On 13th of November, 2017 our House of Representatives passed a Bill, imposing Value-added Tax (VAT) on immovable property at the standard rate, 19%, thereby harmonizing Cyprus’ VAT Law with the EU VAT Directive. The new law has been harmonized mainly on two pillars:
A. Sale of undeveloped building land by persons exercising economic activities
B. Rental / Lease of immovable property for business use.
A. Sale of undeveloped land by persons exercising economic activities
As of 2nd of January 2018, any sale of undeveloped building land with the intention for the construction of one or more fixed structures is subject to the standard rate of VAT, so long as the transferor is acting in the course of his/her economic activities. With that said, the following factors will need to be examined as to establish whether a transaction may be subject to VAT or not:
1. Initially, what needs to be established is whether or not the transferor exercises or not any economic activities: It is submitted that Article 3 of the VAT Legislation interprets “business” as an economic activity exercised independently at any place, irrespective of the intended purpose or the outcome of that activity.
2. Secondly, whether the land is considered to be undeveloped building land for VAT purposes. It is established though that land located in areas or zones of environmental protection, archaeological or agricultural are exempted from VAT taxation.
B: Rental / Leasing of commercial property for business purposes are subject of standard VAT rate of 19%.
As a general rule, under the new provisions, any lease/rental of immovable property to a relevant taxable person acting in the course of its economic activities is subject to the standard rate of 19% unless the building is used as a dwelling.
The current amendment will be only applicable to new contracts, that is, contracts that have came to force after the 13th of November 2017.
Furthermore, contracts which were enacted prior of the 13th of November 2017 and which are automatically renewed and/or there is an automatic increase of the rental/lease payment fall outside the scope from the provisions of the amended legislation.
The decisive factors that will determine whether a transaction based on a new contract is subject to 19% are:
a) What will be the use of building be, a dwelling or a business,
b) Are the activities of the lessee taxable activities?
C. Reverse Charge on Loan restructuring arrangement
The new amended legislation also introduced the reverse charge mechanism for VAT-subject supplies of land and property under a loan restructuring/force-sale arrangement, which will mostly impact financial institutions.
Where a property/land subject to VAT is conducted by the borrower to the lender under a loan reorganization or forced-transfer procedure, the recipient of the property (usually the bank) is obliged to apply the reverse charge mechanism and discharge any VAT that should have been due, as if it was its own supply. With that said, the obligation for imposing and paying the relevant VAT is transferred from the supplier to the recipient. This provision will be valid until 31 December 2019.
D. Exemptions and/or Reduced VAT Rates
Exemptions apply where a buyer purchases a residential property for personal use, as a primary and permanent residence. In this instance the buyer shall pay VAT at a reduced rate, on condition that a relevant application for reduced rate is submitted to the relevant Cyprus’ authorities. This exemption applies to both EU and Non-EU citizens.
An additional exemption from the VAT tax applies to instances where the planning permit application was duly submitted prior to 01/05/2004. (the date when Cyprus became an EU Member State).
As per the provisions of the new legislation enacted, a Reduced rate of 5% may be applicable for the acquisition or construction of residential properties in instances where:
- The property is or intended to be used as the primary and permanent residence of the owner;
- The applicant has not acquired any other property / residence in the Republic with a reduced rate of VAT;
- The acquisition or the construction of the property is or will be completed prior the first occupancy into the property or the first exploitation of the property;
Additionally, a reduced rate of 5% is applied on the first 200 m2 of the property as per the architectural plans submitted to the relevant authorities, whereas for the remaining plot a standard rate of 19% is imposed. For families with more than four children, the VAT rate of 5% is applied for the first 200 m2 increased by 15 m2 per each additional child.
An important note here is that in case where the reduced rate of 5% has been granted due to the fact that it is the applicant’s primary and permanent residence, the applicant must remain in the period for a period no less than 10 years. If the applicant ceases to reside at the said premises, the difference between the standard and reduced rates, proportionately, to the remaining period of 10 years must be paid to the Commissioner of taxation, following a 30 days notice to the commissioner.
Based on the recent VAT Amendment Law, buyers or owners who have been granted the reduced VAT rate for the acquisition of one residence, can acquire another residential property and re-apply for the reduced VAT rate, even if the 10-year period has not lapsed, so long as the applicant:
- Ceases to use the property as his or her residence before the lapse of the 10-year period, and
- Notifies the Commissioner of Taxation accordingly, and
- Pays back to the Tax Department the difference in the VAT between the standard and reduced rates which were applicable at the time of the acquisition or construction of the first residence.
In all other cases, the applicant has the right to be granted the reduced VAT for another private residence after the lapse of 10 years.
Please be informed that the above content is for informational purpose only. Specialist advisory should be pursued for each particular case. For more information please contact us here
How ASC can assist:
- Assess and advice whether a specific transaction may fall within the scope of the new legislation
- VAT registration, reporting and submission
- Advice and apply on behalf of client for a reduced rate VAT
- Assist on claiming back any refundable VAT