This newsletter briefly outlines both shortly expected and recently adopted VAT changes in Cyprus, starting with the changes triggered by amendments in the main EU VAT Directive, which Member States are required to implement, then followed by specific local amendments in the VAT law or the practice of the Tax Department, as well as recently issued clarifications on certain topics.
I. Vouchers Directive
Cyprus is yet to transpose into national legislation the provisions of Council Directive (EU) 2016/1065 concerning the VAT treatment of vouchers.
Under the currently applicable rules, no differentiation is made between single and multi-purpose vouchers and VAT is accounted for at the point of redemption. Hence, the due changes – which distinguish the two categories, will impact any business issuing, dealing or redeeming vouchers (not only retailers and telecommunication providers, which traditionally issue and deal with vouchers).
What has been published so far in the Official Gazette of the Republic is the draft bill, which follows to the letter the provisions of the Vouchers’ Directive. The bill is expected to be voted shortly by the Parliament.
Despite the delay in adopting the EU provisions, these will be applicable retrospectively from 1 January 2019.
We await with interest for the Tax Department to issue, following the adoption of the bill, a Circular detailing their position on certain interpretation issues and providing specific examples of how the new legislation is to be applied in practice.
II. Telecommunication, broadcasting or electronically supplied services
Cyprus is yet to transpose into national legislation the provisions of Council Directive (EU) 2017/2455 concerning electronically supplied services.
Together with the draft Voucher’s bill, a draft bill was published recently for the adoption of the provided in the Directive simplification for small businesses offering telecommunication, broadcasting or electronically supplied services to non-taxable persons. Annual threshold of EUR 10,000 will be introduced, below which sales will be subject VAT in Cyprus, unless the Cyprus established supplier opts out of the simplification.
The changes will apply retrospectively from 1 January 2019. Existing guidance is expected to be amended accordingly.
III. Long-term leases of immovable property
Following the significant changes that took place back in November 2017 and January 2018, imposing 19% VAT on certain commercial leases of immovable property and undeveloped building land, new changes affecting long-term leases of immovable property came into force on 1 January 2019.
Amendments to the relevant provisions of the VAT Law were made so that the effective transfer of the right to dispose of immovable property as owner is treated from 1 January 2019 as a supply of goods as oppose to a supply of services, which was the case before the change.
In a nutshell, the change concerns long-term leases of ‘new’ immovable properties, which depending on the case at hand are now subject to either the standard VAT rate of 19% or the reduced rate of 5% (main residence). Long-term leases of ‘second-hand’ (after the first occupation) immovable properties remain VAT exempt.
On 27 December 2018, the Tax Department issued Circular 229 clarifying that ‘an effective transfer of the right to dispose of an immovable property’ includes not only a free possession of a property but also other rights over a property, which result in an actual effective ownership over the property, and which rights are to be treated for VAT purpose as equivalent to a free possession of the property.
Examples include: a long-term interest over an immovable property – for instance for 99 or 999 years, as determined in the provisions of the Immovable Property Law; a transfer of an interest over an immovable property with an initial lump sum payment equal to the market value of the property and low annual rent over the duration of the lease; a long-term lease where at the start of the lease contract the present value of the minimum lease instalments covers substantially at least 90% of the marker value of the property.
The Circular notes that, as a guiding rule, a common commercial long-term lease (for example for 5, 20 or 30 years), with renewal clauses, should not be covered by the new provisions, however longer-term leases, for instance 99 years or more, with a large initial payment and very low rental payments should almost always be treated as a supply of goods.
In addition, clarifications were given in respect of the applicable place and time of supply rules, as well as the relevant transitional provisions, giving an illustrative practical example.
IV. Undeveloped building land
As from 2 April 2019, Interpretative VAT Circular 219 – dated 29 December 2017, no longer applies. The Tax Department issued a new VAT Circular, that is Circular 233, which expands on the previously given interpretations of the law (imposing 19% VAT on certain transactions of undeveloped building land) and clarifiies their position in respect of certain occasional supplies of building land.
In particular, the new Circular lists five (5) specific categories of transactions involving undeveloped building land which, according to the Tax Department, should always be treated as undertaken within the scope of an economic activity, irrespective of the purpose of the transaction, its value or the location of the property. As a result, a transaction falling within one of the stated categories, will always trigger an obligation for the supplier to register for VAT purposes in order to impose VAT at the standard VAT rate (but see below for transactions undertaken as a result of loan restructuring arrangements).
Furthermore, according to the Authorities, only four (4) categories of transactions, which practically do not fall part of any of the five ‘taxable categories’, are not to be considered an economic activity.
The ‘positive’ and the ‘negative’ lists should therefore be used as a main guidance when determining whether or not a transaction concerning building land would be subject to VAT.
In addition, the new Circular gives specific examples concerning supplies of building land by legal persons and their respective VAT treatment.
Taxpayers are also remined that, until the end of 2019, building land transactions undertaken as a result of loan restructuring arrangements are subject to the reverse charge provisions creating a responsibility for the recipient to self-account for any due VAT.
V. Leasing of yachts
Following the European Commission’s formal notice of the incompatibility of the Cypriot VAT yacht leasing rules with the EU VAT Directive, the Tax Department withdrew Circular 198 (VAT and Tax – 25 November 2015) back in April 2018.
Subsequent to guidance received from the European Commission, a new Circular was issued on 22 March 2019, outlining the amended procedures and rules to be applied as from that date.
Under the new procedures, the place of use and enjoyment of a yacht is determined by reference to the distances travelled and not by reference to the type and size of the yacht, which was the previously used method.
The main points of the new ‘Cypriot yachts regime’ are outlined below.
Each new VAT registration is provisional for a period of six (6) months (but could be extended to a year), during which period the Commissioner of Taxation has the authority to cancel the registration in interest of the public revenues.
In addition to the standard forms required for a VAT registration, further information needs to be provided. That includes relevant lease agreement(s) and detailed description of the operation of a geotracking system or procedures to be followed where a manual logbook is to be kept. Furthermore, a statement must be signed agreeing to the provisional VAT registration and its terms and conditions.
Any lease agreement providing the lessee with an option to purchase the yacht at any point during the duration of the lease could be rejected by the Commissioner on the basis of the agreement being for the supply of goods and not services.
If at the time of a VAT registration, there are no sufficient details in respect of the places where the yacht is expected to be used and enjoyed, the Commissioner of Taxation may – at his discretion, predetermine a percentage of use and enjoyment within the EU. In those cases, additional procedures are to be followed periodically. For example, if the length of the yacht is 20 meters or more, details must be provided to the Tax Authorities every 6 months regarding the distances travelled. The Commissioner of Taxation is able to issue a new calculation of the VAT due if at any point the use of the yacht significantly varies from the predetermined rates (during the 6-year registration period).
For a VAT registration to be approved, a guarantee – not exceeding 3 per cent of the yacht value – must be provided at the registration date; that value must be verified; a formal statement must be signed agreeing to certain terms and conditions to be always met and applied; and the yacht must be put at the disposal of the lessee in Cyprus, whereby the lessee must be a physical person leasing the yacht for recreational purposes and not for business.
A company registered for VAT under the above regime, would have no right to input VAT deduction.
The VAT registration must be kept for at least 6 years. If the activities cease or a de-registration is made before the end of the 6-year period, VAT will be imposed at the prevailing standard VAT rate on the replacement value of the yacht at that date.
VI. Fulfilment of obligations to issue VAT receipts in certain cases
On 20 December 2018, the Tax Department issued VAT Circular 228 advising that in certain cases taxable persons can discharge their obligations to issue VAT receipts using an alternative method than the one required in the Law.
In particular, those cases concern mostly small cash businesses that are unable in practice to follow the provisions of the law (e.g. school canteens, mobile businesses, etc.).
Instead of VAT receipts, such businesses could, upon receiving cash for the goods or services they have supplied, provide ready receipts from sets of printed blocks (e.g. blocks of sequentially numbered receipts of EUR 1, EUR 1.50, EUR 2, etc.), relevant to the value of the sale.
In order for such alternative receipts to be acceptable by the Tax Department, they must contain specific particulars. Furthermore, in addition to the normal record-keeping requirements, additional books must be kept on a daily basis providing information for certain required fields.
VII. Prepaid electronic means of payment
On 20 February 2019, the Tax Department issued VAT Circular 230 clarifying that transactions concerning the purchase and sale of prepaid electronic means of payment, such as ‘paysafecards’, are VAT exempt under the provisions of sub-paragraph (d) of paragraph (3) of Part B of Schedule 7 of the VAT Law. The exemption also applies to commissions earned by intermediaries in respect of such exempt transactions.
VIII. Admission to sporting events and use of sporting facilities
On 21 February 2019, the Tax Department issued VAT Circular 231 clarifying their position in respect of admission to sporting events and use of sporting facilities, which are subject to the reduced VAT rate of 5% in accordance with paragraph 7 of Part B of Schedule 7 of the VAT Law.
In particular, the Tax Department clarifies that admission to sporting events includes all sporting events that take place in Cyprus, such as football games, basketball games, volleyball games, athletics, boxing, etc. In addition, the term sporting facilities includes swimming pools, volleyball fields, gyms and generally areas of immovable property which are specifically designed or adapted for the organisation of any kind of athletic games, events or trainings.
For the reduced 5% VAT rate to apply, the existence of ‘operation licence’ in accordance with the Regulations of the Private Gymnastics Schools of 1995 (as amended) is required. Where such licence is not present, the right to use a sporting facility is subject to the standard VAT rate (currently 19%).
In addition, the reduced VAT rate is only applicable where the admission is granted to physical persons, irrespective of the agreed periods of payment (e.g. per visit, monthly or annual subscriptions) or to organised groups (e.g. athletic clubs) for a short period of time.
The right to use sporting facilities is only subject to the reduced VAT rate of 5% where the right is given for the purposes of sporting events and not for any other reasons, such as marketing events, photography, etc. – those are subject to the standard VAT rate. Also subject to the standard VAT rate are gymnastics services or services of teaching a sport provided by businesses or self-employed persons (e.g. personal trainers), as well as summer school activities – other than those specifically VAT exempt under Schedule 7 of the VA Law.
Furthermore, long-term access to sporting facilities when supplied to another taxable person in accordance with point (vi) of sub-paragraph (a) of paragraph (1) of Schedule 8 of the VAT Law are taxable at the standard VAT rate. In such arrangements, the lessee has the exclusive right to use the immovable property over a longer period of time (e.g. a legal person owning a stadium leasing it out to an athletic club for a long-term use).
Activities, as the ones described above, undertaken by public bodies or public authorities also are subject to VAT – either at the reduced rate or the standard rate, as the case might be, as non-taxation would otherwise lead to distortion of completion.