Transfer of Title of Immovable Property in Cyprus

Transfer of Title of Immovable Property in Cyprus 2022

Transfer of Title of Immovable Property in Cyprus

Immovable property includes any land, buildings, structures, or fixtures affixed to any land or any building, or even trees, privileges, liberties, easements, and any other rights and advantages whatsoever appertaining to any land. This article will cover various issues you should know about transferring the title of immovable property in Cyprus.

What will you find in this article

What do we mean by transfer of title of immovable property?

As per the Cyprus Department Land and Surveys, transferring immovable property means voluntarily passing the title of such immovable property from the transferor to the transferee.

What documents are required for the transfer of immovable property in Cyprus?

Completion of Form N.270Declaration of Transfer of Immovable Property.

The certificate of registration (title) of the immovable property, which is to be transferred, must be attached thereto, in original. The transfer of the property shall take place at a Lands Office other than the Lands Office of the District where the property is located. Form N.270 must be completed in duplicate.

Completion of Form N.313 – Transfers/Changes of Immovable Property

The Seller must produce payment receipts of all fees, charges, and taxes payable for the property under transfer. Such fees, charges, and taxes may be any of the following:

  • Immovable Property Tax and Capital Gains Tax. Receipts of payment  may be obtained from the Internal Revenue Department.
  • Sewerage Board Tax. Receipt may be obtained from the Sewerage Board.
  • Town rate. Receipt may be obtained from the municipality in whose boundaries the property is located.
  • Communal rate. Receipt may be obtained from the community in whose boundaries the property is situated.

Signatures by the associated parties

All documents mentioned above must be completed and signed by the associated parties and deposited with the Lands Office accepting the transfer.

What is the procedure entailed in effecting the transfer of title?

  • Disabled persons must be represented by their lawful agent or any agent appointed by the Court or any other person.
  • Corporate bodies are represented by those persons who manage their affairs in accordance with the statutes, the law or any regulation.

The procedure for acceptance is completed upon the calculation and the payment of the fees by the transferor to the Lands and Surveys Department.

Who pays, and how much is the transfer tax in Cyprus?

The fees payable vary depending on the kind of transfer and are determined based on the assessed value recorded in the Land Register or the property’s market value under transfer. The transfer fees are usually paid by the Buyer and calculated as follows:

Up to €85,000 of the property value – 3%
From €85,001 to €170,000 of the property value – 5%
From €170,001 of the property value – 8%

how much is the transfer tax in Cyprus

How much is immovable property tax in Cyprus?

The immovable property tax previously paid annually to the Tax Offices is abolished as of 1/1/2017.

How long does it take to transfer immovable property in Cyprus?

Straightforward transfers may be completed within one hour. In this case the registration of the immovable property and the delivery of the titles to the parties may be made on the same day, provided all parties involved appear at the Office on time. If not, the title is issued on the next following days depending on the accumulated work volume and the available personnel of the Land Registry Office.

Transfer of Title of Immovable Property in Cyprus

Do I need a lawyer in any of the process of buying immovable property in Cyprus?

The input of a lawyer is not required when buying or selling land; nevertheless, retaining the services of a knowledgeable lawyer will provide you with the necessary experience and knowledge required to avoid the various pitfalls a non-experienced individual may fall into.

Disclaimer: The above is intended to provide a brief guide only. It is therefore essential that appropriate professional advice is obtained. N.V. Panayiotou Legal LLC is happy to assist you in this respect.

Related Insights

Reach out to us to see how we can help your business

Buying Property in Cyprus: Everything you Need to Know in a Nutshell

Buying Property in Cyprus 2021

Buying Property in Cyprus: Everything you Need to Know in a Nutshell

Although Cyprus offers endless opportunities to invest, buying a property in Cyprus requires careful planning and preparation. This ultimate guide covers everything you need to know about the Cyprus property market 2021.

What will you find in this article

Can foreigners buy property in Cyprus?

EU citizens are entitled to acquire property in Cyprus without any restrictions. Non-EU citizens who do not permanently reside in Cyprus may only purchase one apartment, house, or land after having received the approval of the Council of Ministers, with the property size not exceeding 4,014 square meters.

How does property acquisition work in Cyprus?

Property acquisition refers to the process of gaining ownership or rights over a real estate property. The rules of acquiring any property may vary from country to country. Below, we share the most common procedure when it comes to buying a property in Cyprus. 

Involvement of a Real Estate Agent

People looking to acquire real estate in Cyprus often involve a real estate agent to obtain a larger pool of properties. However, such a step is not mandatory and only depends on personal desires. 

Real Estate Agents in Cyprus are regulated as per Real Estate Agent Law N71(I).2010 and must be licensed. The fee of a real estate agent is typically evenly split between the Vendor and Purchaser and ranges between 2-5% of the property’s purchase price. 

The role of a lawyer in a real estate transaction

Acquisition of a property is a considerable investment for any individual or entity involving the transaction of a large amount of money, numerous documents, and lengthy legal conveyancing process. Lawyers are competent and conversant with the local laws, potential legal issues, and tricky classical practices. Therefore, engaging with a local lawyer when buying a property in Cyprus can help you minimize any potential risks and ensure a smooth real estate transaction. 

Real estate is an essential asset of most businesses and individuals. However, its ownership brings with it potential risks and liabilities. It is for these reasons that real estate due diligence forms a crucial part of any property acquisition.

Typically, one of the first things a Cyprus lawyer would inspect is the title deed of the sought property from within the records of the Department of Lands and Surveys (“DLS“). Before entering into a transaction, it is imperative to verify that the Vendor is the rightful owner of the property as well as to ensure that no encumbrances such as easements, mortgages, caveats or leases, are registered on the title, as that could subsequently hinder the successful completion of the transaction.

Once the due diligence on the property has been completed, the lawyer will assist in negotiating the real estate deals and draft the contract for the purchase of land. The agreement must be stamped and filed at the DLS within two months from the date of its signing. Failure to do so makes the Purchaser ineligible from exploiting the rights and safeguards granted by the Specific Performance Law.

The role of a lawyer in a real estate transaction

How to transfer the title onto the Purchaser’s name?

If a title for the sought property exists, then the transfer onto the Purchaser’s name can take place imminently and upon full settlement of the purchase price. An additional proviso for the transfer is that the Vendor has settled all fees, charges, and taxes that burden the immovable property. Such fees, charges, and taxes may be one or more of the following: 

  1. Immovable property tax
  2. Urban immovable property tax
  3. Capital gains tax
  4. Inheritance tax (if applicable). 

Also, a certificate of payment of liabilities must be issued by the Sewage Board, Municipal fees and Community fees.

When it comes to new developments in Cyprus, issuing a title may take some time because a developer must complete specific steps before, during, and after the project is completed. In such cases, the Purchaser may occupy the property before the transfer of the title. 

What is specific performance in property law?

Specific Performance Law safeguards a Purchaser if the Purchaser is not allowed to immediately transfer the acquired property onto his/her name even though payment of the consideration has been effected.

According to the provisions of Specific Performance Law, the Purchaser of immovable property may enforce the specific performance of the terms of the contract and secure the transfer of the acquired property onto his/her name, as long as a duly signed and stamped copy of the contract has been deposited at the DLS, within two (2) months from the date of signing of the contract. 

By depositing the contract in the DLS, the Purchaser prevents the Vendor from transferring the property elsewhere as long as the contract is valid and legally effective. It should also be noted that no burdens, charges or encumbrances can affect the right of specific performance after the contract has been deposited with the Land Registry.

Limassol District Cyprus
Limassol District, Cyprus

How easy is it to get financing in Cyprus?

Mortgages are widely available across the island regarding the financing of immovable property acquisition. As a rule of thumb, up to 70% of the property’s value to be purchased may be financed.

While assessing the financing application in a process called “know your customer (KYC),” the bank will look into the Purchaser’s identity, the origin of the funds used to purchase the property, and the kinds of transactions in which the customer is likely to engage in, in the future. This process enables financial institutions to identify unusual or suspicious behavior, termed anomalies, which may indicate money laundering.

What costs are involved in buying property in Cyprus?

Transfer Fees

The total amount of tax depends on the value of the acquired property and is typically paid by the Purchaser. The Transfer Fee is calculated as follows: 

  • Up to €85,000 of the property value – 3%
  • From €85,001 to €170,000 of the property value – 5%
  • From €170,001 of the property value – 8%

Stamp Duty

Unless otherwise stipulated in the contract, the Purchaser is liable for the payment of stamp duty as follows:

  • Up to €5,000: 0%
  • From €5,001 – €170,000: 0.15%
  • Over €170,000: 0.2%

Although the absence of the revenue stamp on a contract does not render it void, the revenue stamp must be paid before depositing the contract to the Land Registry for Specific Performance purposes (see above). The stamp duty plus a fine will be payable when the document is produced to the Land Office to transfer ownership of the property to any Government department or the court.

Immovable Property Tax

There is no immovable property tax. The tax was abolished 1st of January 2017.

Immovable Property (Towns) Tax

The registered owner of immovable property is also subject to minor taxation under other laws, such as municipal or village regulations. These taxes are calculated according to the property’s size and the area it is located, covering sewerage, refuse collection, and street lights. The charges range in total from €80 to €170 per annum.

Capital Gains Tax

Capital Gains Tax is levied at the rate of 20% on profits arising from the disposal of immovable property or profits arising from the disposal of shares of a company, the assets of which consist mainly of immovable property.

Estate Duty

There is no inheritance tax in Cyprus as the Estate Duty. Estate duty was abolished on 1st January 2000.

Buying Property in Ayia Napa
So White Club Resort, Ayia Napa - Cyprus

What are the best places to buy property in Cyprus?

As per the DLS, in terms of regional distribution of the total CoS during 2019, the majority of the sales were in Limassol (33,9%), followed by Paphos (25,4%), Nicosia (19,3%), Larnaca (15,1%) and Famagusta (6,3%).

Depending on your lifestyle and personal real estate goals, there are attractive properties to be found in locations all over the island.

  • Paphos (Greek: Πάφος) is located on the southwest coast of the island of Cyprus, and sheltered from the north by the majestic Troodos Mountains. It has a local international airport, which is convenient for frequent travel.
  • Famagusta (Greek: Αμμόχωστος) lies on the island’s east coast in a bay between Cape Greco and Eloea and is about 37 miles (55 km) east of Nicosia. One of the most popular summer resorts Ayia Napa is located in this area.
  • Nicosia (Greek: Λευκωσία), the capital of the Republic of Cyprus lies along the Pedieos River, in the center of the Mesaoria Plain between the Kyrenia Mountains (north) and the Troodos range (south).
  • Larnaca (Greek: Λάρνακα) is home to a major international airport, which makes getting there easy. Like other Cypriot coastal towns, Modern Larnaca is divided into an older city center and a wide sprawl of hotels and restaurants along the beach.
  • Limassol (Greek: Λεμεσός) is the second-largest urban area in Cyprus and has been ranked by TripAdvisor as the 3rd up-and-coming destination in the world.

Disclaimer: The above is intended to provide a brief guide only. It is therefore essential that appropriate professional advice is obtained. N.V. Panayiotou Legal LLC is happy to assist you in this respect.

Reach out to us to see how we can help you

Cyprus as an Alternative for Greek Entrepreneurs

Cyprus as an Alternative for Greek Entrepreneurs

Cyprus as an Alternative for Greek Entrepreneurs

This article was originally published on LinkedIn by Vassilis Panayiotou, Managing Partner of Panayiotou Legal.

Since 2012, there has been a 77% increase in the number of Greek businesses that have either relocated to Cyprus or registered a subsidiary, whereas according to the Bulgarian Institute for Market Economics, in the last few years, Greek enterprises have injected approximately 5 billion euros in Bulgaria’s economy.

While it has become apparent that the country’s inconsistent and non-business-friendly taxation system is straggling local businesses, it comes as no surprise, that the country’s weak economic position and a number of fruitless attempts at reform by an ineffective bureaucracy, has forced Greek companies to seek alternative jurisdictions in which they can operate their businesses.

Tax-System

With its corporation tax rate standing at 29%, Greece has a much higher corporation tax than its immediate neighbors, with Bulgaria’s rate standing at 15%, and Cyprus at 12.5%. Similarly, dividend distribution in Greece is taxed with 15%, while the corresponding charge in Bulgaria is 10% and 0% for non-Cypriot shareholders residing in Cyprus.

Unsurprisingly, over the past few years, our firm has been regularly receiving requests from Greek entrepreneurs who wish to exploit the use of Cyprus registered entities, to mitigate or even completely eliminate the overall tax liability of their Greek companies. The extensive network of Cyprus’ double-taxation treaties, the existence of a tax sparing clause between the two countries, the lack of thin capitalization rules and the flexibility of structuring investments through a combination of equity & debt are some of the many tools at one’s disposal to achieve this. But it seems that the island’s beneficial tax system is not the only reason behind the exodus of companies from Greece and into Cyprus.

Retail and Distribution Sector

Greek Retail and Distribution Entrepreneurs moving to Cyprus

Companies in the Retail and Distribution sector have been flooding into the island as they wish to exploit the island’s favorable geographical location and utilize the country’s position as a trading point for the Mediterranean, North African, and Middle East areas. The ease and speed at which a company can be set up and have its operations up and running is also a critical factor. A company can be incorporated in Cyprus in approximately 10 working days, whereas acquiring an Economic Operators Registration and Identification (EORI) number, can be obtained in a matter of a few days. The EORI number is assigned to Cypriot importers and exporters and is used for processing entry and exit declarations with the Customs authorities for shipments in and outside the European Union.

It should also be noted that non-resident businesses are allowed to maintain, store, breakbulk, or re-package their own transit products in warehouses in Cyprus, as long as the handling does not involve any variations in the customs tariff classification.

Culture and Language

Another instrumental factor behind the inward trend is the fact that the two countries have, a similar culture and the same native language. Having spoken to a number of our Greek clients, the latter perceive the ability to communicate in their native language as a critical platform, which enables and facilitates problem-solving, as well as delineates boundaries that exclude those with a different vocabulary.

For the reasons mentioned above, Cyprus has been transformed into one of the most attractive solutions for Greek Entrepreneurs. If you are an entrepreneur yourself and are thinking of expanding or moving your business operations from Greece to Cyprus, feel free to send me a message on LinkedIn, and I would be happy to discuss your options.

Form your company in Cyprus

We will support you from incorporation to full maturity and beyond

5 Reasons to Transfer Your Business From Greece to Cyprus

5 Reasons to Transfer Your Business From Greece to Cyprus

5 Reasons to Transfer Your Business From Greece to Cyprus

More and more experienced entrepreneurs who maintain their business in Greece decide to seek better “tax headquarters” to optimize their business profitability and operations. With taxation rates and operating costs rising dramatically, it is no surprise that many business founders end up in Cyprus looking for alternatives.

In the recent report of the World Bank on the most favorable locations for business professionals, Cyprus is ranked 54th out of 190 countries. In contrast, Greece is ranked 79th, making Cyprus one of the most attractive locations in the European Union for company incorporation.

Moreover, opening a company in Cyprus is not a demanding process; on the contrary, it can be done quickly and without special costs, while the entire process can be easily facilitated by professional service providers such as law firms.

If you are looking for information on starting a business in Cyprus and the immediate benefits that the country’s tax system will offer you, here is a short and practical guide to the five most important reasons that make Cyprus attractive for incorporation.

1. Low Corporate Tax

No entrepreneur does not seek a tax-friendly environment for his/her company. Cyprus has this comparative advantage.  For example, the corporate tax rate for Cypriot companies is 12.5%, while in Greece, the corresponding rate is 29%.

Therefore, the first and immediate benefit of starting a business in Cyprus is the low taxation rate, leading to a higher profit. Therefore, many Greek companies are now being transferred to Cyprus, setting up their parent company there and operating a subsidiary in Greece.

The first and immediate benefit of starting a business in Cyprus is the low taxation rate (12.5& vs. 29%), leading to a higher profit.

2. No Withholding Tax

According to the current regime, there is no withholding tax on dividends received by an EU subsidiary. In other words, no withholding tax is applied on dividends distributed by a parent Cypriot company to shareholders who are non-residents of Cyprus.

For example, suppose you are not a permanent resident of Cyprus. In that case, you can maintain a parent company here and enjoy the profits from your business activities without withholding tax on the distribution of profits. Additionally, there are no capital gains tax on the distribution of profits arising from the sale of securities – such as shares or securities – except profits derived from the sale of real estate located in Cyprus.

No withholding tax is applied on dividends distributed by a parent Cypriot company to shareholders who are non-residents of Cyprus.

3. Lower Social Insurance Premiums

Paying social insurance premiums is undoubtedly a big hoax for most professionals, who are required to pay large sums of money to the social insurance funds. However, in Cyprus, this is a minimal amount compared to other countries.

For example, when a Greek company pays 24.81% employer contribution to Social Insurance and an employee 15.75%, the corresponding amounts are only 8.3% participation for both parties in Cyprus.

Lower Social Insurance contributions are yet another reason companies elect to set up their operations in Cyprus. It is, however, essential to note that a Cypriot company and individuals who operate professionally in the country are required to pay a Special Defense Tax at a rate of 17% on dividends and 30% on interest. Still, non-residents of the country do not pay this tax.

When a Greek company pays 24.81% employer contribution to Social Insurance and an employee 15.75%, the corresponding amounts are 8.3% for both parties in Cyprus.

4. Lower VAT

With VAT at 19%, the fact that more and more foreign companies start their business activities in Cyprus is no surprise. VAT is applied on the supply of goods and the provision of services in Cyprus and goods imported from other EU countries. Compared with other countries, this rate is also significantly lower.

For example, Cyprus VAT is significantly lower than other countries, such as Greece, where the VAT rate is 24%.

The standard rate of VAT in Cyprus is 19%, compared with 24% in Greece

5. Better Banking System

Another factor that plays a critical role in the entrepreneur’s decision on the business’s location is, of course, the banking system. Cyprus holds a strong position in this regard as per the latest international rankings.

Among other things, the banking system in Cyprus presents comparative advantages in obtaining credit, paying taxes, protecting investments from minority groups, and the bankruptcy regime.

doing business in Greece

Conclusion

To conclude, opening a company in Cyprus is an easy process, which is supported by innumerable, measurable and immediate advantages making this country more and more attractive for foreign investment. Following the regulations and the European directive for parent companies, many professionals move their headquarters to Cyprus, enjoying lower taxes and significantly reduced insurance contributions. At the same time, most of their profits go directly to them and not to the state.

The above makes Cyprus one of the most favorable destinations in Europe for starting a company and developing commercial and business activities, and this undoubtedly can not go unnoticed by any experienced or even young entrepreneur.

Form your company in Cyprus

We will support you from incorporation to full maturity and beyond

General Traits, Legal System & the Cyprus Tax Regime

General Traits, Legal System & the Cyprus Tax Regime

Geography & Economics

Despite its limited geographical size and small population of around 800,000 people, Cyprus’ geographical and political significance in the area has always been disproportionate. The reason for this has been the island’s strategic position in the east Mediterranean.

Cyprus is the third largest island in the Mediterranean, and lies on an axis of movement, both north-south and east-west. The island stands at the crossroads of three continents, Europe, Asia and Africa, and is located south of Turkey, west of Syria and Lebanon, north-west of Israel and Palestine, north of Egypt, and south-east of Greece.

International Relations

Cyprus is a member of:

  1. European Union
  2. United Nations
  3. The Commonwealth of Nations
  4. World Bank
  5. International Monetary Fund
  6. Council of Europe

The country has signed the General Agreement on Tariffs and Trade (GATT) and the Multilateral Investment Guarantee Agency Agreement (MIGA). Cyprus has been a member of the European Union since 2004 and held the presidency of the Council of the European Union in the second half of 2012.

The country maintains worldwide diplomatic relations with missions in all major states. It has a stable democratic government and social system.

Cyprus has historically followed a non-aligned foreign policy. The Republic of Cyprus became a member of the European Union in 2004 and adopted the Euro in 2008 as its unit of currency.

Legal System in Cyprus

Although several laws and amendments have been enacted since the island gained its independence in 1960, the basic corpus of the law is still English Law as introduced and applied before that date. Practically the whole of the business and commercial legislation of Cyprus dates back to the time when Cyprus was a British colony. The legal system in Cyprus is based on English statute and English common law, with the UK 1948 Companies Act forming the basis of the Company law in Cyprus.

The Cyprus Tax System

A company is considered to be a tax resident of Cyprus if the management and control of the company is exercised in or from Cyprus. To satisfy the test of “Management and control”, it should be shown that the ‘effective management’ of the company as well as all important decisions and Board meetings are held in Cyprus. Cyprus tax resident companies are taxed on their worldwide income. On the contrary, a non-Cyprus tax resident company is taxed on income accrued or derived from a business activity carried out through a permanent establishment in Cyprus.

The Cyprus Tax System

The Cypriot Company
A Cypriot company can either be a private company established by one or more persons or a public company established by any seven or more persons who cooperate for any legal purpose and form a limited liability company, by signing the Memorandum of Association (MOA) and by complying with the provisions of the Cyprus Companies Law Cap.113. There are no minimum requirements with regards to the issued and paid up capital for a private company.

The island’s flat corporate income tax rate of 12.5% is one of the lowest corporate tax rates in the European Union.

The Investment Holding Company
Cyprus has molded itself into a highly advantageous venue for international business activity, and is considered to be an ideal platform for multinational companies seeking to exploit the Cypriot and European market via a Cyprus holding Company. A Cyprus holding company serves as a perfect gateway to the 
EU, through which shareholders may receive dividends without deduction of withholding tax. Cyprus registered entities are widely used to mitigate or even completely eliminate the overall tax liability of international companies whose business activities are held outside Cyprus. Cyprus registered entities are considered onshore, enhancing further Cyprus’ position as a credible platform for investments, tax planning, and international banking. Below are some of the island’s most notable features that have made Cyprus an acknowledged prime Holding Company jurisdiction:

1. The island’s flat corporate income tax rate of 12.5% is one of the lowest corporate tax rates in the European Union.

2. The provisions of the EU Parent – Subsidiary Directive and the Interest and Royalties Directive have full application in Cyprus, and therefore enable a tax-paying company in the European Union to receive dividends from its EU subsidiary while being exempt from having to pay withholding tax.

3. If a non-EU country is involved, and therefore the EU Parent – Subsidiary Directive may not apply, it is imperative that a network of Double Tax Treaties is in place to reduce the applicable withholding tax-rates. It should be noted that Cyprus maintains an extensive network of double tax treaties with over 50 countries.
4. Irrespective of the existence of a Double Taxation Treaty or the applicability of the EU Parent Subsidiary Directive, dividends being paid by the Cyprus Holding company to the non-Cyprus tax resident shareholders are exempt from any withholding taxes.
5. No capital gains tax is applied on profits arising from the sale of securities.
6. No capital gains tax is applied on the distribution of profit arising from the sale of securities (shares, securities and debentures), except on gains accruing from the disposal of immovable property which is located in Cyprus or profits arising from the disposal of shares of a company that owns immovable property in Cyprus.

7. No capital gains tax or income tax on the liquidation of a Cypriot Holding Company.

8. No capital gains or income tax on the liquidation of participations.

9. The Cyprus Holding Company can be re-domiciled to a third country (provided it is allowed by that country’s law).

10. No thin capitalization rules and no minimum holding period.
11. Cyprus tax resident Companies and individuals should pay Special Defense Contribution tax at the rate of 17% on dividends, and 30% on Interest. Special Defense Contribution tax is not applicable on dividends payable to non-resident individuals.
12. Dividend Income Tax. Dividend Income from a subsidiary non-Cyprus tax-resident company is exempt abroad. The holding company should hold at least 1% of the share capital of the overseas subsidiary company. The exemption does not apply if: a) the subsidiary company engages in more than 50% of its activities in producing investment income. In that case it would be taxed at 12.50%) or b) the tax burden on the subsidiary company’s income is lower than 6.25%. Dividends are not considered to be sourced from investment income if they are derived directly or indirectly from trading subsidiaries.

Reach out to us to see how we can help your business

Employee Assistance Programs – COVID-19 Cyprus

Employee Assistance Programs – COVID-19 Cyprus

The Ministry of Labour, Welfare and Social Insurance has announced a number of employee assistance programs for those affected by Coronavirus, following an emergency meeting of the cabinet and the President of the Republic. Additional information and the relevant applications may be found at the official ministry’s website.

Employee Assistance Programs:

Employee Assistance Programs:

1. Special Leave to care for children not older than 15 years of age, or for children of any age with disabilities. Download a Brief Description of the Program (GR)

2. Special sick leave regarding confirmed cases of Covid-19 and persons in self-isolation. Download a Brief Description of the Program (GR).

3. For the Self-Employed. Download a Brief Description of the Program (GR).

4. For Businesses that have completely suspended their operations Download a Brief Description of the Program (GR).

5. For Businesses that have partially suspended their operations. Download a Brief Description of the Program (GR).

Termination of Employment in the times of COVID-19

Termination of Employment in the times of COVID-19

The unprecedented events of the last few weeks have forced many employers, facing major business disruptions or closures, to make tough decisions about hiring, layoffs, furloughs, and compensation. Law firms all around the world have seen a drastic rise in queries on employee rights and employer obligations, demonstrating the difficulty in striking a balance between employee protection on one hand and safeguarding the company’s profitability or existence on the other.

The termination of employment is governed by The Termination of Employment Law of 1967 (N. 24/76), as amended (hereinafter referred to as the “Law”), whereas clause 5 of the Law, exhaustively specifies the conditions under which an employer may lawfully terminate an indefinite-term employment contract. The burden of proving the legitimacy of the dismissal is borne by the employer, and failure to overturn the legal presumption gives the employee the right to damages of up to two years’ wages.

Invoking Force Majeure Clauses as a Ground for Termination

Clause 5(c) of the Law references the occurance of a “force majeure” event as a justificable ground for termination. Does COVID-19 therefore fall under the scope of clause 5(c)? Are employers able to invoke the force majeure clauses in employment contracts as a ground for dismissal?

The answer is: It depends. As with most things in the legal world, the devil is in the details. The language and scope of the employment contract as well as the specific circumstances of each case should be closely examined prior to answering.

The European Commission defines “Force majeure” as a situation or event that (a) prevents either party from fulfilling its obligations (b) was unforeseeable, exceptional and beyond the parties’ control, (c) was not due to error or negligence on their part and (d) proves to be inevitable in spite of the parties exercising all due diligence.

It is undeniable that Covid-19 was unforeseeable, inevitable and not due to an error or negligence of either party. But will employers be able to prove that the pandemic has prevented or suspended them from fulfilling their contractual obligations?

In an attempt to prevent mass dismissals, the Ministry of Labor, Welfare and Social Insurance has announced that through a number of employee assistance programs the salaries of employees of businesses whose operations have been suspended or have been “affected” by the virus, shall be subsidized.

The above strongly suggests that any redundancies could well be avoided or mitigated and therefore may hinder employers from invoking clause 5(c) as a justifiable ground for dismissal.

Does the financial hindrance of the pandemic on a company justify employee redundancy?

Clause 5(b) of the Law states that an employer may justifiably dismiss an employee on the ground of the latter being redundant, by demonstrating to the Social Insurance Services that the company’s turnover has significantly fallen. The employer should further show that the reasons causing the fall in turnover will remain for a period extending to the relatively unpredictable future.

Unquestionably the pandemic has had an adverse effect on the turnover of most companies, but whether the effect of the pandemic in itself gives companies the right to dismiss their employees due to redundancy is once again debatable.   The two month period in which we have felt the effect of the pandemic may not be perceived as a ‘long enough’ period to prove that the decline in the company’s turnover is not a seasonal or periodic decline. Such decline caused by the pandemic may be deemed premature as an argument, and not suffient to substantiate dismissals on this ground.   The legal implications may be wide-ranging and complex, and therefore great caution is recommended to businesses prior to acting.