VAT is imposed on the supply of goods and provision of services in Cyprus, as well as on the acquisition of goods from the EU and the importation of goods into Cyprus.
Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods or services which they receive (input tax).
If output tax in a VAT period exceeds total input tax, a payment has to be made to the state. If input tax exceeds output tax, the excess input tax is carried forward as a credit and set off against future output VAT.
Immediate refund of excess input VAT can be obtained in the following cases:
- a period of four months has elapsed from the date the VAT became refundable
- input VAT which cannot be set off against output VAT until the last VAT period of the year which follows the year in which the VAT period in which the credit was created
- the input VAT relates to zero rated transactions
- the input VAT relates to the purchase of capital assets of the company
- the input VAT relates to transactions which are outside the scope of VAT but would have been subject to VAT had they been carried out within Cyprus
- the input VAT relates to exempt financial and insurance services provided to non EU resident clients (services for which the right to recover the related input VAT is granted)
No VAT cash outflow arises on intra-community acquisition of goods (with the exception of goods subject to excise taxes) as VAT is accounted by using the acquisition accounting method. This involves a simple accounting entry in the books of the business whereby it self-charges VAT and at the same time claims it back, provided it relates to supplies for which the right to recover input VAT is granted, thereby creating no cost to the business.
In cases the acquisition relates to a transaction for which the right to recover the input VAT is not granted, the trader must pay the VAT that corresponds to the acquisition.
VAT rates
The legislation provides for the following four tax rates:
- Zero rate (0%)
- Reduced rate of five per cent (5%)
- Reduced rate of nine per cent (9%)
- Standard rate 19%
Exemptions
Certain goods or services are exempt from VAT. They include:
- leasing of buildings used for residence
- most banking, financial services and insurance services;
- most hospital, medical and dental care services;
- certain cultural educational and sports activities;
- supplies of buildings, subject to conditions;
- postal services provided by the national postal authority;
- lottery tickets and betting coupons for football and horse racing;
- management services provided to mutual funds
VAT on immovable property
- Leasing of immovable property
VAT at the standard rate must be charged on the lease of immovable property when the lessee is a taxable person and is engaged in taxable activities by at least 90%. The lessor has the right to opt not to impose VAT on the specific property. The option is irrevocable.
- Sale of non-developed building land
VAT at the rate of 19% must be charged on the sale of non-developed building land, as from 2 January 2018. Non-developed building land is defined as any land intended for the construction of one or more structures in the course of carrying out a business activity. No VAT will be imposed on the purchase or sale 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.
- Repossession of immovable property by financial
institutions
VAT must be accounted under the reverse charge provisions on transactions relating to transfers of immovable property during the process of loan restructuring and for compulsory transfer to the lender, as from 2 January 2018. As from 5 December 2019, the definition of the term 'lender' includes licensed credit and financial institutions, credit acquiring companies, including their subsidiaries, as well as a public body or any licensed company which acquired/received from a credit institution any non performing/overdue loans. This provision is effective until 31 December 2023.
- Leases of immovable property which effectively transfer
the risks and rewards of ownership of immovable
property
As from 1 January 2019 leases of immovable property which effectively transfer the risks and rewards of ownership of immovable property are considered to be supplies of goods. They also become subject to VAT at the standard rate.
- Amendment to the VAT Law on the supply of
buildings
On 11 November 2022, Schedule 8 of the VAT Law (95(I)/2000) was amended pursuant to R.A.A. 423/2022. As per the amendment, the supply of a building is subject to VAT when supplied before its first delivery and under any subsequent deliveries within a period of five (5) years from its completion, provided that no actual use has occurred by an unrelated person for a period of at least twenty-four (24) months.
For the purposes of the above provision, the following definitions shall take precedence:
- Completion means the completion of the building so as to be able to be put in use for the purpose which is intended.
- Actual use means the use of the building on a systematic basis.
- Related person has the meaning given in paragraph 1(4) of the
Fourth Schedule to the VAT Law
The new provision substitutes the previous rule which provided that the supply of a building was subject to VAT when supplied before its first use.
The amendments are effective as of 11 November 2022.
Imposition of the reduced rate of 5% on the acquisition and/or construction of residences for use as the primary and permanent place of residence.
The reduced rate of 5% applies to contracts that have been concluded from 1 October 2011 onwards provided they relate to the acquisition and/ or construction of residences to be used as the primary and permanent place of residence for the next 10 years.
The reduced rate of VAT of 5% applies on the first 200 square meters. The standard rate applies for the remaining square meters as determined based on the building coefficient.
The reduced rate is imposed only after obtaining a certified approval from the Tax Authority.
The eligible person must submit an application on a designated form, which will state that the house will be used as the primary and permanent place of residence. The applicant must attach a number of documents supporting the ownership rights on the property and evidencing the fact that the property will be used as the primary and permanent place of residence. The application must be filed prior to the actual delivery of the residence to the eligible person.
Eligible persons include residents of Cyprus, EU and non-EU Member States, provided that the residence will be used as their primary and permanent place of residence in the Republic.
The documents supporting the ownership of the property must be submitted together with the application. The documents supporting the fact that the residence will be used as the primary and permanent place of residence (copy of telephone, water supply or electricity bill or of municipal taxes) must be submitted within six months from the date on which the eligible person acquires possession of the residence.
A person who ceases to use the residence as his primary and permanent place of residence before the lapse of the 10-year period must notify the Commissioner of Taxation, within thirty days. The person must also pay the difference resulting from the application of the reduced and the standard rate of VAT attributable to the remaining period of 10 years for which the property will not be used as the main and primary place of residence.
Persons who have already acquired a residence on which the reduced VAT rate was imposed, can re-apply and acquire a new residence on which the reduced VAT rate will be imposed, irrespective of whether the 10 year prohibition period for using the initial residence has lapsed or not. A condition for this to apply is that in case the 10 year period of using the residence as the main and permanent place of residence has not lapsed, the persons must return to the Tax Department the difference in VAT between the standard and reduced VAT rates applicable at the time of the acquisition or construction of the residence.
Persons who make a false declaration to benefit from the reduced rate are required by law to pay the difference of the additional VAT due. Furthermore, the legislation provides that such persons are guilty of a criminal offence and, upon conviction, are liable to a fine, not exceeding twice the amount of the VAT due, or imprisonment up to 3 years or may be subject to both sentences.
Imposition of the reduced rate of 5% on the renovation repair and extension of private residences
The renovation and repair of used private residences (for which a period of at least three years has elapsed from the date of their first use) is subject to VAT at the reduced rate of VAT of 5%, excluding the value of materials which constitute more than 50% of the value of the services.
As from 20 August 2020, the reduced rate of 5% applies also to any additions made to a private home for which three years have passed since its first occupation.
In addition the renovation and repair of old private residences (for which a period of at least three years has elapsed from the date of their first use) and which are used as the place of residence of vulnerable groups or residences that are used as the place of residence and which are located in remote areas are subject to VAT at the reduced rate of VAT of 5%.
Difference between zero rate and exempt supplies
The difference between zero rate and exempt supplies is that businesses that make exempt supplies are not entitled to recover the VAT charged on their purchases, expenses or imports.
Irrecoverable input VAT
As an exception to the general rule, input VAT cannot be recovered in a number of cases which include the following:
- acquisitions used for making exempt supplies;
- purchase, import or hire of saloon cars;
- entertainment and hospitality expenses (except those relating to employees and directors).
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
