax bills on to home buyers who have yet to receive their Title Deeds. This will increase the overall costs of owing a home in Cyprus and could further depress the Island’s already beleaguered overseas property market.

Property taxes to raise 80 – 100 million Euros next year

David Crowther
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The Cyprus Finance Minister, Mr Charilaos Stavrakis

EARLY this morning the Cyprus Finance Minister, Mr Charilaos Stavrakis, meet with MPs and social partners to present the government’s package of measures which are designed to reduce state expenditure and increase revenues.

The package, which is estimated to be worth €500 million, includes proposals for eliminating tax evasion, an town planning amnesty and re-evaluating the tax system on property. It also includes measures for lowering the cost of public pensions, targeting social benefits and reducing the number of public service employees by 1,000 over the next five years.

Cyprus has lost more than €1.0 billion in earnings this year, equivalent to 6.7 points of its GDP. The drop is primarily from a collapse in property sales and tourism.

During his presentation the Minister spoke about the structural problems faced by the Cypriot economy and stressed that if his proposed measures were not adopted the Islands fiscal deficit could reach 6% of GDP in 2011.

Mr Stavrakis explained that to reverse the situation the Government needs to find €500 million in additional revenues and savings, which corresponds to 3% of GDP. The package includes:

  • €80 to €100 million – reappraisal of property taxes
  • €75 million – town planning amnesty
  • €100 million – combating fraud and tax evasion
  • €100 – targeted social benefits
  • €150 million – pension cost reductions

The reappraisal of property taxes will introduce higher tax on property other than a home by adjusting valuations on real estate that have remained unchanged for 30 years. This reappraisal is expected to bring in an additional €100 million, while the proposed town planning amnesty could bring in a further €75 million next year.

The crackdown on fraud and tax evasion could result in a further €100 million of revenue to the state.

Regarding state expenditure, he said that the extraordinary measures announced earlier this year will not be repeated in 2011. These include the drop in the consumer tax on heating oil (€13m) which is a non-targeted measure. He also referred to the VAT ratio in restaurants and savings in medicine purchases.

The Minister stressed that another target is to reduce the number of the public employees by 1,000, the suspension of new job posts for 2 years, the termination of appointments of temporary staff and the abolition of a percentage of the permanent positions.

The Minister made it clear to the partners that the package does not recommend a drop in salary scales for new entrants into public service, but Mr Stavrakis stressed the need for restraint in salary increases and freezing the funds for overtime payments.

However, he referred to an increase in public pensions, structural problem due to the ageing population and salary increases. He recommended a drop of the state payroll by 20% (from 35%), saving €150 million per annum.

He proposed that better targeting of social benefits will result in their cost declining by 10% or €100 million by excluding those without financial needs.

On the subject of growth the Minister said that top priority projects will be accelerated, a favourable tax regime will be maintained, he will try to boost double taxation agreements and improve the regulatory framework.

Tax revenues slump, deficit increases

David Crowther
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TOTAL tax revenues collected by the Cyprus Inland Revenue Department during the first eleven months of 2009 fell by 15% to €1.56 billion from €1.83 billion during the same period last year; a reduction of €272.79 million which is entirely attributable to the collapse of the Island’s property market.

Inland Revenue Tax Collections Jan – Nov 2009
€ millions		 Jan – Nov 2008
€ millions		 Increase/ Decrease
€ millions		 %age
Change
Income Tax
– Employees 438.40 393.72 44.68 11.3%
– Self employed 51.09 51.84 -0.75 -1.4%
– Corporation Tax 580.04 631.77 -51.73 -8.2%
Immovable Property Tax 10.25 11.18 -0.94 -8.4%
Capital Gains Tax 66.26 291.04 -224.78 -77.2%
Special Contribution to Defence Fund 325.93 341.93 -16.00 -4.7%
Stamp Duty 38.12 60.77 -22.65 -37.3%
Penalties 39.18 41.34 -2.16 -5.2%
Other Taxes 8.31 6.77 1.54 22.8%
Total Collections 1,557.58 1,830.36 -272.79 -14.9%

Inland Revenue Tax Collections (source: Cyprus Inland Revenue Department)

The Island’s Finance Minister, Charilaos Stavrakis, is expected to meet with MPs and social partners today to present the government’s action plan to reduce state expenditure and increase revenues.

In his budget address two weeks ago, Mr Stavrakis ruled out the possibility of any cuts in the salaries of civil servants. However, when confronted by representatives of coalition partners DIKO and EDEK just before Christmas, he said: “When you have 60,000 civil servants, it is very possible that you’ll have some who get paid without working. This is very natural. It happens in every public and private organisation. The issue is to establish, together with the other parties, the legal tools which will allow us to punish those employees who are taking advantage of the Cypriot taxpayer.”

An additional 4,312 people have been employed in the broader public sector during the last five months alone and ministries are demanding more personnel for the coming year to cope with the increasing workload.

In 1990, €372 million went toward paying the wages of civil servants and employees in semi-governmental organisations. By comparison, the 2010 budget provides for €1.9 billion.

According to figures announced in parliament during the budget debate, in July the number of people employed in the public sector stood at 63,719. This month, it has risen to 68,031.

A deputy said that for every Euro in revenues generated by the state in 2010, 38 cents would go to paying wages, nine cents to pensions, 22 cents to running expenses and 11 cents to loan servicing, leaving just 20 cents to finance development projects and welfare.

Construction output falls continue

David Crowther
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PRODUCTION in Cyprus’ construction sector fell by 10% during the period July to September compared to the same 3 months in 2008.

This is the fourth consecutive quarter that construction output has fallen. During Q4 2008 output fell by 4.9%, in Q1 2009 it fell by 8.9%, and in Q2 2009 by 10.5%.

According to the latest provisional data from the Cyprus Statistical Service (CYSTAT) the index now stands at 93.5%.

Looking at the index in more detail, output in the construction of buildings has performed somewhat worse than the overall index. During Q4 2008 it fell by 5.4%, in Q1 2009 it fell by 10.2% and in Q2 by 13.6%. (CYSTAT has yet to publish their Quarter 3 figures).

Meanwhile, output prices in construction have also been falling. Compared to Quarter 3 of 2008, the index fell by 5.6% following a 3.8% fall in Quarter 2. Output prices in buildings have performed slightly better with the index falling 2.6% during Quarter 2 and 5% during Quarter 3.

(Earlier this year, the Cyprus Statistical Service, CYSTAT, revised a number of indices to bring them into line with European Union Regulations and to improve the quality of statistics. The Index of Production in Construction is now published using 2005 as its base year (2005=100) and is calculated using a new sample of enterprises, with changes in the relative weights of the various types of projects in total construction).

Call to outsource Title Deeds procedure

George Psyllides
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THE ISSUING of Title Deeds for new properties currently takes up to 20 years in some areas of Cyprus with thousands pending, the island’s developers association said yesterday.

Lakis Tofarides, the chairman of Cyprus Land and Building Developers Association said between four to seven years are needed to issue a Title in the Nicosia district while it could take 10 or 20 years to issue a Title in the coastal areas if there are no irregularities or changes to the property.

“I assure you, in most cases there are changes and irregularities,” Tofarides told reporters.

An estimated 130,000 Titles are still pending, though many concern privately owned houses, the developers said.

The association suggested allowing private certified experts to carry out 11 of the 12 procedures currently needed to issue a Title, letting the Land Registry handle the final approval.

This, the developers said, would enable the state to issue 30,000 to 40,000 Titles annually, without an additional cost and receive at least €30 million more a year from transfer fees.

It will also free the property market from rigid bureaucratic procedures and Cyprus will stop being discredited abroad as a problematic property market that does not issue Titles and traps buyers.

The association welcomed the government’s decision to implement a building amnesty and suggested that incentives should be given so entice the largest possible number of owners.

If the amnesty succeeds it could fetch the state over €300 million in just a few years, the developers said.

They also recommended the introduction of a unified development authority that will have the form of a one-stop shop to handle all procedures for issuing permits, since it will include all relevant services like, town-planning, municipalities, and public works.

“This will abolish the current bureaucracy, avoid unnecessary expenses and issue necessary permits in a short period,” Tofarides said.

The developers had several suggestions aiming to rejuvenate the property market that has taken the hardest hit from the global economic crisis.

They want the scrapping of transfer fees where VAT is imposed.

“We are saying that government revenue will increase with a cut in fees,” Tofarides said.

Around 27 per cent of the cost of buying a property goes to the government.

He said transfer fee scales should be amended to reflect the current state of affairs.

They had been imposed around 10 years ago when an average apartment cost €51,000.

The state charged three per cent for the first €85,000, five per cent for the next €85,000 and eight per cent thereafter.

This was designed so that people could acquire a home with low transfer fees – in that case €1500.

But today, the same apartment costs €200,000 with people asked to fork out €9,000 in transfer fees and an additional €30,000 in VAT.

“The figures are frightening,” Tofarides said.

The association called for a cut in the capital gains tax – from 20% to 10% – for a specific period of time to help land deals to be carried out in more reasonable prices and contain the phenomenon of undeclared cash that never enters the economy.

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