VAT on Commercial Property Rentals

©2017 Grant Thornton International Ltd. All rights reserved.
VAT on income from the
lease/rental of commercial
immovable property
VAT Alert
January 2018

In brief
• Following the enactment of legislation N157(1) of 2017
which was published in the Official Gazette of the Republic
of Cyprus on 13/11/2017, the Tax Department has issued
VAT Circular No.220 providing clarifications on the resulting
changes which govern the imposition of VAT on income from
the lease/rental of commercial immovable property.
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Which rents/leases are affected
• The amendments to the law affect leases/rentals of immovable
property (other than property used as a residence) which begin
at or after the date the amendments were brought into effect
(13/11/2017), where the transactions are carried out by the
lessor towards another person for the purpose of their business
activity (supply of goods or supply of services) and they
constitute taxable supplies. Existing agreements are not
affected by the amendments unless they are terminated and
new agreements are executed after the effective date of the
amendments.
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• In cases where existing agreements provide for automatic
renewal then this provision, in itself, does not constitute a
new agreement. This applies even where an automatic
increase in the consideration is provided for.
• A lessor may be deemed to include, besides the owner,
any other person who may have a right of occupation or
other beneficial interest (e.g. sublease, right of usufruct)
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Opting-out of the obligation to tax
• The imposition of VAT on the lease/rental of a property
does not constitute an option for the lessor but it applies
automatically where they are a taxable person.
• The lessor however may choose to be exempted from the
imposition of VAT if they notify the Tax Commissioner of
their intention.
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• The notification is made by the completion and
submission of Document ΤΦ1220 pursuant to the terms
and conditions included in Notification ΚΔΠ 423/2017,
and submitted to the relevant District Office of the Tax
Department.
• It should be noted that if the option is exercised the lessor
will not have an obligation nor a right – depending on the
circumstances - to register for VAT.
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The lessee must be a taxable person
• The lessee of the property must be a taxable person who carries out
taxable transactions for VAT purposes. The term “taxable
transactions” is not defined in the VAT law but is deemed to apply to
transactions which are not exempt or outside the scope of VAT as
these are described and/or referred to in the VAT law.
• The Tax Department will accept as a taxable transaction the
lease/rental of immovable property where the taxable transactions of
the lessee constitute at least 90% of their total supplies. Supplies
outside the scope of Cyprus VAT which provide a right to recover the
related input VAT should be included for determining the relevant
taxable supplies.
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• The lessor is obliged to obtain the necessary documents
and/or confirmations from the lessee relating to the nature of
their transactions and where these include also exempt
transactions there is an obligation to obtain evidence as to their
value.
• The necessary investigation by the lessor must be made at the
time of the execution of the agreement but the lessor has no
obligation to monitor subsequent transactions of the lessee for
maintenance of the aforementioned 90/10 analogy.
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Subsequent leases/rentals and subsequent owners
• The lessor has the right to recover the whole of the input
VAT which directly relates to the lease/rental when their
supplies are wholly taxable. Where both taxable and
exempt supplies are carried out by the lessor they are
obliged to apportion the input VAT which is recovered
according to their circumstances.
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• It should be noted that if the option to opt out from the
obligation to tax is exercised it cannot be retracted at a later
stage and will affect any subsequent lease/rental agreement
in relation to the specific property.
• According to the relevant notification (ΚΔΠ 423/2017) the
declaration ceases to apply where there is a change in the
ownership of the specific property. As a result, the new
owner will have the right to decide whether to submit a new
notification to opt-out from the obligation to tax.
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Special VAT regimes
The obligation to tax applies only to taxable persons who
follow the standard VAT regime. A taxable person who is
registered under a special regime is obliged to apply for
registration under the standard VAT regime when they
lease/rent property, unless the option not to tax is exercised.
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VAT registration
The obligation for VAT registration is subject to the usual
provisions governing registration i.e. the value of taxable
supplies must exceed the amount of €15.600 at any point in
the preceding 12 months according to the provisions of par.
1, Part 1, Annex 1 of N95(I)/2000. To confirm the obligation
to register a person must provide a copy of the lease/rental
agreement to the Tax Department.
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Time of supply
The lease/rental constitutes a continuous supply of a
service. As a result, if the agreement provides for the
payment of rent from time to time, the VAT is accounted for
at the earlier of the issue of an invoice or payment of the
rent.
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Co-ownership and other beneficial interests
• Where the owner provides to another person the beneficial use of the
property the obligation to tax applies to both persons. Each
transaction is independent and subject to the provisions of the law.
• The above includes cases where a simple agreement exists between
owner and the user of the property as well as cases where the right of
usufruct has been transferred in accordance with the necessary Land
Law provisions.
• Where there is co ownership of the property its taxation is a common
obligation, however for the practical application of VAT, only a single
registration will be made as a partnership.
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Recovery of VAT on expenditure
• A taxable person has the right to recover input VAT for the
construction or maintenance of the property, where the related
lease/rental income is subject to VAT, in accordance with Article 21 of
the VAT law and the relevant Regulations.
• For the exercise of this option, a necessary condition is the
possession of a VAT invoice or other supporting evidence which may
substitute an invoice subject to the relevant regulations, so that the
VAT which has been imposed may be confirmed and the supply of
goods or services may be substantiated.
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• Where a property which, until the date the amendments were brought
into force, was leased/rented thereby constituting an exempt supply,
and where
– a period of ten years has not expired from the date on its purchase
or construction, and
– the lessor has formed a new lease/rental agreement after the
amendments were brought into force,
Regulations 75-79 of ΚΔΠ314/2001 will apply. According to these
Regulations, in relation to properties which are subject to an obligation to
tax, any VAT which was imposed at the time of their purchase or
construction is apportioned on the basis of the years remaining until the
completion of 10 years from the time of their first use. The tax recovered
should be monitored and adjusted for the years remaining to complete
the 10-year period.
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Imposition of VAT on part of the property
The imposition of VAT may relate to the whole or part of the
property or complex. The term “part of the property” is
defined as one or more spaces which are functionally
independent. In this case the lessee must maintain sufficient
evidence so that the spaces which are subject to VAT can be
specified.
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Indicatively, for a building comprised of ten (10) independent
shops, in accordance with the construction permit, the lessor
may opt not to tax one, two or more of the shops. However,
they are under an obligation to notify the Tax Commissioner
of their decision in accordance with the procedure outlined
above. In each case the right to recover tax is determined
according to the time of the exercise of the option.
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How we can help
As a result of the aforementioned clarifications there is an
opportunity to derive significant benefits in the form of VAT
recovery arising from past capital expenditure on property
falling within the scope of the new provisions.
Similarly, there is an opportunity to recover VAT on future
expenditure therefore any intention to opt-out from the
obligation to tax should be considered within the context of a
medium-long term time-frame.
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How we can help
It is important that any actions required because of the
changes, including VAT registration and imposition of VAT or
submission of declarations, are taken in a timely manner to
avoid unnecessary costs and penalties.
Our dedicated VAT team is available to discuss and assist
you with the potential impact of the above changes.
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Key contacts
Nicosia
George Karavis | Tax Partner
T + 357 22600000 | E George.Karavis@cy.gt.com
Constantinos Loizou | VAT Manager
T + 357 22600000 | E Constantinos.Loizou@cy.gt.com
Kyriakos Fili | VAT Manager
T +357 22600000 | E Kyriakos.Fili@cy.gt.com
Limassol
Augoustinos Papathomas
Head of Assurance and IBC Director
T + 357 25248000
E August.Papathomas@cy.gt.com
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VAT on Commercial Property Rentals

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