North Cyprus Tutorial: Buying property in North Cyprus
New DTA Regulations for North Cyprus: An Analysis
Overview of the Situation in Cyprus
Double Taxation Agreements (DTA) between various countries play an essential role in ensuring that investors and companies do not have to pay taxes in multiple countries for the same income. In relation to the situation in North Cyprus, the question arises to what extent the DTA-Cyprus is applicable to this area since the island has been effectively divided since the 1974 Turkish invasion.
The Greek Cypriot part still claims the rights of the Republic of Cyprus with the divided capital Nicosia, while the Turkish Cypriot part in the north also claims separate sovereign rights with the capital Nicosia (Lefkoşa, the northern part of the city). The applicability of the DTA-Cyprus (Double Taxation Agreement) to North Cyprus is therefore disputed and will be explained below. The results are based on the prevailing opinion in specialist literature and corresponding decisions of the German Federal Finance Court (BHF) on the basic interpretation of DTA dated June 15, 1973.
The following explanations use the DTA Germany-Cyprus as a reference. Since DTAs worldwide follow the same principles, the results presented here are generally considered valid for most countries or DTAs of most countries.
Interpretation Principles of DTAs
Each DTA signatory state may interpret the agreement from within its own legal system. When it comes to the applicability of the DTA-Cyprus to North Cyprus, the political will of Nicosia is not the determining factor, but rather how in the case of Germany for example the Federal Republic of Germany (or any other home state of an investor or a private individual) assesses the treaty provisions.
Scope of the DTA-Cyprus
The DTA-Cyprus generally applies to the territory of Cyprus. In the case of North Cyprus, however, there is no tax sovereignty for the Greek part. Based on the interpretation principles of DTAs, there are three reasons why the Republic of Cyprus cannot levy taxes in North Cyprus:
- The connection to circumstances in the occupied territory is not feasible.
- The enforcement of tax claims is factually not possible.
- The jurisdiction can not exercise its authority due to the division.
Consequences for Investments in North Cyprus
Since the Republic of Cyprus cannot currently exercise tax sovereignty over the northern part of its territory, the DTA-Cyprus is not applicable to the Turkish part. Accordingly, with respect to North Cyprus, this represents at least a temporary agreement-free state.
Despite the legal challenges arising from the non-applicability of the DTA-Cyprus to North Cyprus, there are various reasons why investments in North Cyprus can be considered relatively safe:
- Tax Advantages: Although the DTA-Cyprus may not directly apply to North Cyprus, investors benefit from the tax treatment offered by the government of the Turkish Cypriot part. This includes a broad exemption from corporate profits for the first ten years, as well as the tax-free realization of capital gains on property sales.
- Stable Political Climate: In recent years, the political climate in North Cyprus has stabilized, and the Turkish Cypriot government has sought to improve relations with other countries. This has led to investments in the region being considered less risky.
- Economic Growth: The economy of North Cyprus has experienced steady growth in recent years, particularly in the areas of tourism, real estate, and renewable energy. This growth has strengthened confidence in the region's economy and offers investors attractive investment opportunities.
- Progress in Resolving the Cyprus Conflict: Despite the previous unsuccessful efforts to find a comprehensive solution to the Cyprus conflict, there are still signs that progress can be made. A potential breakthrough in negotiations could lead to clarification of the application of the DTA-Cyprus to North Cyprus, providing investors with additional security.
- Property Commission for North Cyprus (IPC): The IPC is an independent authority that deals with disputes and claims related to real estate in North Cyprus. In particular, it helps to resolve issues arising from the Cyprus conflict, in which many properties and real estate were abandoned by Greek Cypriots.
New article on North Cyprus: Legal certainty for foreign property buyers in North Cyprus: The Property Commission of North Cyprus.
- North Cyprus is effectively separated from the Republic of Cyprus.
- The applicability of the DTA-Cyprus to North Cyprus is disputed.
- The Republic of Cyprus cannot levy taxes in North Cyprus.
- The DTA-Cyprus is not applicable to the Turkish part.
- Considering the overall circumstances and especially the existence of the IPC (since 2005, see below), there is a high degree of legal certainty for property buyers in North Cyprus.
Tables and Enumerations
Reasons for the lack of tax sovereignty of the Republic of Cyprus in North Cyprus:
- The resolution of tax issues in the occupied territory is not feasible for the Republic of Cyprus.
- The enforcement of tax claims is practically not possible.
- Jurisdiction of the Republic of Cyprus cannot exercise its authority due to the division.
Significance of the Property Commission (IPC) for North Cyprus (IPC - Complete Article):
- Clarification of property claims by independent commission.
- Compensation and return of real estate.
- Legal assistance.
Consequences for investments in North Cyprus:
- DTA-Cyprus not applicable to the Turkish part.
- Temporary non-agreement (in terms of DTA) status in North Cyprus.
- Legal certainty for foreign property buyers in North Cyprus.