by Stuart Gray, October 2004

IMPORTANT WARNING: The contents of this report have been compiled in good faith by Investorsoffshore.com to provide assistance to investors, but do not constitute investment advice or recommendations. Investors should not rely upon the information given in order to choose types or routes of investment but should make their own independent enquiries before making choices. Investorsoffshore.com has taken reasonable care in researching and presenting the information herein but makes no representations as to its accuracy and accepts no liability for actions taken or not taken as a result.

Situated at the eastern end of the Mediterranean and lying approximately 100 miles off the southern Turkish coast, the island of Cyprus has in recent times expertly combined business with pleasure by carving out a niche as a popular location for offshore business whilst taking advantage of its natural beauty and climate to become a busy tourist hot spot. Its long history has seen the country absorb an eclectic mix of influences from Ancient Greece through to the modern era when it became an important military and strategic base within the British Empire at the crossroads of Europe and Asia.

A notable British presence remains to this day and Cyprus has become home to a large expat community (estimated at around 50,000), while British tourist trade accounts for the overwhelming majority of the country's tourism income. A look at the Cypriot climate and its easy to see the attraction: average temperatures only dip below 70F (21C) between November and April and the country can boast on average 300 days of sunshine per year. English is also widely spoken by the local population, and the legal and land registry systems are largely based on British practices. What's more, luckily for the Brits, they also drive on the left side of the road!

However, it must be remembered that when we talk about Cyprus, we are for the purposes of this feature only talking about the south. The country has been divided politically since, in Greek eyes, the Turks invaded and took control of the northern third of the island in 1974, and to all intents and purposes the island has remained two distinct countries ever since. Whilst moves are afoot towards a political settlement, and restrictions on movement and trade over the demarcation line have recently been lifted following Cyprus' entry into the European Union, it is uncertain when the island will become fully integrated.

The political situation however, should in no way act as a deterrent to potential investors in the South. In fact, the country has been rapidly growing in popularity for property investors and this has been borne out by steadily rising prices. So what do you get for your money? About 130,000 Cyprus Pounds (EUR224,000, USD278,000, GBP154,000) will buy you a detached three bedroom dwelling, although expect to pay more to get near the beach. In the north, the equivalent property can be picked up for around CYP90,000, and prices here are rising fast, albeit from a low base. However, there are significant risks attached to buying in the North which will be explained later.

Whilst there are no hard and fast rules governing the purchase method of property in Cyprus, one will typically buy through an agent or developer, or a partnership of both. Agents typically charge the buyer a commission of 5%, although an extra 3% may be charged if a developer is also involved. However, fees have become more negotiable as the market has tended to cool in recent months. There is nothing to stop a buyer dealing directly with a seller, but this is not recommended as the land registry system is somewhat bureaucratic and best tackled by a professional representative. Legal fees are likely to be in the region of CYP600 for a normal transaction.

Obtaining finance for a property purchased in Cyprus is relatively straightforward, and thanks to the country's British connections, most bank staff speak reasonably fluent English. Typically, Cypriot banks will lend between 60% and 80% of the value of the property with the term usually fixed at seven to ten years, although longer repayment periods can be negotiated. As things stand, it would be very difficult to obtain a Cyprus mortgage from a non-Cyprus bank. The country's accession to the EU means in theory that any restrictions on capital transfers or interest rates should no longer apply. In practice however, it is taking longer than expected for the domestic banking industry to fully adjust to the new environment.

There are a number of taxes that are associated with the purchase of property in Cyprus. First, there is a Real Estate Transfer Tax. This is necessary to transfer the freehold into the name of the buyer and is levied on a progressive scale starting at 5% up to CYP10,000 increasing in five steps up to a maximum of 8% above CYP75,000.

For residents there is an Immovable Property Tax based on the value of the property at a rate of 0.2% between CYP100,000 and CYP250,000; 0.3% up to CYP500,000; and 0.35% over CYP500,000. The first CYP100,000 is exempt.

The buyer is also liable for stamp duty. This is charged at a rate of 0.15% on the first CYP100,000, and 0.2% above this threshold.

Depending on the size of the property, local authority taxes range from 0.1% to 0.5% per annum to cover refuse collection, sewerage, street lighting etc.

When the time comes to sell, capital gains tax is charged on disposals of real property in Cyprus and shares in companies owning real property in Cyprus. The base date for calculating the acquisition cost of real property is 1st January, 1980 or later acquisition. The tax rate is 20% of the chargeable gain as adjusted for inflation unless the gain is already liable to corporation tax, but certain lifetime exemptions apply to individuals for the disposal of agricultural land and main residence. The first CYP10,000 of a gain is exempt. This exemption limit rises to CYP50,000 if the seller has lived in the property continuously for the previous five years. Further allowances are granted in relation to transfer fees, inflation and improvements made to the house, but the total exemption cannot exceed a CYP50,000 limit. Capital gains tax does not apply to profits from the sale of overseas real estate by residents who were not resident when they purchased the asset.

Since Cyprus joined the EU, residency and work permits are no longer required of EU citizens. However, for non-EU citizens, employees of entities in Cyprus require 'Temporary Work and Residence (TRE) Permits', which are issued by the Central Bank. For this purpose, employees are categorized either as Executives or Non-Executives.

In effect, executives are defined as senior management, and only three are permitted per company unless the Central Bank can be persuaded otherwise. The minimum age for an Executive is 24, and the minimum salary is CYP12,000 per year. In both cases, a fair amount of documentation is required by the authorities and permits are normally issued for 2 years, renewable for a further three years.

Of course not everybody investing in Cypriot property is doing so with the intention of living there, and many investors (mainly British) will rent out homes whilst staying put in their home jurisdiction. Rentals in Cyprus will generally yield around 8% gross. After various management fees and costs have taken a bite, yields are closer to 5%.

This also brings up the thorny issue of tax. Few countries tax their citizens purely on a territorial basis (that is, only on income obtained from within the country of residence), and rental income from a property let in Cyprus will almost certainly attract income tax in your home state should you choose to remain there, not to mention capital gains tax when the property is sold on. In Cyprus itself, income tax is levied on a progressive scale up to 30% on income above CYP20,000. The first CYP10,000 is exempt. Meanwhile, pensions are taxed at 5%.

Finally, we must address the issue of investing in the North. With the process of rapprochement between the two communities underway, many brave (again mainly British), souls have chanced their arm with an investment in the northern property market. Whilst there are unquestionably many property bargains to be had in the beautiful and still largely unspoilt north, a note of caution: the risk of losing your entire investment is a very real threat unless you have a cast iron guarantee to the title. This is because the “Turkish Republic of Northern Cyprus” is legally recognised by very few countries except Turkey, and therefore the legal position of title deeds issued in the TRNC over the last three decades is precarious to say the least. A lot will depend on Turkey's entry into the European Union, if and when it happens.

Since border restrictions were lifted and Greek Cypriots have been allowed to cross the demarcation line, many have visited land or homes lost after the Turkish invasion, and may be expected to press for restitution or compensation in any negotiated bi-communal settlement. Therefore, buying in the north is probably only for the more determined or adventurous bargain hunter.