19 % VAT Charge on Cyprus Plots of Land - New Measures are being considered

Further to pressure from the EU Commission on the imposition of 19% VAT on the sale of building land for business purposes, the Parliament Economic Committee proceeded with a conference for discussion of the above law, which according to our opinion will be approved and voted due to the EU Commission pressure exert to the Republic of Cyprus, for some time now.

 

BRIEF SUMMARY OF THE ISSUE

The Cyprus Republic was exempt from the relevant directive, by the EU Commission, for the period ending 31 December 2017.

EU commission has repeatedly warned for the imposition of penalties for non-compliance. Such penalties amount to 100.000 EURO – 300.000 EURO daily, from the date of non-compliance up to the date of full application of the directive.

In order to avoid the imposition of penalties this VAT law shall be approved and voted the soonest possible by the Cyprus Parliament!

The law applies also to the imposition of VAT on sales of shares of companies that own land and/or immovable property and with the sale of shares the ownership of the land and immovable property is transferred to the new shareholder. By imposing VAT on such transactions, cases of tax avoidance will be prevented.

Exemptions from the law are:

1.    Live stock areas

2.    Protected areas (i.e. Natura)

3.    Forest areas

In addition, the following compensatory measures have been put in place:

1.    Exception from capital gains tax

2.    Imposition of VAT on rents only for trading and business purposes

3.    Amendment of the regulation for the imposition of VAT on sales of shares of land holding companies

 

CONSEQUENCES FOR THE TAX PAYER

 

Cost of acquisition Rises!!!

With the application of the above-mentioned law, the cost of acquisition of land increases automatically by 19%, since the land developers will charge VAT to the ending buyer (this is the main principal of the VAT law).

For example, a couple enters into a purchase agreement with a land developer for acquisition of a plot at a price of 200.000 EURO.

With the current legislation the transaction is exempt from VAT and the purchase price id 200.000 EURO. With the application of the above mentioned VAT law the acquisition price will increase instantly by 38.000 EURO, to 238.000 EURO.

In the event that this couple finances the acquisition of the land with a loan, then the loan will be based on the principal amount of 238.000 EURO instead of 200.000 EURO.

Therefore, the enforceable VAT law not only results into higher transfer fees, and higher land registry associated fees but also to higher loan interests and longer repayment period for the loan.

 

Financing issues

Financing though a bank institutions will become even harder since the principal values will increase automatically by 19%. The cost of borrowing will increase, resulting into less investments in the land sector at a time the Cyprus needs it the most to boost the economy.

In addition, this will affect the existing collateral values held by bank institutions, on immovable property. The issue with the value of the existing collateral is whether the collateral will increase by 19% to reflect the new market value of the property, or whether the value of the collateral will deemed to already include the 19%.

 

ISSUES TO BE CLARIFIED & QUESTIONS

 

1.    The definition of <<business purpose>> shall be explained in detail in terms of the new VAT law, since individuals who might enter into transactions for sale of land might be suffer the 19% even if such transactions are limited or one off.

2.    Clarification regarding the application of the law on companies and individuals register in the Republic of Cyprus or non-register in the Republic of Cyprus shall be provided by the ministry of finance.

3.    What happens in the case that 2 or more plots of land are sold from an individual in the event that the transaction is not under the definition of a <<business purpose>>

For instance, what happens if 3,4 or 10 land plots are sold through one off transaction? Or though multiple transactions?

4.     When the sale of land plots which has been inherited is made, will this transaction be subject to 19% VAT?

Does this transaction fall under the definition <<business purpose>>?

Does the number of land plots in each transaction affects the application of 19%?

5.    In the event that the acquisition of land is made for First Residence, will any reliefs be provided?

6.     Any VAT incentives for non-Cyprus resident persons will be provided for the acquisition of land?

With the approval of the law probably the answer to the above questions will be given and clarifications will be provided for any issues that might raise.

CONCLUSION

Companies and individuals which are planning to proceed with the acquisition of land, should proceed ASAP prior to the approval and application of this VAT law so that they will take advantage of the current, 19% reduced market prices of plots of land in Cyprus.

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