Amendment of VAT legislation on the sale of underdeveloped land
By Chrisilios K. Pelekanos, Associate, Head of Indirect Tax Services
Until 31 December 2007, Cyprus, by way of derogation from the European Directive, exempted land sales transactions from VAT. Although it should have been harmonized with the acquis communautaire by 1 January 2008, the relevant harmonizing amendment to Cypriot law was adopted by the Parliament plenary ten years later, on 3 November 2017, following repeated Commission pressures for compliance.
Major amendments to the Legislation
The amendments to the Legislation concern:
(a) the imposition of a 19% VAT on the sale of land when it is undertaken in the course of carrying on an economic activity (ie individual transactions will not be taxed). At the same time, no VAT will be paid on the sale of shares or company shares in the event that the sale is transferable. The law will apply to contracts that have been filed with the competent authority or the Tax Commissioner from January 2, 2018 onwards.
(b) taxation of immovable property leases, effective date of November 13, 2017, for taxpayers. Under the terms and conditions, the landlord may choose not to tax the rent. The choice of the lessor cannot be differentiated.
(c) applying the reverse charge to transactions involving transfer of immovable property in the event of loan restructuring. The law will be valid from January 2, 2018 until December 31, 2019.
Expected impact of the change of legislation
Changes to the Legislation are expected to have a positive impact, at least in the case of transactions involving businesses registered for VAT purposes acquiring land and / or renting property for tax purposes, as the tax will be refundable.
For example, in the case of renting real estate to individuals who carry out taxable business, the lessor will be entitled to deduct tax on the cost of constructing and / or renting buildings, without any additional cost to the tenant, since VAT on the rent will be deducted for him. . This will reduce the cost of real estate.
The most common category of people for whom the change in legislation will have positive effects are land development companies as well as businesses acquiring land to build offices, shops, showrooms, warehouses, etc.
However, the cost of residential land to be sold to consumers for the purpose of building a private house by the individual is expected to increase as, under existing provisions, the land will be taxed at 19% VAT. , while the exemption from transfer charges will be a maximum of 4%. In these cases the tax cost will be less if the house is purchased by a land developer, as it will impose a 5% VAT on both the land cost and the cost of building the house.
Issues that need clarification
Following the adoption of the Law, there are still issues that need clarification and for which regulations are expected, such as:
Definition of buildable land
When is it considered that the sale of land by a person not registered in the VAT register is carried out as part of an economic activity
The terms and conditions under which the lessor of a property can choose not to tax rent
Expected implementation of the new legislation by the Tax Commissioner and the adoption of regulations that will clear the ambiguities where they exist.