Cyprus Imposes 19% VAT on Building Land

From January 2, 2018 in Cyprus, the new VAT Law has entered into force, providing for changes in the main VAT Law No.95(I)/2000. The document introduces VAT at a standard rate for the sale of building land, as well as leasing/rental of business premises on the conditions specified in the law. It also introduces the reverse charge mechanism for VAT-subject supplies of land and property under a loan restructuring/force-sale arrangement, which will mostly influence financial institutions.
Imposition of VAT at the standard rate of 19% on building land
The standard VAT rate of 19% will be applied in the following cases:

• transfer of ownership;
• transfer of indivisible land portion;
• transfer of ownership via contract or sale agreement or agreement which specifies that the ownership will be transferred in the future or leasing agreement with buyout option.

The above shall apply to non-developed building land which is meant for the construction of one or more structures in the course of carrying out a business activity. More clarifications are still needed for the application of the law, such as the circumstances whereby a transfer is not considered to be a part of a person’s economic activities. It is expected that these clarifications will come in the form of Regulations in the near future as they require the approval by the House of Representatives.
VAT on leasing of immovable property used for business purposes
The leasing of immovable property, except for the buildings which are used as residential dwellings, for the taxable persons for taxable business activities will be subject to VAT. The lessor has the right, based on terms and conditions which will be specified by the Commissioner of Taxation in his relevant Notification, to make decision for the non-imposition of VAT to the lessee of the immovable property. This variant is irrevocable. The provisions on leasing will apply to lease agreements which are concluded from 13 November 2017.
Introduction of Reverse Charge provisions on transfers resulting from loan restructuring or forced transfer of property to lender
Transfers under loan reorganization or compulsory transfers are usually made without any payment to the taxpayer by the Bank. The transaction creates a VAT liability, which the taxpayer would not be in the position to pay. For this reason, article 11D is introduced in the main VAT Law, which provides for the transfer of an obligation to pay VAT from the taxpayer to the recipient (the bank). These provisions apply to immovable property, including land and/or buildings which are transferred along with the land in which they are built on, provided that the transaction takes place before the first occupation of the building. The new reverse charge provisions came into force on January 2, 2018 and they will remain in force until December 31, 2019. Since the property development and management industries contribute greatly to the economy of Cyprus, the consequences of this new amendment to the VAT Law will have an impact on many businesses and investments across the island, despite the inaccuracy and lack of clarification of certain aspects.