VAT on transfer of right to dispose of immovable property

The Cyprus Tax Department has issued a circular (EE 229 dated 27 December 2018) explaining the application of Law 39(1) of 2018, which amended the VAT Law of 2000 to 2018 to bring the transfer of the effective right to dispose of immovable property as owner within the scope of VAT with effect from 1 January 2019.

With the exception of a few special cases, listed in paragraph 1(a) of the Eighth Annex of the VAT Law, lettings of immovable property are exempt from tax, so the lessor has no right to deduct any input tax it has been charged for the construction or maintenance of the property, regardless of the length of the lease.

However, from 1 January 2019 a lease which effectively transfers full ownership rights to the lessee or enables the lessee to dispose of the property is defined as a supply of goods, and not as a supply of services, and is taxable at a rate of 5% or 19% depending on the nature of the buyer. VAT is only chargeable on the initial sale of the property by the developer: there is no VAT on sales of “secondhand” properties.

The circular clarifies three issues, namely the nature of transactions that give rise to a taxable supply, the place and time of supply, and the transitional arrangements for transactions that take place at the time the new provisions take effect.

Transactions giving rise to a taxable supply

The supply of goods for VAT purposes is the transfer of ownership of the goods. This includes transfer of the right to dispose of property, regardless of whether the transferor is the absolute owner. For example, the lessee of a property on a 999 year lease, and in some cases a 99 year lease, will have the equivalent of full ownership. Leases giving the equivalent of full ownership are characterised by a large initial payment equal to the current market value of the property followed by a low or nominal annual rental payment, effectively transferring all the risks and rewards that result from the ownership of the asset to the lessee, regardless of whether or not ownership title may be transferred. The circular suggests that this test is met where, at the beginning of the lease, the present value of the minimum lease payments (excluding the cost of any services offered during the lease) is 90% or more of the market value of the asset.

In most cases, the nature of the lease will be clear at first sight. As a rule, the creation and assignment of ordinary commercial leases for up to 30 with rent reviews and typical lease provisions will not constitute a transfer of ownership rights. However, if there is any doubt, taxpayers are encouraged to seek the advice of the Tax Department.

Place and time of the transaction

The place of the transaction is the actual location of the goods concerned. In the case of an immovable property this is clearly the address of the property. The time of the transaction is the time when the goods are made available to the person acquiring them (article 9 (2) of the VAT Law) or, if earlier, the date on which an invoice is issued or payment is received (article 9 (4).  The transfer of the right to ownership of immovable property is deemed to occur when the contract for the sale of the property is completed and does not require the formal transfer of title to the buyer. It is sufficient that the buyer has effectively acquired the right to dispose of the property.

Transitional provisions

If the date of the transaction determined in accordance with article 9 of the VAT Law is 31 December 2018 or earlier, the transaction is exempt from VAT; otherwise it is taxable at the appropriate rate.

A long-term lease transaction deemed to be a supply of goods will be treated as exempt if the immovable property is made available to the lessee on or before 31 December 2018, even though the invoice is issued later. The property will be deemed to have been made available to the lessee if both parties involved in the transaction had signed a contract which included a specific condition that the specific immovable property is reserved for the lessee; or where, by agreement, funds had been deposited in an escrow account to be released after the agreed terms had been fulfilled; or where the transaction had been agreed, but required approval by a government department, and approval took place later; or where the contract between the interested parties had been stamped and filed with the Department of Lands and Surveys or the Tax Office.