Issue January 2018 Imposition of VAT on the supply of undeveloped buildable land

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1 Indirect Tax Update Issue January 2018 Imposition of VAT on the supply of undeveloped buildable land According to the VAT Amendment Act (N 157 (I) / 2017), which was published in the Official Gazette of the Republic on 13/11/17, VAT is levied on the supply of undeveloped buildable land (u.b.l) by a person engaged in an economic activity. The amendment came into force on 2/1/18. On 22 December 2017, the regulations provided for in Paragraph 1 (b) (iii) of Schedule Eight of the Value Added Tax Act from 2000 to 2017 were published in the Official Gazette of the Republic. The purpose of the regulations is to define the concept of undeveloped buildable land intended for the construction of one or more constructions. The undeveloped buildable land falling under Paragraph 1 (b) (iii) of Schedule eight includes four different categories First category Plots of land for which: (a) An application has been submitted to the Planning Authority (PA) to change the status of the land into buildable land (b) An approval has been granted by the PA and construction works commenced (c) Construction works have been completed (d) A final approval certificate has been issued; or (e) Property title was issued. Therefore, if a piece of land is supplied at any of the above stages, provided the supply is made - by a person exercising an economic activity; and - the supply time is identified after 2/1/18 is subject to the standard VAT rate. Second category Plots of land which, due to location, urban area, vicinity with infrastructures, resemble plots and are registered in the registry of the Department of Lands and Surveys with other names such as - building / residence - courtyard - place - threshing floor and which fall within the boundary / area of any residential, commercial, tourist, holiday, industrial, semi-industrial or other type of development or mixed development plan. This category also includes pieces of land in a zone / area in which development was activated after certain conditions such as road design have been satisfied. Third category Pieces of land that are located outside the development area but have been granted planning permission or building permission either through regular procedures or with assignments for special types of developments, e.g. theme park.

2 Fourth category Pieces of land created due to seclusion of the sea and registered in the Department of Land and Surveys and for which a town planning or building permit has been secured. Paragraph 2 of the Regulations clarifies in relation to the above categories that they concern the following cases: (a) Plots of land that whilst they have the status of buildable land, there is not in force any town planning or building permit (simply the land has the final approval certificate or title of land ownership). (b) Plots of land for which an application for a town planning or building permit is being considered. (c) Plots of land for which a town planning or building license was issued but no construction work has commenced as yet (d) Plots of land on which there is no development, but there are antiquities which, once removed, a development can begin. (e) Plots of land in which there is a lawful or illegal construction which according to a town planning and / or building permit are to be demolished. (f) Plots of land in which there is a small part of a licensed construction which is incomplete, nonfunctional or frozen and the construction works were interrupted. (g) Plots of land in which there is a small functional part not exceeding 10% of the buildable coefficient of the total permissible area Paragraph 4 of the Regulations refers to plots of land which are not included in the definition of undeveloped buildable land: (a) Plots of land which are in a livestock zone/area; or (b) Plots of land which are outside development zones/areas such as environmental, archaeological and farming. The exemption from VAT for the above categories is not affected by whether the person who delivers the land engages in economic activity or not or for what reason the land is supplied. Therefore, in order to tax a piece of land, the following three conditions must be met (a) The piece of land should fall into one of the four categories mentioned in the regulations (b) The supply must be made within the scope of an economic activity*; and (c) The supply must take place after 2 January 2018 **. *Meaning of economic activity The concept of economic activity is given in Article 3 of the VAT Act and does not have the same meaning given for commercial activity in the Income Tax Act. This means that the person who supplies the land does not have to be in the business of selling land in order for the land to be taxable (see example 1). It is emphasized that the Cyprus VAT Act does not provide for the inclusion of occasional land sales in the concept of economic activities as provided for in Article 12 of the EC Directive. Paragraph (1) of Article 3 of the Cyprus VAT Act gives the meaning of business for VAT purposes. Business means an economic activity that is carried out independently and in any place, regardless of the purpose or intended result. Economic activities within the meaning of subsection (1) of Article 3 are all activities of - a producer - a merchant - a service provider

3 - extraction - farmers - freelancers - the exploitation of tangible or intangible property for the purpose of obtaining income of a lasting nature Whether an activity falls within the definition of economic activity for VAT purposes is not easy to answer but depends on the surrounding facts. When the TD examines the nature of an activity in order to come to the conclusion whether it is an economic activity, it raises the following questions: 1. Is the activity a serious occupation or a systematic occupation that is not necessarily limited to commercial or profit-making activities? E.g. if someone sells a piece of land to meet his money needs, it does not mean he does it systematically. 2. Is the activity a profession or is it actively pursued for future recognition? E.g. if a former banker or civil servant purchases pieces of land and resells them in a systematic way it can be considered as a profession. 3. Can the value and quantity of activity be measured on a quarterly or annual basis? That is that the person has a number of transactions at regular intervals. 4. Is the activity based on recognized business practice? Account books are kept. 5. Does the activity target consumers for a consideration? E.g. A coin collector buys coins in duplicate aiming at selling one of them to other coin collectors. 6. Is the activity carried similar by those seeking profit? Based on the above, an individual transaction without any other evidence indicating the person's intention to continue to practice the business systematically is not a taxable transaction. But if it subsequently turns out that this act was the beginning of similar future operations, it would be taxed retroactively. **Taxing point/time of supply The amended law provides that if the transfer of the land was made before 2/1/18 or the sale agreement was submitted to the Department of Lands and Surveys or to the Tax Commissioner prior to 2/1/18, the supply does not constitute a taxable supply of land. It is stressed that regardless of the above provision, the tax points provided for in the VAT Act continue to apply, i.e. at the earliest of payment, issue of invoice and transfer of possession. Examples with regard to supplies of undeveloped buildable land Example 1: Sale of buildable land by a Company trading in goods other than land A company registered for VAT purposes deals with the import and distribution of electrical appliances. The company purchased and owns a piece of land located in an industrial / commercial development area. On 30/3/18 the company agrees with another person to sell the land for 300,000. Tax treatment: As the company exerts an economic activity, the item falls under the definition of undeveloped building land and since the delivery is made after January 2, 2018, the company is required to charge VAT on the sale regardless of the fact the Company is not trading in land. Example 2: Sale of residential land with the submission of a stamped agreement and an advance payment before 2/1/18 A company registered in the VAT Register deals with the development as well as with the sale of buildable land. The company, apart from residential, industrial and tourism development plots,

4 owns two plots, one of which is located within the agricultural and the other within the livestock zone. On 30/11/17 the company agrees with a physical person to sell a buildable plot for 300,000. The buyer pays the amount of 30,000 as a down payment and a stamped sales contract is deposited with the Department of Lands and Surveys/Commissioner of Taxation. The remaining 270,000 will be paid sometime in March 2018 when the transfer is expected to take place. Tax treatment: Under the second reservation of paragraph 1 (b) (iii) of Schedule Eight, where the supply of land is identified with filing of a sales agreement to the Department of Lands and Surveys of the Commissioner of Taxation before the entry into force of the law is not covered by the law and is therefore excluded from the imposition of VAT. Therefore, the deposit/stamping of the sales agreement on 30/11/17 makes the sale of the buildable land exempt from VAT. Example 2a: Sale of residential land without filing a sales agreement with the Department of Lands and Surveys or Commissioner of Taxation The same data as Example 2 except that the sales agreement was not filed on 30/11/17 but either is not filed at all or filed after 2/1/18. Tax treatment: In this case, only the amount of the advance payment will be excluded from the imposition of VAT (Article 9) unless it is shown that the plot was given to the purchaser to use it as the owner before 2 January 2018 (possession in accordance with Article 9) Example 2b: Sale of farming or livestock land Irrespective of the fact that the company trades in the development and sale of land as an economic activity, both livestock and agricultural land do not fall under the definition of 'undeveloped building land' and therefore any sale by the company of this category of land before or after on 2/1/18 is exempt from VAT. Example 3: Application to secure Planning / Building license for own purposes A physical person, who holds a piece of land within a residential area not covered by a water supply, submits an application to the planning authority to subdivide it. The intention of the natural person is to sell one of the plots that will result from the subdivision to cover the costs of the subdivision, four to give at no consideration to his children and one to keep for himself. Tax treatment (a) First of all, submitting an application to the town planning authority for the separation of the land makes the whole piece buildable land for the purposes of the VAT Act. If the plot is sold to third parties either before or after the application is approved, it is likely that the sale will be considered to be in the course of an economic activity and hence the individual should be registered and impose 19% VAT if the sale is made after 2/1/18. (b) Assuming that 5 of the 6 plots that will result from the subdivision will be retained for the purposes of the natural person's family, the sale of the one is not considered to be in the course of an economic activity and therefore not subject to VAT. Example 3a: Application to secure Planning / Building license for other purposes The same data as in example 3 with the difference that the individual holds one of the plots and sells the other five. Tax treatment: In this case, the actions of the physical person indicate an intention to engage in economic activity and therefore he has to register and impose VAT on the sale of the five plots. Example 4: Small functional part of licensed construction A company registered with VAT submitted an application to the planning authority and was given permission to build a shopping mall. After the license was issued, the company started the construction of the center and built a small warehouse for the storage of inventories and tools. The area of the warehouse does not exceed 10% of the total permissible buildable coefficient. Tax treatment: Possible sale of the plot together with the warehouse will be considered a sale of building land and not land with construction, just because of the existence of a small functional structure. Example 5

5 A person who is not involved in the purchase and sale of land inherits a piece of u.b.l from his father and then sells it after 2/1/18. Such a supply is considered occasional and no VAT is charged. However, if the heir is involved in the purchase and sale of land as a professional, the sale of the inheritance land is subject to VAT. Example 6 An individual owns a piece of buildable land which is located next to a number of undeveloped buildable lots owned by a Company which is involved in the purchase and sale of land. Due to economic difficulties the individual advertises the sale of his land through the same press the Company uses to advertise its own. The question raised by the individual is whether the sale of his land is subject to VAT as in the case of the land neighboring his sold by the Company Tax treatment: Although the specific piece of land is located next to land which is subject to VAT, since this piece of land is the only one the individual sells in the area, imposing VAT on the grounds of distorting completion are not valid because the sale of a single piece of land in a specific area is unlikely to set the price for the rest of the land in the area. Where, however, the size of the particular piece of land would have affected the price of other plots in the vicinity owned by land traders hence liable to impose VAT, the supply might be considered as falling with the meaning of an economic and not occasional activity. Final Comment Because it is not always certain whether a particular supply of land is being carried out in the context of an economic activity, we are of the opinion that the TD's written position should be sought to avoid unpleasant surprises. Harry Charalambous Board Member KPMG Limited Indirect Tax Services Michael Grekas Principal KPMG Limited Indirect Tax Services kpmg.com.cy Privacy Legal You have received this message from KPMG Limited. If you wish to unsubscribe from all KPMG communications, please click here kpmg@kpmg.com.cy If you have any questions, please send an to mgrekas@kpmg.com KPMG Limited, 14 Esperidon Street, 1087, Nicosia, Cyprus 2018 KPMG Limited, a Cyprus limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.