RECENT VAT CHANGES RENTAL INCOME & PLOT DISPOSALS

 

A.  Property Rentals

All property owners renting out their properties should be alarmed as it is very probable that they fall under the recent VAT conditions for compulsory VAT Registration which means they should be Charging VAT at 19% on their Rental Income on a quarterly basis.

Consequences

Failure of VAT Registration could result to large VAT penalties & fines as the VAT Office would demand a 19% on the rental amounts, as they fall due.

It is imperative to remember that the VAT has the Highest Penalty in the Cyprus Tax System at 10% of the Due Amount (plus interests and fines).

Typically, as this is a new VAT legislation which contains lots of inconsistencies and Cyprus, been Cyprus, it will take 4 -5 years before the VAT officers start examining and investigating which Persons (Physical or Legal) should be charging VAT on Rental Income.

In any case and unfortunately, the VAT Tax will have to be collected => VAT Amount will have to be paid out by the Owner of the Property + 10% VAT Penalty + Interest + Fines.

Therefore if you are uncertain after reading this article of how the latest VAT Changes Affect You Feel Free to send us a message or email me at kt@cyprusaccountants.com.cy or call me directly at 00357 99 428 543.

The Legislation Explained, Simply

-        Affects Rental Agreements That Took Place After the 13.11.2017

-        Affects all property owners who rent out premises for Commercial Use therefore even if a house is rented to a Company => Commercial Use => VAT Eligible.

-        Applies if the Tenant is a VAT Registered Persons (Physical or Legal)

-        Rent or Total Rentals of the owners’ assets exceeds the general VAT Rules for compulsory VAT Registration which are:

a)   >Euro 15,600 or rental income within 12 consecutive months

or

b)   expectation to exceed the threshold within the next 30 days

-        VAT Rate is 19 %

-        Quarterly VAT Returns must be submitted (the help of an accountant is essential)

-        The property owner has the right to “Opt Out” from the Compulsory registration if the VAT office is informed within 10 days by filling out form Τ.Φ 1220

What Does “Opt-Out” Mean:

It means that an owner, liable for Compulsory VAT Registration (hence preparation and submission of quarterly tax returns), can decide to be excluded from this obligation, as long as the VAT office is informed.

 

VERY IMPORTANT TO UNDERSTAND

1.    The owners have a choice whether to become VAT Registered (we strongly advice to consult with a Tax or VAT adviser).

The VAT office allows the non-registration as long as it is informed on time (the so called “Opt Out”, in order to avoid penalties and fines).

2.    The exemption is linked directly to the specific property until ownership of the property changes.

An owner, once “Opt Out”, cannot change their mind and become VAT registered in order to claim back VAT on repairs or Capital Additions. This can only be performed if the Ownership of the specific property changes.

So why what should property owners do? Shall the “Opt Out” or Register and Charge VAT?

This decision needs to be though through very carefully as the owner can make it once for each specific property. Typically, owners of properties who indent to spend significant amounts of money on Repairs and Renovations are more likely to register with the VAT (and not “Opt Out”) in order to claim back the VAT on the Repairs and Capital Additions.

Owners that do not intent nor have the financial capabilities to pursue such repairs and capital / building additions / amendments etc. are more likely to “Opt Out” in order to avoid accountant’s costs and the paperwork associated with the VAT submissions every 3 months. By "Opting Out" they effectively inform the VAT Office that they do not want to charge VAT on rents on the particular properties.

IMMEDIATE EXEMPTIONS

- If the Tenant is not VAT Registered

- If the Tenant is using the property for Residential Purposes and Not Commercial

Quick Summary and Important Details (a Recap)

- The law applies since 13.11.2017

- VAT Rate is 19%

- Owners who rent out housing / domestic units are outside the scope (are not affected by this legislation)

- The tenant should be VAT Registered

- The tenant should carry out taxable activities (Rule of Thumb: If at least >90% of the total activities are considered taxable then they fall within the definition for compulsory registration)

- The legislation applies only if the owner’s total rental income together with additional income exceeds the VAT Registration threshold of Euro 15,600

- The owner of the property has the right to “Opt Out” in which case future VAT paid on Repairs and Capital Alterations cannot be claimed back. To “Opt Out” the owner has to inform the VAT office within 10 days from the obligation of registration or rental agreement via the submission of form Τ.Φ1220.

Note: We believe the VAT Officer will not be strict with the 10 day rule as it is rather harsh given this is a new regulation voted just before the year end.

Old Rental Agreements < 13.11.2017

-  If the rental agreement took place before the 13.11.2017 then this new VAT law does not apply until the rental period ends; i.e the rental agreements ceases to be in force.

- If the rental agreement took place before the 13.11.2017 and includes the option for automatic renewal then this legislation does not apply.

- The VAT exemption is per property and not per owner, hence registration can be re-examined only if the owner changes (physical or legal person).

How to “Opt Out”

Once the owner of a property decides not to charge VAT on rental income then the following steps must be carried out so that he / she “Opts Out” from the Compulsory VAT Registration

§  Declaration via Form Τ.Φ 1220 should be submitted to the VAT Office

§  Within 10 days

§  Together with the tenancy agreement

§  Details of the property (Tide Deed)

§  The Identity Card of the owner of the property

For further guidance and assistance please do not hesitate to contact us at kt@cyprusaccountants.com.cy or call me directly on 00357 99 428 543.

A.  VAT on Disposals of Plots & Land

In force since 02.01.2018

Following the recent VAT changes in the VAT Law all immovable property owners must be alarmed and well informed as it is likely that disposals of their properties will fall within the definition of VAT Charge at the rate of 19%.

The Law – VAT 157 (1)

Since the 02.01.2018, VAT should be charged on the disposal of plots of land if the seller makes such disposals within their normal economic activities in order to erect one or more stable constructions.

Note:

The law comprises several inconsistencies which,in our opinion, will be resolved within the next 3 months. Such inconsistencies include:

- Immovable Property Inherited (Land, Flats, Plots):

It is still not clear how the law applies when, a person which is not trading in any way (with properties or development of land etc.) and inherits more than one properties or land which is then divided into several parts, is taxed.

- The definition of the term economic activity is difficult in certain cases.      

Law Details

-        The law is enforceable since 02.01.2018

-        The VAT Rate is 19%

-        Affects all immovable property which has been sold / title deed changed ownership after the 02.01.2018 and is not located in;

a)   Farm Areas / Zones

b)   Designated Areas where Development is prohibited such Archaeological areas, Natura prohibited areas, Farm areas, Protected zones and so on.

 - For the construction of one or more immovable properties (movable properties are exempted)

- If the transaction / disposal is below the Euro 15,600 then it is exempted (which is very rare but if the VAT Threshold is not exceeded then the transaction is exempt).

- Transfer of property takes place following *economic /commercial transaction / activity of the seller (the definition of which contains several issues and uncertainties)

What constitutes economic / commercial activity / transaction 

Definition

Exercise of Economic Activity is defined as the form of any production, trade, service provision, extraction, agriculture and non regulated professions as well as the use of tangible and intangible products in order to earn income

Framework

The assessment of economic activity should be examined separately in each case and based on the VAT Guidance 219 which clarifies whether or not such activities of the seller fall within the definition.

In any case, the general rules of the VAT apply whereas economic activities are defined when one of the below circumstances takes place:

a) Delivery of goods in exchange of consideration from a VAT registered person

b) EU purchases of goods in exchange of consideration from a VAT registered person

c) Provision of services παροχές in return for consideration from a VAT registered person

d) imports of goods

If the trade does not fall within the above definition that it is outside the scope for VAT purposes.

 

Term: Economic Activity (Article 219) - How it should be Examined / Assessed

- The definition of the term economic activity should be examined on a case by case basis.

- It should be proven beyond reasonable doubt that economic activity has been carried out

- The economic activity should be systematic

- Should be carried out in return of consideration.

- To make turnover of continuous basis (not one – off)

- Should be carried through actively and continuously and this can be evidenced

- It is carried through based on trade norms of the specific industry (the VAT office will examine equivalent companies in the same industry)

 - It does not constitute a “one-off” act.

- It cannot be considered an extraordinary sale (one off sale that will not take place again)

 Note:

These criteria must be considered as a bundle (not in isolation) on a case by case scenario to conclude whether or not the transaction falls within the definition of economic transaction / activity. In the event that the transaction does not fall within the definition, then the trade is exempt from VAT.

As you can imagine, since there are many uncertainties within the existing legislation and confusion among the VAT officers. Therefore always ensure that you consult a professional on the matter prior to signing a sale agreement as the transaction could be subject to VAT => Increased Cost for the Buyer => Deal May not Be Successful.

For further guidance and advice please contact me directly at 00357 99 42 85 43 or email me at kt@cyprusaccountants.com.cy with your inquiries.

About Us, CYAUSE Audit Services Ltd

Our Audit and Assurance Firm Specializes in Cyprus Tax and VAT Matters and has direct communication with the senior officer of the Cyprus Income and VAT Departments. Our portfolio of clients comprise of local and international based Companies in various industries.

During 2015 we have been awarded by I.C.P.A.C and the A.C.C.A for the Quality of our Audit Services and Procedures. More information about CYAUSE Audit Services and the Cyprus Corporate & Tax System you can refer to our Mobile Tax App called: «Cyprus Audit & Tax» free from the App Store and Google play our Website www.cyprusaccountants.com.cy and our YouTube channel called «Cyprus Accountants ACADEMY»