Overview of the Reform
On 13 November 2017 the House of Representatives passed a Bill imposing Value Added Tax on immovable property at the standard rate of 19%, thereby harmonising Cyprus VAT law with the EU VAT Directive. The new law rests principally on two pillars: the sale of undeveloped building land by persons exercising economic activities, and the rental or lease of immovable property for business use.
Sale of Undeveloped Building Land
As of 2 January 2018, any sale of undeveloped building land intended for the construction of one or more fixed structures is subject to VAT at the standard rate, provided the transferor is acting in the course of its economic activities.
Two factors determine whether a transaction falls within scope. First, whether the transferor exercises economic activities: Article 3 of the VAT legislation interprets "business" as an economic activity carried on independently at any place, irrespective of its intended purpose or outcome. Second, whether the land qualifies as undeveloped building land for VAT purposes. Land situated in areas or zones of environmental protection, or of archaeological or agricultural designation, is exempt from VAT.
Rental and Leasing of Commercial Property
As a general rule, any lease or rental of immovable property to a 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 amendment applies only to new contracts — those coming into force after 13 November 2017. Contracts enacted before that date which are automatically renewed, or which provide for an automatic increase in the rental or lease payment, fall outside the scope of the amended legislation.
The decisive factors for determining whether a new contract attracts the 19% rate are the use to which the building will be put — dwelling or business — and whether the activities of the lessee are themselves taxable activities.
Reverse Charge on Loan Restructuring
The amended legislation introduced a reverse charge mechanism for VAT-liable supplies of land and property under loan restructuring or forced-sale arrangements, primarily affecting financial institutions. Where property subject to VAT is transferred by a borrower to a lender under such an arrangement, the recipient — typically the bank — must apply the reverse charge and account for any VAT due as if it were its own supply. The obligation to impose and pay the VAT thus shifts from the supplier to the recipient. This provision applied until 31 December 2019.
Exemptions and Reduced Rates
Exemptions apply where a buyer purchases a residential property as a primary and permanent residence, in which case a reduced rate applies provided the relevant application is submitted to the Cyprus authorities. This exemption is available to both EU and non-EU citizens. A further exemption applies where the planning permit application was duly submitted before 1 May 2004, the date on which Cyprus joined the EU.
A reduced rate of 5% may apply to the acquisition or construction of a residential property where the property is intended as the owner's primary and permanent residence, the applicant has not previously acquired another residence in the Republic at the reduced rate, and the acquisition or construction is completed prior to first occupancy or first exploitation of the property.
- The reduced 5% rate applies to the first 200m² of the property per the architectural plans; the remaining area is subject to the standard 19% rate
- For families with more than four children, the 5% rate applies to the first 200m² increased by 15m² for each additional child
- Where the reduced rate is granted on the basis of primary residence, the applicant must remain in the property for no less than 10 years
- If the applicant ceases to reside there, the proportionate difference between the standard and reduced rates for the remaining period must be paid to the Commissioner of Taxation, following 30 days' notice
Re-Application for the Reduced Rate
Under the recent VAT Amendment Law, a buyer or owner who has been granted the reduced VAT rate for one residence may acquire another residential property and re-apply for the reduced rate before the 10-year period lapses, provided the applicant ceases to use the first property as a residence before the lapse of the period, notifies the Commissioner of Taxation accordingly, and repays the difference between the standard and reduced rates applicable at the time of the original acquisition or construction. In all other cases, the applicant may be granted the reduced rate for another private residence only after the 10-year period has lapsed.
How ASC Can Help
ASC assesses whether a specific transaction falls within the scope of the VAT legislation, manages VAT registration, reporting, and submission, applies on behalf of clients for the reduced rate, and assists in claiming back any refundable VAT. As this note is for general information only, specialist advice should be obtained for each particular case — contact us to discuss yours.