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VAT on the Letting of Immovable Property

VAT on the Letting of Immovable Property

The house of Representative of the Republic voted into law the amendment to the Cyprus VAT legislation on 13 November 2017. According to the provisions of the law, the imposition of VAT on the rentals of immovable property is effective as from the same date (effective date).

On 02/01/2018, the Cyprus Tax Authorities published an interpretive circular in relation to the effect on leases of immovable property from the amendment to the Cyprus VAT legislation. The important details of this circular are described below.

Imposition of 19% VAT on real estate rentals
 
On condition that the rental agreement enters into force after effective date, persons who lease immovable property to persons who carry out taxable transactions are obliged to impose VAT on rentals
 
The commitment 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 that if the lessor chooses 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 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. It should be noted that the lessor opts not to tax, he will never be able to claim any input VAT, as described below.
 
Since rentals are subject to VAT, the landlord is allowed 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 (as long as the registration threshold of €15.600 is exceeded);
               
               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. Consequently if:
              a) rentals do not exceed the registration threshold; the landlord is not mandatory 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.
 
If the property is co-owned by two or more people, then they are obligatory to register as an informal partnership and submit a joint tax return
 
 
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 addition of a clause for imposing VAT on rentals.
It is explained that a simple 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.
 
 
 
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

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