Update of Paragraph 1(b) (i) and (ii) of Schedule Eight, 11 November 2022 - Cyprus

Date: May 29, 2023

A. What the amendments are about
1. With the amendment of Paragraph 1(b) points (i) and (ii) that took place on 11/11/2022, the supply of immovable property with a time horizon of 5 years from its completion becomes a taxable transaction if the following conditions are met:

(a) The property is supplied one or more times within 5 years from the time of its completion and

(b) was not put into actual use by an unrelated person for a period of more than 24 months

2. The amended paragraph 3 of Schedule Eight defines the concepts:
(a) Completion of a building or part there of

Be capable of being put to its intended use

(b) Actual Use

Using it on a systematic basis (for 24 months but not necessarily continuously)

(c) Related Person

As set out in Paragraph 1(4) of Schedule Four

It is noted that paragraph 1(a)(ii) covers the transfer of possession of immovable property pursuant to an agreement which provides that the immovable property will also be transferred at some time in the future as well as lease agreements with right of redemption. The analysis below applies to these cases as well.

B. What are the effects of the above amendments in practice

(a) The transfer of buildings or parts thereof within 5 years of their completion may be subject to VAT even if the property had been used for a specified period of time prior to their transfer.

(b) The period of actual use which does not exempt the property from VAT was set at 24 months, assuming such use is carried out by an unrelated person. The actual use of 24 months may not be continuous.

(c) From the wording of point (b) it follows that if the actual use is carried out by a related person beyond 24 months and the property or part thereof is transferred within the time limit of 5 years, it will be subject to VAT.

C. Example

Data
A Company is erecting a building on the beach front consisting of six apartments and two shops on the ground floor. The construction of the building is completed on 31/12/22 and after the inspection by the competent authorities, a certificate of suitability and use is issued in accordance with the conditions of the building permit.

The company deals with the apartments and shops as follows:

(a) Two of the apartments are sold two months after the building is completed

(b) One of the apartments is rented to a natural person for residency for a period of 24 months

(c) Two of the apartments are leased to an unrelated company for the purpose of making them available to tourists visiting Cyprus for short holidays

(d) One of the flats is let to a related company to use as an office for a consideration

(e) One of the two shops is leased to an unrelated business for 36 months

(g) The second of the two shops is leased for one year and then remains unlet for the next 2 years when it is sold

Tax implications
(a) Two of the apartments are sold two months after the building is completed

19% VAT is charged on the value of the selling price unless the buyer provides a certificate of reduced rate of 5%.

(b) One of the apartments is leased to a natural person for residency for a period of 25 months

No VAT is charged on rents because the tenancy is for private residency (exception of Paragraph 1(a)(vi) of Schedule Eight). If the apartment is sold after the lease is terminated either within or outside of 5 years of completion, the sale will be exempt. The need to refund the VAT attributable to the apartment in relation to the cost of construction must also be considered.

(c) Two of the apartments are leased to an unrelated company for the purpose of making them available to tourists visiting Cyprus for short holidays

Initially, the rental of the apartments is subject to 19% VAT based on paragraph 1(b)(vi) of Schedule Eight unless non-taxation is chosen (opt out). The input tax on the construction is provisionally claimed in its entirety.

If the lease of the two apartments extends beyond 24 months, their possible subsequent sale will be exempted. Input tax on construction should be readjusted based on the Capital Goods Scheme (CGS).

If the lease of the two flats is less than 24 months and subsequently are sold within 5 years as of the completion time, the sale will be subject to 19% VAT unless the reduced rate of 5% applies (see question below).

Question: Will the buyer be entitled to 5% given that the first use has occurred but according to the amendment VAT has been imposed on the supply?

If the apartments are sold 5 years after their completion, no VAT is charged and input tax on construction should be refunded in accordance with the CGS

(d) One of the apartments is let to a related company to use as an office for consideration

Regardless of how long the apartment has been leased to the related company, if the apartment is sold before 5 years from its completion, it will be subject to VAT. The 24-month period does not apply in this case since the lessee is a related company.

The CGS applies and input tax on construction will be claimed to the extent that the apartment is rented with VAT. If the apartment is sold after the 5th year, the sale becomes exempt and the VAT on the construction will be adjusted based on the CGS.

(e) One of the two shops is leased to an unrelated business for 36 months

In this case, both the 24-month condition and the unrelated person condition are met. This means that if, after the lease, the shop is sold either before or after the 5-year time limit from completion, the delivery is considered exempt and the input tax is adjusted according to the CGS

(g) The second of the two shops is leased for one year and then remains unlet for the next 2 years when it is sold

In relation to the second shop, the 24-month condition is not met and therefore if the store is sold before the 5-year period, VAT will be imposed on the sale. Input tax on construction is claimed in its entirety because both the lease and the sale are taxable transactions.

If the second shop is sold after the 5-year threshold has passed, the sale will be exempt, resulting in the adjustment of input tax on construction based on the CGS.

D. Problems arising from the amendment of Schedule Eight

1. The elimination of the term ‘first occupation’ from paragraph 1(b)(vi) does not consider the fact that the same term is used in other parts of the Legislation:

Paragraph 11 of Table B of the Fifth Schedule:

In the context of renovation and repair as well as static upgrading works of a private house

First occupation: “means the first use, in any way, of the private residence after its construction, including ownership, private use, rental or any other use”

Paragraph 1 of Table C of the Fifth Schedule:

In the context of the supply of a building or part of it and construction of a building

Supply of a building or part of it, including the plot of land purchased together with it or an undivided ideal share on it, provided that the supply takes place before the first occupation in it, which is used as a main and permanent place of residence in the Republic.

Question: If the property is sold as taxable, the buyer will be entitled to 5% since the property has already been used for e.g., lease and the first occupation has occurred

2. Real estate sales by credit recovery companies

Possibly they own properties whose acquisition/construction was completed either over 5 years or close to 5 years, with the result that they become exempt persons.

3. Leasing of properties for less than 24 months and subsequently selling them as new
 
There are cases where the initial use of the building was an exempt lease for a period of less than 24 months and then they are sold before 5 years. The input tax on acquisition or construction was not claimed but when it is sold VAT will be imposed. What about the input tax that was not claimed in the first place?
 
4. Properties which, for various reasons, could not be sold within 5 years of their construction/acquisition
 
In these cases, based on the intention, the VAT was claimed, but if the property is not sold within 5 years, it becomes exempt, resulting in a refund of the VAT initially claimed.
 
5. There are no transitional provisions
 
D. Actions in progress
 
Bearing in mind the problems arising from the amendment of the relevant paragraphs of Schedule Eight, and after pointing them out to the competent officials of the Tax Department by the affected taxpayers or their professional bodies, including the VAT committee of the Institute of Certified Accountants of Cyprus (ICPAC), a review of the amendments is expected.
 
Regardless of any further amendments, transactions concluded between the date of the initial amendment (11/11/22) and the date of the possible upcoming new amendment, most likely, be subject to the tax treatment described in this update.

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