By Alexis Tsielepis
Chelco VAT Ltd
Dear VAT Aficionados,
On the 11 November 2022, and with effect from that day, an amendment was made to the Eighth Schedule of the Cyprus VAT Law, via the back door. I say ‘via the back door’ as the amendment was made via the issuance of a Decree from the Council of Ministers “CoM”. That in itself is not a problem – it is a power that the CoM possesses with regards to the Eighth Schedule, and one which has been exercised before. However, this amendment was so important that there should have been in good faith from the Department of Taxation “DoT” or the Ministry of Finance “MoF”, a public discussion. Or any discussion. And there was none. No discussion and no consultation. No heads-up. No consideration for the businesses. No respect to the professionals. It is not clear whether there was communication on this between the two as one rumour has it that the MoF sent this directly to the CoM without discussing the matter with the DoT. For the sake of our sanity I sincerely hope this was not the case.
Upon joining the EU on 1 May 2004, Cyprus had, as part of its obligations under the VAT Directive, to introduce VAT on the sale of new immovable property. In order to draw a line for properties sold before the VAT-able date, and those sold after, there was a peculiar provision inserted in the Eighth Schedule of the Cyprus VAT legislation that made reference to whether the application for planning permission of a property was submitted, duly completed, before 1 May 2004. If it was, then no VAT would be imposed to the subsequent supply of that property. That term, ‘duly completed’ was not well thought through as it created numerous disputes and several cases ended up over the coming years in the courts.
The DoT was caught off guard as this provision was inserted by a Member of Parliament and voted through immediately, and the tax office could not consider nor react – because that date was the 30 April 2004, the eve of accession, so no time to discuss and no time to delay. Unfortunate. But this is not the issue surrounding the 11 November 2022 amendment.
As part of the provisions inserted in the law as of 1 May 2004, Cyprus had to define ‘new property’. New property would be subject to VAT. Old property would not be. So a definition had to be inserted in the law, and it had to be clear. The provisions inserted at the time stated that the supply of immovable property would be subject to VAT only if the supply was carried out ‘before the first occupation in them’.
The term ‘before the first occupation in them’ was further defined in the Eighth Schedule as meaning “the first use, in any way, of the buildings after their construction, including residing in it, own use, leasing or any other use”. The lawmaker at least made it clear – any use, in any way. I recall one of the VAT seminars taking place at the time where it was suggested that installing a microwave, and using it to heat milk, constituted ‘first use’, and therefore a subsequent re-sale was exempt from VAT.
There were cases where the property was used, for example rented out for a period of time, before it was sold. In accordance with the legislation, the subsequent supply would be exempt. Yet it seems that the DoT also came across situations where the leasing of the property was to a person who was related to the developer, and probably did not need a place to rent. Apparently there were abusive schemes whose purpose was to render the property ‘used’ and thus exempt from VAT. There were also no doubt genuine cases where no scheme existed. Yet the DoT could not tell the difference and aggressively disputed all cases. I know this as I am currently defending one such case where the VAT is significant. The DoT, as part of its policy, started introducing new parts to the definition of ‘first occupation’ that did not appear in the law, such as ‘systematic use’ and ‘permanence’. What was even more riveting was when the DoT tried to justify this amended definition by reference to the Table C of the Fifth Schedule of the legislation where therein, there is indeed a definition of ‘first occupation’ that makes reference to ‘systematic use’. Bewildering, given that the definition in Table C of the Fifth Schedule comes under a sentence that stipulates that that said definition is ‘only for the purposes of Table C of the Fifth Schedule’, and that Table C of the Fifth Schedule concerns only the reduced rate of 5% on new property in Cyprus.
I am guessing that the MoF and/or the DoT decided enough was enough and wanted to ‘take down’ what I assume they saw as an open window to delivering property without the imposition of VAT, through tax avoidance schemes. And in truth I empathise with them. But there is a right way of doing things, and it involves dialogue…
On 11 November 2022, the definition of what constituted ‘new property’ was removed. In its place were totally new provisions, and no transitional arrangements.
Property will now be subject to VAT for any supply made within a 5-year period from the date that the property was first available for use. The only exception is where the property was actually used for a period of at least 24 months, by a person that is not related to the owner. ‘Actual use’ is further defined as the use on a systematic basis. And this definition commences from 11 November 2022, and there are no transitional arrangements.
There is a grammatical error in the wording that renders the sequence of words nonsensical in the Greek language. This is the first thing to note. More to the point, a number of questions and practical problems arise. The ones noted below are indicative but by no means exhaustive:
- does a person still need to be a taxable person in order to have to apply VAT on such sales so that occasional transactions will still be considered outside the scope? If yes, as has been the case so far, guidance is necessary for when a person should be considered as carrying out taxable activities and when not. This precise point has been incorrectly implemented for the supply of building land where the DoT considers that a supply of 2 pieces of land over a period of several years constitutes economic activity, even if the land was inherited, which is just incorrect. Another example is that the DoT considers a number of situations as constituting deemed economic activity based solely on the location of the land (!). The uncertainty in this context is overwhelming.
- if a person was negotiating the sale of their personal home in which they lived in for 4 years and was purchased new, and the sales agreement is executed after 11 November 2022, presumably, they will have to register for VAT and apply VAT to the sale, as there are no transitional arrangements in place (notwithstanding the point made in the previous bullet point). If this is the case, the legislation only allows for recovery of any input VAT for a period of 3 years before the date of registration. So the person in this example will not be able to recover the input VAT even though they will charge output VAT. It is even worse if they owned the land and received building services as the legislation only allows a 6-months recovery period for pre-registration input VAT on services.
- when is the property ‘available for use’? For example, if the developer is selling commercial or residential properties under an ‘open concept’ (i.e. the finishings will be the responsibility of the buyer), does the 5-year period commence then or only when the ceilings and floors are put in place by the buyer?
- Does this mean that any property will never be subject to VAT after the 5-year period, even if it has never been used?
- does the 24-month period need to be consecutive?
- the reduced rate of 5% to assist first-time buyers (a social measure) will not be able to apply for the case of any re-sale during the 5-year period, even where VAT is applied. This is counter intuitive to the purpose of the reduced rate as a social measure. Is there a consideration for an amended to the Fifth Schedule, Table C as well?
There is sufficient necessity to have a public discussion regarding the amendment. Yet it is in force and has been since 11 November 2022. We will now enter into a dialogue with the DoT to look at the practical implementation and try to limit the damage already done.