EU VAT Compliance on Land Sales Around the Corner

With Cyprus possessing one of the world’s most favourable corporate tax environments, Cyprus is also known for its advantageous real estate taxation. Nevertheless, while Cyprus continues to offer great tax incentives across multiple sectors, since becoming a member of the European Union in 2004 Cyprus is subject to EU directives.

In terms of land sales, Cyprus’s VAT derogation on building land sales, granted by the EU in 2004, appears to be coming to an end. Long overdue, Cyprus lawmakers are to vote on a European harmonising bill whereby 19% VAT is expected to be imposed on land sales for building and developments. What’s more the Cyprus tax authorities have drafted a circular defining ‘building land’ as undeveloped land that is clearly intended for further development.

 

Table 1.1: Overview of Current VAT on Cyprus Real Estate

Property VAT before 1 May 2004 As a rule of thumb, property that acquired the necessary permits for construction prior to Cyprus becoming a part of the EU, leave property owners free of VAT commitments.
Property VAT after 1 May 2004 In regard to property whereby building permits where acquired after 1 May 2004, a 19% VAT is imposed on the said property.

First Time Buyers

 

First time buyers of residential property under 275m2 are able to apply for a reduced VAT of 5%, provided the property will be the owner’s main residence in Cyprus. The reduced VAT rate however is applied only to the 200m² of the property, noting that the total coverage does not include the following:

  • Up to 5m² for engine rooms;
  • Up to 7m² for storage spaces;
  • Up to 36m² for covered parking spaces;
  • Up to 40m² for covered verandas.

In light of the above, a property of up to 363m² will essentially qualify for the reduced VAT rate.

VAT Exemptions & Requirements

 

  • Buyers must reside in the said property for at least 10 years in order continue benefiting from the reduced VAT rate of 5%.  If they dispose of the property within the first 10 years, then they are obligated to refund the part of the VAT they benefited to the authorities.
  • What’s more, after 10 years reimbursees are entitled to the same VAT rights when purchasing another property with the intention of the second property being the buyers’ main place of residence, with the property being occupied by the buyers for a minimum of 186 days annually.
  • VAT is non-applicable if the property remains vacant after construction, in other words, VAT is imposed on those who reside and generate utilities expense within the property.
  • Resales have no Cyprus VAT added. A resale property is considered a second-hand property.
Commercial Land Purchases

 

Land purchases are currently VAT free, however after 31 December 2017 the new bill imposing 19% VAT on land sales for the purpose of further development will come into effect in order to comply with EU directives.

EU Harmonising Bill to Impose 19% VAT on Building Land Sales

In order to avoid infringement by the European Commission, the draft bill together with its circular is processed through the EU Pilot, a process whereby the EU Commission assesses non-compliance of EU Law by member states.

The bill is expected to apply to ‘building land’ for business purposes only while agricultural land, such as farm land, protected areas and forest land are exempted; nevertheless, those who build on agricultural land are obligated to pay 5% VAT. The bill will also apply to the imposition of VAT on a sale of shares of companies that own land and/or immovable property.

With Cyprus expected to comply with EU directives as an EU member state, Cyprus is facing significant fines from the European Commission if non-compliance of the said directive continues after 31December 2017. More significantly, it is alleged that non-compliance after 31 December 2017 will result in financial repercussions, with the EU imposing fines from Euro 100.000 up to Euro 300.000 daily.

Financing Implications

Moreover, the new imposition of VAT on commercial land sales is except to impact banking institutions and the land industry negatively. Financing from banks is expected to become more challenging after the said legislation comes into effect. With banks valuing commercial land at 19% higher than the norm, the cost of borrowing will increase and in turn also supress land investment.

Confounding the pre-existing collateral values on immovable property held by financial institutions, the question will be whether the collateral of immovable property will increase on par with the new directive coming to effect or be included therein.

In light of the new directive on imposing VAT on commercial land sales, it is evident that the cost of such transactions will not only increase but will possibly create several other problems explained above and therefore, any sensible investor who is contemplating in investing in land in Cyprus should do so now, before the enactment of the relevant legislation.

For further information, please contact Soulla Dionysiou at Dionysiou & Partners LLC at sdionysiou@dplawcyprus.com  or +357 22 272360.

 

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