A recent decision of the Administrative Court differentiated the interpretation and application of the provisions of the capital gains legislation for the exemption of disposal of property of a deceased person.
The tax commissioner interpreted the relevant legislative provision of Article 5, as relating only to physical persons and did not provide an exemption for the disposal of property belonging to a deceased person and imposed tax. This interpretation was deemed incorrect and annulled by a decision of the court.
The administrator of the estate of a deceased person who sells property to cover the costs of the administration and distributes the remaining amount among the heirs is considered to fall within the concept of a physical person disposing of the property. The law does not define or refer to the disposal of property belonging to a physical person, but to the disposal of property made by a physical person, such as an administrator.
Therefore, the correct interpretation of the capital gains legislation allows the administrator of the deceased’s estate to sell property and obtain the deduction within the scope of the exemption provided for each person.
In the case of disposal of property, in the exceptions, section 5(1) of the Capital Gains Law, L.52/1980, provides, inter alia, that no tax shall be payable when the total gain arising from the disposal of property by any individual does not exceed the amount of €17.086, whether acquired during the same year or any other year.
Profit means the profit of any person arising from the disposal f and includes profit which is exempted from tax.
Taking into account the exceptions, tax is imposed and paid on any gain arising from the disposal of property at a rate of 20 per cent.
Decision of the Administrative Court
The Administrative Court, in its decision issued in case No.1358/2021, dated March 31, dealt with recourse by an administrator of the estate of a deceased person, who requested the annulment of the decision of the tax commissioner to impose final capital gains tax on disposal of a property belonging to the deceased, without deducting the relevant tax exemption.
The applicant alleged a legal error by the tax commissioner, regarding the interpretation of article 5 of the Capital Gains Law, Law 52/1980, lack of reasoning and due investigation.
Specifically, the commissioner explained to the administrator that the deceased owner of the property was not entitled to the exemption of €17.086. Only physical persons are entitled to this exemption and a person acquires the status of a physical person at birth and loses it after death.
The court analysed the provisions of the relevant legislation and concluded that taxation is imposed on the profit arising from the disposal of property (real estate or shares).
There did not appear to be any disagreement between the parties that the disputed act concerned disposal. Consequently, if the disposal of the property is made by a physical person, then the provisions of Article 5 of the Law apply.
It added that, in the present case, the disposal of the property was not made by the deceased person, but by the administrator, who is not disputed to be a physical person. Of course, the disposal did not concern the administrator himself, but the heirs of the deceased and was made with the aim of covering the administration and other expenses and any amount remaining would be distributed to the heirs.
The court concluded that, since the sale was made by a physical person, in the specific capacity of administrator, the commissioner erroneously proceeded to interpret the rights of the deceased person for the purposes of applying section 5(1) of the law, since what the law provides is that the disposal is made by a physical person.
The commissioner’s approach might have been correct if section 5(1) provided for the disposal of property belonging to a physical person. However, this is not the provision.
Therefore, if the disposal is made by a physical person as it was in the case under consideration, then the provisions of article 5(1) apply and by extension the commissioner should investigate whether the disposal coul benefit from the exception provided for by the law and annulled the contested decision.
George Coucounis is a lawyer specialising in Immovable Property Law, based in Larnaca. E-mail: [email protected], tel: 24818288