In November 2017, the Cyprus parliament voted an important amendment to the Cyprus VAT Legislation, which amends the main VAT Law N.95(I)/2000 concerning taxation of building land, in order to align it with the provisions of EU VAT Directive 2006/112/EC. The amendment has entered into force on 2 January 2018.
Specifically the amendments relate to (a) the imposition of 19% VAT on the sale of building land, (b) the taxation of new commercial immovable property leasing contracts and (c) the application of reverse charge on transactions relating to transfers of immovable property during the process of loan restructuring.
In relation to commercial immovable property leasing, the rental/leasing of business premises (i.e. all properties other than residential properties) are subject to VAT at the standard rate of 19% when it is a B2B transaction and the recipient is engaged in taxable activities.
As per the new legislation, the standard VAT rate of 19% will be imposed in all of the following cases:
(i) transfer of ownership,
(ii) transfer of indivisible land portion,
(iii) transfer of ownership via contract or sale agreement or agreement which specifically provides that the ownership will be transferred on a future date or leasing agreement with buyout option,
the above cases apply to non-developed building land which is intended for the construction of one or more structures in the course of carrying out a business activity.
The Council of Ministers of Cyprus shall have the power to designate, via relevant regulations to be approved by Parliament, the types of land which will fall under the category of non-developed building land, as well as the exact date which will be taken into account for the identification of the time of supply for VAT purposes.
No VAT will be imposed on the disposal of shares in companies, resulting in transfer of ownership of related immovable property.
In late December and January 2018, the Tax Department has circulated guidelines on the following topics:
Lease / Definition of Business activity
The authorities have clarified that any lease of commercial property, that may amount to a business activity, will be subject to VAT. Inter alia, the following criteria will be taken into account to establish what constitutes business activity:
- whether the activity is systematic or constitutes professional activity which does not necessarily need to be commercial or for-profit;
- whether the activity is pursued professionally;
- whether the activity is quantifiable on a fixed period basis;
- whether the activity is based on established business procedures;
It is made clear that individuals renting out a single property will be exempt as the new VAT additions are aimed to professionals who pursue this sort of activities as their main business. It is highlighted that residential properties are excluded. Existing agreements that would be subject to VAT shall not be affected, unless terminated and new agreements are entered into. The lessor, may choose to notify the Tax Authorities should he is exempt from the payment of VAT for a number of reasons that may include the lease not being a business activity and/or the lessor is not liable to be registered for VAT purposes.
Sale of Undeveloped Land
It has been clarified that any types of undeveloped land falling under the definition of “nondeveloped buildable land” shall not be subject to VAT. Land which falls under agricultural land, environmental protection land, land which falls out of local town planning plans, archaeological interest land and land aimed for the development of farming shall be exempt from the imposition of VAT irrespective of the entity which is selling the land (i.e. whether the entity conducts in the sale in the framework of business activities or not). Several criteria have been set for the time of sale of the undeveloped land so that any transactions completed or filed before the 2nd of January 2018 will be exempt.
Reverse charges are applied to transfers when these are made within a restructuring process, loan restructuring as well as in procedures where the property is transferred by law to a lender. In such cases, the VAT registered individual is not under an obligation to be subject to VAT, however the receiver of the property must pay the corresponding tax and simultaneously have the right to claim input tax.