On the 3rd of June 2020, the Cyprus Tax Department issued a circular clarifying new article 9E of the Income Tax Law relating to the tax credit arising on reduced rents as a result of the COVID 19 pandemic.
Specifically, as per the issued circular, article 9E relates only to tax year 2020 and provides a tax credit equal to 50% of the reduction in rent, provided that the following criteria are met:
1. Monthly reduction in rent
a. The monthly rent reduction does not exceed 50% and is not less than 30% of the monthly rental amount and is for a maximum period of three months, irrespective of which these three months are. As a result, if the rent reduction exceeds the 50% (e.g. 70%), then the tax credit will be restricted to the 50% reduction.
b. The reduction of the monthly rent amount should be evidenced by a written agreement between the owner and the tenant.
2. Related persons
The owner and the tenant cannot be related persons as defined in article 33 of the Income tax law
3. Tax credit
The tax credit only reduces the final amount of income tax paid and does not have an impact on special defense contribution and/or contributions to the General Health System.
It is clarified that in the case were a tax refund results from this tax credit, the amount to be refunded will not exceed the amounts which were withheld, paid as temporary taxes, or paid as a self-assessment
It is further clarified that the tax credit relates to rents, leases and rights of use
In the circular, three simplified examples are included:
A physical person owns a shop which is rented to X Ltd at a monthly rent of €2.000. The individual decides to reduce the rent for the months of May to July by 50% (i.e. a total reduction of €3.000). As a result, the tax credit the individual is entitled to amount to €1.500 (€3.000 * 50%).
In the above example, if the total tax payable of the individual amounts to €1.800 for which no temporary tax has been paid, after applying the tax credit of €1.500, he/she will only be liable to pay €300.
Using the same example as above with the only difference that a tax of €1.500 had already been withheld.
Using the tax payable amount of €300 as explained in the previous example, when subtracting the tax withheld of €1.500, a refund of €1.200 results. This amount will be refunded in full as it does not exceed the amount of tax withheld of €1.500.
Using the tax credit of €1.500 into consideration as detailed in example 1, the individual had paid a temporary tax of €100 during the year. In this example the individual has a total tax expense of €1.400 and a tax payable of €1.300 (after subtracting the temporary tax of €100).
Taking into consideration the tax credit of €1.500, a tax refund of €200 arises (€1.300-€1.500). However, since the amount of tax refund is higher than the amount of temporary tax paid, the amount that will be refunded will be capped at €100.