Nicosia, Cyprus. The audit office released a report questioning the validity of a property sale by an unnamed “well-known businessman” after the agreed value dropped by €8.5 million. The report asked why the tax department did not investigate the matter at the time.
Price change and documentation
The audit office said the property was valued at €19.35 million in 2015 when an initial sales agreement was produced and signed. It said that six months later, in June 2016, that agreement was cancelled and a new agreement was signed valuing the property at €10.85 million.
The audit office said the change represents a 44 per cent drop in price and that the reduction was left “undocumented” because “there is no relevant information in the tax files of the companies involved”.
Lack of independent valuation and rationale
The report said the property was never independently valued and that no reasoning was provided for any “impairment of the value of it” or any “rapid change in the conditions of the real estate market in the specific area” between December 2015 and June 2016.
It added that the payment terms appeared to have remained essentially the same in both agreements, and said “the sellers appear to be waiving the [€8.5m] without receiving any consideration or benefit”.
Tax implications
The audit office said the issue should have been investigated by the tax department due to the high risk involved in such transactions.
It said that if the sale at the original €19.35 million had proceeded, the selling party would have made a taxable gain of €760,000 on the recognised value of the property, which it said was €18.59 million.
Instead, it said, the revised transaction resulted in the selling party recording a loss of €7.74 million against the value of the property, which was then used to write off €4.45 million worth of taxable corporate profits for the year 2016.
The audit office said the tax department’s failure to investigate the sale “may have led to” the government losing tax revenue and to the “acceptance of a sale price which may not correspond to market purchase prices”, which it said is an offence.
It also said the reduced sale price may have caused the government to miss the possible collection of value added tax on the sale.
What steps should the tax department take to assess whether the sale price reflected market purchase prices?
