The Cyprus Supreme Court has recently adjudicated on the competence of the Director of the Department of Inland Revenue to reassess the value of a Cyprus property held by a Cyprus company, which was the subject of a share purchase agreement of the Cyprus company. The issue focused on the circumstances where the Director of the Department of Inland Revenue could exercise his discretion and reject the agreed contractual value of the sale and adopt his own view as to such value for the purpose of assessment of capital gains tax. Section 9(1) of the Capital Gains Tax Act sets out the circumstances when the Director of Inland Revenue in Cyprus could estimate again the value of a company’s real estate, irrespectively of the value expressly agreed by the parties. Section 9(1) provides that, as a matter of principle and for the purpose of assessment of capital gains tax, the value of a property is equal to the amount expressly agreed by the parties in the sale agreement. Nevertheless, the same section states that where the Director is in doubt about whether such value is indeed the true value agreed between the parties, he is entitled, within 6 months from the date of the parties’ agreement, to investigate the matter and if, as a result of the investigation, it transpires that the agreement states a false value, then the Director may impose additional taxation, calculated on the difference between the amount agreed by the parties and the value of the real estate as assessed by the Director. In those circumstances, the Director may also impose interest.
In the event where the matter involves disposal of shares of Cyprus company owning real estate in Cyprus, the same section provides that the value for purposes of capital gains tax shall reflect the value of the property owned by the target company. The Supreme Court observed that the true meaning of section 9(1) is that it is not sufficient for the Director, even after due investigation of the matter, to take the view that the amount declared by the parties simply happens to be low or lower than any estimate in which he views as reasonable. A declaration by the parties that they have agreed to sell the property for a low sum cannot be considered as a “false” statement. This is because the seller may sell the property for his own commercial reasons at an undervalue or there always may be other reasons why the purchaser will acquire the benefit of the property at a low price. If a low price is the real and true price of the disposal, then this cannot be characterised as “false” and may not trigger the discretion of the Director to make his own assessment as to the taxable value of the property.
According to the interpretation accepted by the Supreme Court, a “false” statement is only one which differs and is lower than the true and real sum agreed between the parties for the property sale. That is to say, if it is declared that the sale is made for sum A and if the Director takes the view that this is not the true value agreed, he can carry out an investigation which shall focus on the genuineness of the statement. If the investigation proves that, in reality, the sale was made for a different amount, obviously higher, then the Director may obviously consider such statement as “false” and the Director has the authority to impose the payment of tax or additional tax on the difference.
However, this investigation cannot extend to the objective and market value of the property, as this, alone, is irrelevant and does not, per se, prove that the declared value was false. The above guidance of the Supreme Court puts in question an established taxation practice adopted for many years in the past from the Director of Inland Revenue. The Director can no longer rely on his own view as to the market price of the property in question and use that price as the basis for the tax calculation. Rather, he is obliged to use the value stated by the parties in the sale transaction, unless he can prove that the said value was not the real value agreed by the parties and that, in fact, the parties had agreed a higher value which was not mirrored in the relevant agreement. Short of that, the Director may not exercise his discretion and substitute the agreed value with a value corresponding to his own view as to the value of the property at the time of the sale.