VAT is imposed on the supply of goods and provision services in Cyprus, as well as on the acquisition of goods from the European Union (EU) and the importation of goods into Cyprus.
Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods or services which they receive (input tax).
If output tax in a VAT period exceeds total input tax, a payment has to be made to the state. If input tax exceeds output tax, the excess input tax is carried forward as a credit and set off against future output VAT.
Immediate refund of excess input VAT can be obtained in the following cases:
- a period of three years has elapsed from the date the VAT became refundable (reduced to two years as from 1/1/2014, one year as from 1/1/2015 and eight months as from 1/1/2016)
- input VAT which cannot be set off against output VAT until the last VAT period of the year which follows the year in which the VAT period in which the credit was created falls
- the input VAT relates to zero rated transactions
- the input VAT relates to the purchase of capital assets of the company
- the input VAT relates to transactions which are outside the scope of VAT but would have been subject to VAT had they been carried out within Cyprus
- the input VAT relates to exempt financial and insurance services provided to non EU resident clients (services for which the right to recover the related input VAT is granted)
For intra-community acquisition of goods (with the exception of goods subject to excise duty) the trader does not pay VAT on receipt of the goods in Cyprus but instead accounts for VAT using the acquisition accounting
method. This involves a simple accounting entry in the books of the business whereby it self-charges VAT and at the same time claims it back, provided it relates to supplies for which the right to recover input VAT is granted, thereby creating no cost to the business.
In cases the acquisition relates to a transaction for which the right to recover the input VAT is not granted, the trader must pay the VAT that corresponds to the acquisition.
As from 1 January 2010 significant changes came into effect in the EU and Cyprus VAT legislation in the following areas:
- Changes in the country of taxation of services provided between businesses established in two different EU Member States (B2B)
- Changes in the country of taxation of services, supplied to consumers (B2C)
- Changes in the time of supply of services for which VAT is due by the recipient
- Procedure for refund of VAT paid in another Member State
- Additional compliance obligation for electronic submission of the monthly VIES return for services subject to VAT in another EU Member State through the reverse charge provisions
In addition to the above, as from 1 January 2011 changes came into effect in the EU and Cypriot VAT legislation with regards to the country of taxation of cultural, artistic, sporting, scientific, educational, entertainment and similar services including services of organisers of such activities, supplied between businesses (B2B).
Up to 31 December 2010 the above services, were subject to VAT in the country where those activities were physically carried out.
As from 1 January 2011, only admission to such activities is subject to VAT in the country where the activities are physically carried out. Services, other than the admission to such events, are subject to VAT in the country
where the recipient of the services has established his business.
As from 1 January 2013 the long-term hiring of means of transport to non taxable persons (i.e. to individuals or legal persons who are not engaged in business activities) is subject to VAT at the place where the customer is
established or has his permanent address or usually resides.
However, in case the hiring refers to the hiring of a pleasure boats, the place of taxation for VAT purposes is the place where the pleasure boat is actually put at the disposal of the customer, so long as the service is provided by the supplier from his place of business or from his fixed establishment situated at the place where the pleasure boat is actually put at the disposal of the customer.
Up to 31 December 2012 the above services were subject to VAT at the place where the service provider has established his business.
VAT rates
The legislation provides for the following four tax rates:
- Zero rate (0%)
- Reduced rate of five per cent (5%)
- Reduced rate of eight per cent (8% up to 12 January 2014 and 9% as from 13 January 2014)
- Standard rate (15% up to 29 February 2012, 17% from 1 March 2012 up to 13 January 2013, 18% from 14 January 2013 to 12 January 2014 and 19% as from 13 January 2014)
Exemptions
Certain goods or services are exempt from VAT. They include:
- the letting of immovable property (the letting of immovable property with the right of purchase is not exempt);
- most banking and financial services and insurance services;
- most hospital, medical and dental care services;
- certain cultural educational and sports activities;
- supplies of real estate (except supply of new buildings before their first use) including supplies of land and of second-hand buildings;
- postal services provided by the national postal authority;
- lottery tickets and betting coupons for football and horse racing;
- management services provided to mutual funds
Imposition of the reduced rate of 5% on the acquisition and/or construction of residences for use as the primary and permanent place of residence
The reduced rate of 5% applies to contracts that have been concluded from 1 October 2011 onwards provided they relate to the acquisition and/ or construction of residences to be used as the primary and permanent place of residence for the next 10 years.
For contracts concluded up to 30 September 2011 for the acquisition and/ or construction of residences for use as the primary and permanent place of residence, the eligible person must apply for a grant.
The reduced rate of 5% applies for the first 200 square meters of residences of total covered area of up to 275 square meters. In the case of families with more than 3 children the allowable total covered area increases by 15 square meters per additional child beyond the three children.
The reduced rate is imposed only after obtaining a certified confirmation from the VAT Commissioner.
The eligible person must submit an application on a special form, issued by the VAT Commissioner, which will state that the house will be used as the primary and permanent place of residence. The applicant must attach a number of documents supporting the ownership rights on the property and evidencing the fact that the property will be used as the primary and permanent place of residence. The application must be filed prior to the actual delivery of the residence to the eligible person.
As from 8 June 2012 eligible persons include residents of non EU Member States, provided that the residence will be used as their primary and permanent place of residence in the Republic.
The documents supporting the ownership of the property must be submitted together with the application. The documents supporting the fact that the residence will be used as the primary and permanent place of residence (copy of telephone, water supply or electricity bill or of municipal taxes) must be submitted within six months from the date on which the eligible person acquires possession of the residence.
A person who ceases to use the residence as his primary and permanent place of residence before the lapse of the 10 year period must notify the VAT Commissioner, within thirty days of ceasing to use the residence, and pay the difference resulting from the application of the reduced and the standard rate of VAT attributable to the remaining period of 10 years for which the property will not be used as the main and primary place of residence.
Persons who make a false statement to benefit from the reduced rate are required by law to pay the difference of the additional VAT due.
Furthermore, the legislation provides that such persons are guilty of a criminal offence and, upon conviction, are liable to a fine, not exceeding twice the amount of the VAT due, or imprisonment up to 3 years or may be subject to both sentences.
Grant for acquisition of first residence
The grant is given to eligible persons for the construction, or purchase or transfer of a new residence which is used as the main and primary place of residence. The grant applies for contracts concluded up to 30 September
2011.
The application for the grant is submitted to the Ministry of Finance, in relation to residences for which an application has been submitted for the issue of a planning permission after the 1 May 2004. Persons entitled to this grant are individuals who are citizens of the Republic of Cyprus or of any other EU Member State, who reside permanently in the Republic of Cyprus and who have reached the age of 18 at the time of application. The grant is given for residences whose total covered area does not exceed 250 m².
The level of the grant is limited to 130 m² (extended for families with four and more children) and depends on the type of the property and on whether the house was constructed or purchased. The relevant legislation provides that the level of the grant will be adjusted annually for the increase in the Retail Price Index.
Difference between zero rate and exempt supplies
The difference between zero rate and exempt supplies is that businesses that make exempt supplies are not entitled to recover the VAT charged on their purchases, expenses or imports.
Irrecoverable input VAT
As an exception to the general rule, input VAT cannot be recovered in a number of cases which include the following:
- acquisitions used for making exempt supplies;
- purchase, import or hire of saloon cars;
- entertainment and hospitality expenses (except those relating to employees and directors);
- housing expenses of directors
Registration
Registration is compulsory for businesses with (a) turnover subject to VAT in excess of €15.600 during the 12 preceding months or (b) expected turnover subject to VAT in excess of €15.600 within the next 30 days.
Businesses with turnover of less than €15.600 or with supplies that are outside the scope of VAT but for which the right to claim the amount of the related input VAT is granted, have the option to register on a voluntary basis.
An obligation for registration also arises for businesses which make acquisition of goods from other EU Member States in excess of €10.251,61 during any calendar year. In addition as from 1 January 2010 an obligation for VAT registration arises for businesses engaged in the supply of intra-community services for which the recipient must account for VAT under the reverse charge provisions. Furthermore an obligation for VAT registration arises for businesses carrying out economic activities from the receipt of services from abroad for which an obligation to account for Cyprus VAT under the reverse charge provision exists subject to the registration threshold of €15.600 per any consecutive 12 month period.
No registration threshold exists for the provision of intra-community supplies of services.
Exempted products and services, and disposals of items of capital nature are not taken into account for determining annual turnover for registration purposes. Registration is effected by completing the appropriate application form.
VAT declaration – payment/refund of VAT
VAT returns must be submitted quarterly and the payment of the VAT must be made by the 10th day of the second month that follows the month in which the tax period ends.
VAT registered persons have the right to request for a different filing period. Approval of the VAT authorities is required. The VAT Commissioner also has the right to request from a taxable person to file his VAT returns for a different period.
Where in a quarter input tax is higher than output tax, the difference is refunded or is transferred to the next VAT quarters.
As from 19 February 2013 taxpayers who make a claim for VAT refund will be entitled to repayment of the principal amounts together with interest in the event that the repayment is delayed for a period exceeding four
months from the date of the submission of the claim.
The grace period for the VAT Authorities to repay the refundable amounts is extended by four months (i.e. eight months in total) in the event that the Commissioner is carrying out an investigation in relation to the submitted
claim.