V.A.T - NEW LAW

Recent VAT Changes in the Cyprus Legislation & their Effect on Immovable Property Transactions: A Practical Viewpoint

13 August 2024

The House of Representatives passed the amending bill concerning applications for the reduced VAT rate of 5% on the construction or acquisition of brand-new properties to be used as primary and permanent residences in the Republic of Cyprus (the “Republic”).

According to the new provisions of the Value Added Tax Law of 2000 (the “VAT Law”), the reduced rate of VAT will apply to the first 130 square metres of the buildable residential area – based on the building factor and architectural plans presented to get a planning permit – where the Property value does not exceed the amount of €350.000, provided the total transaction does not exceed €475.000 and the total buildable area is no more than 190 square metres.

Individuals with a disability, who fall under the definition of “individuals with disabilities” as provided by the VAT Law, can apply for the reduced VAT rate of 5% to the first 190 square meters of buildable residential area, regardless of the total buildable area of the residence.

However, there are many diverse impacts of VAT which affect Property acquisition in all its commonly understood forms. The first and key example is the rental of Properties (the “Rentals”), given the high level of tourism within the local economy and the influx of forex and fintech business and their employees and consultants required in the Republic.

Short-term Rentals

Short-term Rentals like the ones listed on platforms such as Booking.com or Airbnb are subject to a VAT rate of 9%. This rate applies to income from Rental activities from Properties rented out for a period less than 30 days.

Further, Property owners engaging in short-term Rental activities must comply to a number of VAT-related requirements, such as:

VAT registration: Property owners must VAT-register if their annual rental income exceeds the registration threshold, which is currently set at €15.600. The registration process entails the submission of relevant forms to the Cyprus Tax Department (“CTD”).

Charging VAT: Once VAT-registered, Property owners are required to charge VAT at the rate of 9% on their Rental income. The VAT charge should be clearly stated on the Rental invoices or receipts issued.

Filing VAT returns: Property owners must comply with their filing duties by submitting VAT returns, typically on a quarterly basis. The VAT returns must detail all Rental income, and the corresponding VAT collected. Failure to file the relevant VAT returns or settle the VAT due may result in penalties and further interest charges.

Bookkeeping: Maintaining accurate records of all Rental transactions is vital. This obligation includes storing copies of Rental agreements, invoices, receipts and any correspondence with tenants. Proper record-keeping ensures compliance with tax regulations and facilitates the VAT return filing process.

The VAT rate of 9% in relation to short-term Rentals is relatively low in contrast to other services. Thus, short-term Rentals are an attractive option for Property owners, however, the administrative challenges involved could cause a huge burden to the Property owners. Therefore, professional advice should be sought to ensure compliance.

Further, to benefit from the reduced VAT rate for short-term Rentals, Property owners and prospective buyers shall follow specific procedures and maintain proper documentation. This includes:

Applications for reduced VAT: Submit the necessary forms and documentation to the CTD in order to qualify for the 9% VAT rate;

VAT registration for rentals: Register with the CTD if the Rental income breaches the threshold and ensure VAT is appropriately charged and remitted; and

Record-keeping: Maintain detailed records of all transactions, including sales contracts, Rental agreements, and VAT returns.

Ensuring compliance with the VAT regulations on Property purchases prevents any legal complications and financial penalties.

In respect of the Property owners of the short-term Rentals, registering for VAT and adhering to the 9% VAT rate is important for being compliant with their legal obligations. In this respect, proper documentation and timely VAT return filing are critical components for compliance.

VAT on purchases

Purchasing a residential Property is for many people a major life commitment and therefore shall be treated with the utmost seriousness.

When purchasing Property in the Republic, the standard VAT rate of 19% applies on the selling price by default. This rate applies to the acquisition of new properties, which are defined as those sold for the first time following their construction or significant renovation. The VAT must be paid by the purchaser, and it is typically included in the Property’s purchase price.

The Republic offers a reduced 5% VAT rate for first-time home buyers upon the satisfaction of certain conditions:

Primary residence: The Property must be used as the buyer’s primary and permanent residence.

Size limitations: The reduced VAT rate used to be applicable for the first 200 square metres of the Property’s covered area. Any area exceeding 200 square metres was subject to the standard VAT rate of 19%. However, since June 2023, the Republic has implemented changes to the reduced VAT criteria for primary residences. Under the new rules, the reduced 5% VAT rate applies to the first 130 sqm of a primary residence if the primary residence has a value of up to €350.000 and the total transaction value does not exceed €475.000; and

Citizenship and residency: The reduced VAT rate is available to Cypriot and other EU citizens and residents, as well as non-EU citizens intending to use the Property as their primary residence in the Republic.

To qualify, buyers must submit an application to the CTD, providing documentation that proves the Property will be their primary residence. This process involves several steps, inter alia, obtaining confirmation from the local municipality or other relevant authorities.

It shall be noted that applications for the preferential 5% VAT rate can only be made electronically through the “Tax for All” (TFA) digital portal. It is also only feasible to obtain the relevant certificate once the application process has been completed though the TFA website.

The information provided by AGPLAW | A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.