Indirect Tax Update Issue 136 8 January 2018 VAT on the letting of immovable property The House of Representatives of the Republic passed the so called Land Bill on 13 November 2017. According to the provisions of the Land Bill, whilst the imposition of VAT on the rentals of immovable property, is effective as of 13 November 2017, the imposition of VAT on u.b.l, is effective as of 2 January 2018. A. Imposition of 19% VAT on real estate rentals Main points Provided that the rental agreement enters into force after the commencement of the Amended Law (AL), i.e. 13/11/17, persons who lease immovable property to persons who carry out taxable transactions are obliged to impose VAT on rentals. The obligation ceases to exist if the lessor elects to notify the Commissioner that he does not wish to impose VAT on rentals. It should be noted, however, that if the lessor elects to notify the Commissioner that he chooses not to impose VAT on rentals, he will not be able to revoke his election in the future for that particular property. The election not to tax can be made either for the entire property or for a functional part of the property. If the property is transferred to another owner, the next owner is obligated to tax rentals or elect not to, regardless of whether the former owner exercised the option not to tax. Therefore, the non-taxation election concerns a specific property and a particular owner and does not bind the next owner. The opt out application must be accompanied by a signed rental agreement hence forcing the parties to also pay stamp duties on the value of the agreement. Since rentals are subject to VAT, the landlord is entitled to claim input tax both on the acquisition/construction cost or other capital expenditure incurred on the property and on the non-capital expenditure relating to the rental property. The claim of VAT on acquisition/erection or capital expenditure is based on the provisions of the Capital Goods Scheme Regulations which provide that VAT on the acquisition/construction of immovable property is adjustable over a ten year period from either the date of acquisition or the date the property was placed for the first time in use for any purpose depending on the landlord s registration status at the time the property was constructed or purchased. It is noted that the obligation to charge VAT on rentals applies only to taxable persons who are registered under the normal VAT regime. Persons registered under a special regime (farmers, taxis) and intend to rent property to taxable persons may choose to (a) register under the normal VAT regime (provided the registration threshold of 15.600 is exceeded); or (b) notify the Commissioner that they will not impose VAT on a particular property by submitting the form ΤΦ1220. The VAT registration obligation by landlords follows the usual registration rules. Therefore if
(a) rentals do not exceed the registration threshold, the landlord is not required to register unless he/she wants to register voluntarily (b) the tenant is not registered because it does not exceed the registration threshold, the landlord does not have to impose VAT. In order for the landlord to establish his right or obligation to register for VAT purposes, he must submit the rental agreement to substantiate its right for registration at the time of application. Since rental of immovable property is considered a contiguous service, the time of accounting for VAT is the earliest of when a VAT invoice is issued or payment is made. The granting of a right to exploit the property by another person may possibly create an obligation for both the owner and the right-holder to charge VAT on rentals (see example 6 below). If the property is co-owned by two or more people, then the co-owners are required to register as an informal partnership and submit a joint tax return. The following examples explain the application of Amended Law (AL) as well as the application of Capital Goods Scheme (CGS). Example 1 Construction of immovable property by non-registered person before 13/11/17 and first lease before 13/11/17 with subsequent lease with new contract after 13/11/17. A non-vat registered Company constructs a building at a value of 1m plus 150.000 VAT which construction work is completed on 28/2/12. During the construction, no input tax is claimed because the company's intention was to rent it. The building is rented for the first time on 30/9/13 to a law firm. The law firm leaves the building on 31/12/17 and a new contract with an audit firm was signed on 1/1/18. Based on the provisions of the new Legislation, the company is registered in the VAT register and charges VAT to the audit firm. 1 Company s VAT status at the time of construction Not registered 2 Time of completion 28/2/12 3 VAT registration date 1/1/18 3 Time from date of first use to registration date (30/9/13-1/1/18) 4 years and 3 months 5 Extent of recovery Partial (5yrs and 9months) 6 Justification The 10-year period has not been exceeded since the date of first use (30/9/13-1/1/18) Example 2 Acquisition of immovable property by non-registered person before 13/11/17 and leasing under a new contract after 13/11/17.
A company not registered in VAT purchases a newly built property worth 1m plus 190,000 on 30/6/16. Input VAT on acquisition is not claimed because the company's intention was to rent it. However, until the start of the new legislation despite the company's efforts, it is not possible to rent the property and the first lease is entered into on 1/1/18. 1 Company s Vat status at the time of erection Not registered 2 Time of acquisition 30/6/16 3 VAT registration date/first use 1/1/18 5 Extent of recovery Full amount 6 Justification First use/registration after 13/11/17 Example 3 Construction/Acquisition of a building by a non-registered person after 13/11/17 and leasing it under a new lease after 13/11/17. A non-registered Company purchases/builds a building at a price of 1m plus 190.000 VAT on 30/4/18. The building is leased for the first time on 30/6/18. At the time of acquisition/building VAT is claimed since the company s intention was to rent it to persons exercising taxable transactions. The tax year of the company starts at 1/4 and therefore the tax periods of the company are: 1/4-30/6, 1/7-30/9, 1/10-31/12 and 1/1-31/3. 1 Company s Vat status at the time of erection Registered 2 Time of acquisition 30/4/18 3 Time of first use 30/6/18 5 Extent of recovery Full amount during first interval and adjustment over the next nine intervals (if there will be a change in the use*) 6 Justification Acquisition/First use after 13/11/17 In the above example the tenant of one of the units of the building vacates the unit on 30/4/19 and as from 1/5/2019 the unit is rented to a person carrying out exempt transactions (e.g. insurance broker). The owner of the building is liable to return back to the TD 1/10 of input VAT attributable to the construction of the unit for each subsequent year the property is rented to the exempt tenant till the 10th year adjustment period is over. Example 4
A person purchases a used building in 2013. The building was built by the previous owner in 2005. The building is rented under a new lease agreement on 1/1/18. The new owner is eligible to claim input VAT only on renovations carried out by him following the purchase of the building if are considered of capital nature and provided that ten years have not passed following the date they were made. Example 5 A person purchases a used building in 2013. The building was constructed by the previous owner in 2005. The building is rented under a new lease agreement on 1/1/18 and the new owner applies and registers for VAT. During the year of acquisition the new owner carries out repairs and paints the building. The new owner is not entitled to claim input VAT on repairs carried out by him because they are not of a capital nature and since then six (6) months have passed. Example 6 Company (A), owner of property rents it to another company (B) with the right to sublet to other persons. At the signing of the lease agreement with B, A (a) Knows B s tenant (b) Does not know B s tenant (a) Where A knows B s tenant In this case, A will charge B VAT on rentals depending on whether B s tenant is involved in taxable or exempt activities (considering the 10% allowable threshold) or the leased property will be leased to a person for residential purposes. Therefore, if the third part of the chain is making taxable transactions, A as well as B must impose VAT. Otherwise neither A nor B imposes VAT. (b) Where A does not know B s tenant In this case, it is suggested that A charges VAT on B until such time is established with certainty whether B will rent to a person who is taxable or not. If it is found that the lessee of B exerts exempt transactions then A will have to issue a credit note to B. Example 7 A Cyprus established company rents office space from landlord A. The activities of the Company consist of providing advisory services to persons established outside Cyprus hence it has the right to recover input VAT. Landlord A must impose VAT to the Company on the grounds the Company is involved in the provision of services which although treated as supplied outside Cyprus i.e. where the client is established, nonetheless if supplied in Cyprus they would have been taxable. Example 8 The same facts as in example 7 except that the Company s activities consist of granting interest bearing loans to parties established outside the EU. Although the granting of loans is an exempt financial service, since Article 21(2)(c) of the VAT Act gives a right of recovery of input VAT associated with this activity, the lessor is liable to charge VAT unless he opts out. Example 9 A Cyprus established Company is involved in both taxable and exempt activities. The exempt activities constitute 8% of its turnover. Upon the signing of a rental agreement with landlord A, the Company confirms in writing that its exempt income at the time of signing the rental agreement is 8%. The landlord does not opt out and charges 2.000 plus 380 VAT.
The Company can only recover 350 ( 380 X92%) of VAT on rental as the balance of 30 is attributable to exempt income. Going forward, if the exempt % of the Company s turnover will increase or decrease, the landlord will not have to do any adjustments as far as the VAT charge on rentals is concerned but the Company will have to adjust its VAT recovery accordingly. B. Which are considered new agreements for the purpose of imposing VAT on rentals? According to the expressed position of the VAT Authorities, where the two parties agree to the change of the basic terms of an existing rental agreement, the resulting agreement is considered a new agreement. The changes to the basic term could include the increase or decrease of the rental, extension of the term or simply the inclusion of a clause for imposing VAT on rentals. It is clarified that a mere renewal of an agreement does not create on its own a new agreement even if in the initial agreement is provided that rentals will increase yearly or from time to time. C. What is the lessor s position if the lessee is also involved in exempt supplies? The VAT Authorities clarified that the lessor is not obligated/expected to examine as to whether in addition to taxable supplies the lessee has decided to also be involved in exempt supplies after the lease agreement is entered into. However, at the time of entering into the agreement, the lessor must confirm that the lessee is involved in no least than 90% of taxable transactions. The Tax Department clarifies in an interpretative circular that if the tenant s transactions include exempt transactions the landlord is under an obligation to receive from the tenant either (a) the necessary data with respect to the height of exempt transactions; or (b) an attestation confirming the amount of exempted transactions Harry Charalambous Board Member KPMG Cyprus Indirect Tax Services Michael Grekas Principal KPMG Cyprus 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 e-mail 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.