TAXATION OF REAL ESTATE IN CYPRUS FOR VALUE ADDED TAX PURPOSES
Following the recent amendments introduced by the House of Representatives of Cyprus, for the purposes of harmonizing the legislation with the EU Value Added Tax (“VAT”) Directive, we set out below the way of taxation of real estate transactions in Cyprus.
Transactions in the course of furtherance of a business activity
In general, for VAT purposes, the supply of goods or the provision of services is subject to VAT when the transaction is carried out by a person in the course of furtherance of a business activity. The law specifies that the term “business” means an economic activity which is carried out independently and in any manner, irrespective of the purpose or the result of that activity.
The disposal or exploitation of real estate is included in the business activities for VAT purposes.
The determination of business activity should be based on the facts of each case separately and a set of criteria should be taken into consideration by the person in order to determine his obligations regarding the registration in the VAT Register and the imposition of VAT or not.
The supply of land is not taxed when it is done as an isolated transaction, i.e. there is no evidence or indications to demonstrate that it is done in the course of carrying out a business activity. For example, if the transaction relates to the sale of undeveloped land by a person who inherited the land and who does not carry out a business activity and this transaction was followed up by a transaction for another plot of land after seven (7) or ten (10) years, then this is a strong indication that it relates to an isolated transaction.
Moreover, the intended purpose of the transaction or the final result does not affect in any way the interpretation of an economic activity. For instance, if a person sells three plots of land to repay a loan, the conclusion whether or not he is engaged in an economic activity does not depend on the purpose of the decision or its final outcome.
Whether the sale of real estate is subject to income tax or capital gains tax is not a criterion for deciding whether a person is engaged in an economic activity for the purpose of charging VAT. In case the real estate is a company’s asset, its disposal will always be a taxable transaction, irrespective of the type of economic activity that the company carries out.
VAT on the sale of land and embedded buildings
Imposition of standard VAT rate of 19%
The supply of new buildings (including the land in which they are erected) before their first use is subject to VAT at the standard VAT rate of 19%. Buildings include both commercial or industrial buildings and dwellings.
Imposition of reduced VAT rate of 5% for the acquisition and/or construction of a dwelling for use as main and permanent residence
The reduced VAT rate of 5% applies to contracts concluded after 1 October 2011 relating to the acquisition and/or construction of dwellings by qualified persons for use as their main and permanent residence for the next 10 years.
Certain conditions must be met for the submission of the relevant application to the Tax Commissioner.
Imposition of reduced VAT rate of 5% for the renovation and repair of private dwellings
As from 4 December 2015, renovations and repairs of private dwellings which are deemed to be old (i.e. at least three years have elapsed since their first use) are subject to VAT at the reduced rate of 5%, excluding materials that exceed in value 50% of the total value of the services provided.
In addition, as from 4 December 2015, renovations and repairs of private dwellings which are deemed to be old (i.e. at least three years have elapsed since their first use) and which are used as a residence for vulnerable persons or dwellings which are used as a residence of the border areas is subject to VAT at the reduced rate of 5%.
VAT on the sale of land
What is taxed?
As from 2 January 2018, VAT is charged at a rate of 19% on the transfer of the ownership of undeveloped land, which is intended for the construction of one or more fixed structures in the course of furtherance of a business activity.
What is excluded?
No VAT will be imposed on the supply of land located in a livestock zone or areas which are not intended for development such as zones/areas of environmental protection, archaeological and agricultural. The above exemption applies irrespective of whether the person making the sale has as his main business activity the development and/or sale of land. Also, the disposal of the referred land is not taxable for VAT purposes, irrespective of the purpose of sale.
Transactions which have been carried out before 2 January 2018
On the basis of transitional provisions, the supply of undeveloped land is exempted from VAT if:
- It has been transferred before 2 January 2018, or
- for which a sales contract has been filed with the Land Registry or the Tax Commissioner (and has been properly stamped) before 2 January 2018.
As long as the contract of the transaction is submitted on the above Authorities before 2 January 2018, the transaction is deemed to have taken place before 2 January 2018 and it is not taxed, even if the consideration has been partially paid before 2 January 2018 and the remaining balance will be paid after this date.
However, if the contract was submitted after 2 January 2018, then the transaction is considered as taxable.
VAT on the rental / lease of real estate
Up to 12 November 2017, the rental of buildings was deemed to be an exempt supply and no VAT was imposed.
Under the new provisions, the lease/rental of immovable property to a taxable person in the course of furtherance of a business activity (except the lease/rental of immovable property for residential purposes), is deemed to be a taxable transaction and is taxed at the VAT rate of 19%, unless the building is used as a dwelling.
For example, if a Tenant is a restaurant business and enters into a contract after the 13th of November 2017 with an Owner for leasing / renting a shop, this transaction is subject to VAT.
The lessor is entitled (under certain conditions) to opt for the non-taxation of leases/rents with VAT, provided the he informs the Tax Commissioner of this decision through a certain form.
In case of exercising the non-taxation option, the lessor has no right to change his decision subsequently.
Existing contracts for the lease or rental of real estate, remain in force and are not affected by the above amendment. Therefore, the lease/rental is deemed to be an exempt transaction and is not taxable.
In case of termination and conclusion of a new agreement on or after 13 November 2017, the lease/rental will be a taxable transaction. In case there is a provision in the existing contract which allows the automatic renewal or automatic increase of the lease/rent, then this on its own does not create a new contract for VAT purposes.
Refundable input VAT
In the case of VAT on leases/rents, the lessee is entitled to a full refund of VAT charged by the lessor, provided that the lessee’s transactions are taxable for VAT purposes. If part of its transactions is not taxable, then it will have to claim VAT on a pro-rata basis as in the case of any other input VAT.
Change of the owner of the property
Whatever is the nature of the lease/rental transactions (whether taxable or exempt), it can only be changed in the event of a change in the ownership of the building. For example, if the existing owner of the building, who leases/rents the building and charges VAT, sells the building to another person, then the other person may opt for the non-taxation of the lease/rent with VAT.