Value-added tax (VAT)
Value-added tax (VAT)
VAT is imposed on the supply of goods and services in Cyprus as well as on the acquisition of goods from the European Union 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 that they receive (input tax).
The standard VAT rate in Cyprus is 19%. Additionally, two reduced VAT rates, a 9% rate and a 5% rate, apply in Cyprus:
- The reduced VAT rate of 9% applies on accommodation, restaurant and catering services, as well as on certain local passenger transport services and the supplies of goods and services by penitentiaries (if not exempt from VAT).
- The reduced rate of 5% applies, amongst others, on foodstuffs, pharmaceutical products, books and newspapers, as well as on a variety of other goods and services.
- A reduced rate of 5% applies on the first 200 square metres of the buildable area of a property that qualifies as a new building/house acquired by individuals/eligible persons, as this is determined on the building coefficient of the residence in accordance with the architectural plans filed with the competent authorities. This is on the condition that the property will be used as their primary and main residence for ten years. On the remaining square metres, the standard VAT rate of 19% is applied. In addition, based on the amendment, persons who have already acquired a residence on which the reduced VAT rate was imposed can re-apply and acquire a new residence on which the reduced VAT rate will be imposed, irrespective of whether the ten year prohibition period for using the residence provided for in the legislation has lapsed or not. A condition for this to apply is that in case the ten-year period of using the residence as the main and permanent place of residence has not lapsed, the persons must pay back to the Tax Department the difference in the VAT between the standard and reduced VAT rates applicable at the time of the acquisition or construction of the residence.
- The 5% reduced rate also applies to renovation,repair and extension (the reduced rate of 5% on extensions applies from 20 August 2020 onwards) of all used private residences that are considered as being old (i.e. a period of at least three years has elapsed from their first use), excluding the value of materials that constitute more than 50% of the value of the services.
Amongst, others, exports from Cyprus are zero-rated (i.e. no VAT must be charged on the export, and the company is entitled to recover the relevant input VAT suffered). In addition, the supply, modification, repair, maintenance, chartering, and hiring of qualifying aircraft and qualifying vessels, as well as the supply of goods for the fuelling and provisioning of qualifying vessels and qualifying aircraft and the supply of services to meet the client needs of qualifying vessels/aircraft are also treated as zero-rated. An aircraft meets the definition of a qualifying aircraft where it is used by airlines operating for reward chiefly on international routes, and a qualifying vessel is the vessel that is used in the navigation on the high seas for industrial purposes.
Supplies of goods taking place outside the European Union are outside the scope of Cyprus VAT.
Certain supplies in the public interest such as postal, education services, medical services, and supplies of charities are exempt from Cyprus VAT.
The supply of financial services is also exempt.
Supplies of buildings also are exempt from VAT unless the supply relates to new buildings before first use.
Over the past few years, a number of amendments to Cyprus VAT legislation concerning transactions in real estate were enacted. These amendments comprise of:
- Imposition of VAT on leasing of immovable property (land and commercial buildings, other than residential buildings) when used by the lessee in making taxable supplies by at least 90%. The lessor has the right to opt not to impose VAT on the specific property. The option is irrevocable.
- The imposition of VAT on the sale of non-developed building land, as of 2 January 2018, which is defined as land intended for the construction of one or more structures in the course of carrying out a business activity. No VAT is imposed on the purchase or sale of land located in a livestock zone or areas that are not intended for development, such as environmental protection, archaeological, and agricultural zone/areas.
- The application of reverse charge on transactions relating to transfers of immovable property during the process of loan restructuring and for compulsory transfer to the lender, as of 2 January 2018. As of 5 December 2019, the definition of the term ‘lender’ includes licensed credit and financial institutions, credit acquiring companies, including their subsidiaries, as well as a public body or any licensed company that acquired/received from a credit institution any non-performing/overdue loans. This provision is effective until 31 December 2021.
- As of 1 January 2019, leases of immovable property that effectively transfer the risks and rewards of ownership of immovable property are considered to be supplies of goods. They also become subject to VAT at the standard rate if the immovable property is not used.
Other recent amendments in the Law are:
- As of 1 January 2019, amendments have been made in relation to the VAT treatment of vouchers. A voucher is an instrument (whether in physical or in electronic form) that contains an obligation to accept it as consideration, or partial consideration, for a supply of goods or services, but does not cover discount vouchers, an instrument functioning as a ticket, or postage stamps. Specifically, two types of vouchers exist, namely 'single-purpose' and 'multi-purpose' vouchers, and the timing at which you account for VAT will differ depending on whether it is a single or multi-purpose voucher. Details as to the timing at which VAT is accounted for under each category are beyond the scope of this summary.
- As of 1 October 2020, new provisions have been adopted to combat fraud in the field of mobile phones, other devices operating in networks, microprocessors, central processing units, gaming consoles, tablets, and laptops, according to which the recipient of the above-mentioned goods will be responsible to account for VAT under the reverse-charge provisions when these are acquired in the course of a business activity.
- As per the new legislative amendments of the Cyprus VAT law and with effect from 1 July 2021, failure to apply the reverse charge provisions as per Articles 11, 11A, 11B, 11C, 11D, 11E or 12A of the Cyprus VAT Law will result in the imposition of EUR 200 per VAT return up to a total penalty of EUR 4.000. The penalties will apply irrespectively of whether a taxpayer is in a fully recoverable VAT position.
- From 1 July 2021, Cyprus has adopted the Directive 2017/2455 Directive 2019/1995 (hereafter referred to as “EU VAT e-commerce Directives”).
VAT registration is compulsory for business with:
- turnover in excess of EUR 15,600 during the 12 preceding months or
- an expected turnover in excess of EUR 15,600 within the next 30 days.
Businesses with turnover of less than EUR 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 that:
- make acquisitions of goods from other EU member states in excess of EUR 10,251.61 during any calendar year, or
- are engaged in intra-Community supply of goods or services or supplies of goods for which the recipient must account for VAT under the reverse-charge provisions.
No registration threshold exists for the provision of intra-Community supplies of goods and services.
Additionally, an obligation for registration arises for businesses carrying out economic activities as a result of 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 EUR 15,600 per any consecutive 12-month period.
Supply of goods and services that are exempt from VAT, and disposals of items of capital nature, are not taken into account for determining the annual turnover for registration purposes.
Registration is effected by completing the appropriate application form and submitting the relevant supporting documentation within the prescribed deadlines.
As of 20 August 2020, taxpayers who are not established in Cyprus but are engaged or expect to be engaged in taxable activities in Cyprus in the course of their business also have the obligation to register for VAT purposes without a VAT registration threshold.
VAT declaration and payment/return of VAT
VAT returns must be electronically submitted on a quarterly basis, and the payment of VAT must be made by the tenth day of the second month that follows the month in which the VAT period ends.
VAT-registered persons have the right to request for a different filing period. The approval of the Commissioner of Taxation is required. The Commissioner of Taxation also has the right to request for a taxable person to file their VAT returns for a different period.
Where, in a quarter, input VAT is higher than output VAT, the difference is refunded (subject to certain conditions) or is transferred for set-off against the VAT payable of the next VAT returns.
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 Tax Department to repay the refundable amounts is extended by another four months (i.e. eight months in total) in the event that the Commissioner of Taxation is carrying out an investigation in relation to the submitted claim.
From 20 August 2020, VAT refunds will be suspended if the taxpayer:
- has not complied with the obligation to file income tax returns, or
- has not submitted an application for VAT refund within six years from the time the VAT refund arose. In this case an application for VAT refund can be submitted, subject to the Tax Commissioner’s consent.
Customs duties may be imposed upon the importation of goods into Cyprus. The customs duties are imposed in accordance with the provisions of the applicable legislation.
Whether customs duties are imposed depends on the nature of the goods and the respective customs duty codes.
Excise taxes are imposed on certain products, including means of transport, petroleum, tobacco products, and alcoholic drinks.
Immovable property tax (IPT)
IPT has been abolished as of 1 January 2017.
Immovable Property Transfer Levy
As of 22 February 2021 a 0,4% levy is imposed on the sale proceeds from all disposals of immovable property which is within the current control of the Republic.
The levy also applies on disposals of shares of a company which is the owner of such immovable property, to the extent that the buyer of the shares assumes control of such company.
Obligation for payment of the levy lies with the seller of the property.
No clarity is currently available on certain issues such as:
- the taxing point (i.e. date of agreement to sell the property, or any other), as there is no provision for interest and penalties;
- basis of calculation of the levy (e.g. remuneration actually received or agreed disposal consideration);
- the payment method and payment recipient, which is yet to be decided;
- application of the Law amendment to indirect disposal of shares;
- potential exemptions from the levy (e.g. reorganisations, debt for asset swaps and listed shares);
- pro-rata calculation of levy on non 100% share disposals.
The general rule is that Cyprus stamp duty is imposed only on written instruments relating to assets located in Cyprus or to matters that will take place in Cyprus. The applicable rates are based on the value stipulated in each instrument and are nil for values up to EUR 5,000, 0.15% for values from EUR 5,001 up to EUR 170,000, and 0.2% for values above EUR 170,000, subject to an overall maximum amount of stamp duty of EUR 20,000. Exemption from stamp duty applies in the case of a qualifying reorganisation scheme.
As of 18 December 2018, capital duty of 0.6% on the authorised share capital or any increases thereof has been abolished.
As a result, no capital duty is imposed from that date onwards on (i) the initial authorised share capital upon incorporation of a new company, and (ii) any subsequent increase of authorised share capital.
The EUR 105 upon incorporation of a new company and the EUR 20 for the issuance of an 'issue and allotment of shares' certificate as regards (i) issued share capital upon incorporation if the shares are issued at a premium, and (ii) any subsequent increase of issued share capital, whether the shares are issued at nominal value or at a premium, remain applicable (i.e. not unaffected by the abolition of capital duty).
Capital gains tax (CGT)
CGT applies only to gains relating to Cyprus-situated immovable property when the disposal is not subject to CIT.
Disposal for the purposes of CGT specifically includes sale, exchange, lease, gifting, abandoning use of right, granting of right to purchase, and any sums received upon cancellation of disposals.
CGT at the rate of 20% is imposed on gains arising from the disposal of immovable property situated in Cyprus or the disposal of shares in companies that own Cyprus-situated immovable property. CGT is also imposed on disposals of shares in companies that indirectly own immovable property situated in Cyprus where at least 50% of the market value of the said shares derives from Cyprus-situated immovable property. Shares listed on any recognised stock exchange are excluded from CGT.
In the case of disposal of company shares, the gain is calculated exclusively on the basis of the gain relating to Cyprus-situated immovable property. The value of the immovable property will be its market value at the time the shares were disposed of.
The taxable gain is generally calculated as the difference between the disposal proceeds and the original cost of the property plus any improvements as adjusted for inflation up to the date of disposal on the basis of the consumer price index in Cyprus. In the case of property acquired before 1 January 1980, the original cost is deemed to be the value of the property as at 1 January 1980 on the basis of the general valuation conducted by the Land Registry Office under the Immovable Property Law.
Other expenses that relate to the acquisition and disposal of immovable property are also deducted from the gain, subject to certain conditions (e.g. interest costs on related loans, transfer fees, legal expenses).
It is important to note that, subject to conditions, land, as well as land with buildings, acquired at market value (excluding exchanges, donations, and foreclosures) from unrelated parties in the period 16 July 2015 to 31 December 2016 will be exempt from CGT upon their future disposal.
Finally, certain disposals are totally exempt from CGT based on their nature (e.g. gifts from parents to children or between spouses).
Immovable property transfer fees
The fees charged by the Department of Land and Surveys to the acquirer for transfers of Cyprus-situated immovable property are as follows:
|Market value (EUR)||Rate (%)||Fee (EUR)||Accumulated fee (EUR)|
|Up to 85,000||3||2,550||2,550|
|85,001 to 170,000||5||4,250||6,800|
It is important to note that:
- No transfer fees are payable if VAT is applicable upon purchasing the immovable property.
- The above transfer fees are reduced by 50% in case the purchase of immovable property is not subject to VAT.
Certain debt-for-asset swap arrangements may, under certain conditions, be exempted from transfer fees.
Mortgage registration fees are 1% of the current market value.
In the case of companies’ reorganisations, transfers of immovable property are not subject to transfer fees or mortgage registration fees.
In addition to the employers' own contributions on their employees’ gross salaries (see below), employers are also responsible to withhold from employees’ earnings the employees’ contributions to the social insurance fund, General Healthcare System (GHS), and employees' PIT burden through the pay-as-you-earn (PAYE) system.
Social security contributions
Employed persons are compulsorily insured under a state-administered social insurance fund. Contributions to the fund are borne by both employer and employee. The employer’s contributions are calculated as a percentage of the employee’s earnings. The employer also contributes to other funds as set out in the table below:
|Funds||Employer contribution (% of employee’s earnings) (1)|
|Social insurance fund||8.3 (2, 3)|
|Training development fund||0.5|
|Social cohesion fund||2.0|
|GHS contributions||2.90 (3, 4, 5)|
|Holiday fund (if not exempt)||8.0|
- With the exception of the social cohesion fund, the maximum amount of monthly earnings on which the contributions are paid is EUR 4,840 for 2022 (EUR 4,784 for 2021). This maximum is usually adjusted for inflation annually at the beginning of each calendar year.
- As of 1 January 2019, the rate increased to 8.3% for both the employee and the employer for the next five years. Thereafter, the rate will increase every five years until it reaches 10.7% as of 1 January 2039.
- The employee must also contribute at the same rate as the employer to the social insurance fund and the GHS fund at 8.3% and 2.65% respectively (see 4 below), but not to the other funds. It is the employer’s responsibility to withhold this contribution upon payment of employee’s earnings.
- GHS contributions are capped at EUR 180,000 annual income.
A Cyprus CIT payer will be subject to the Cyprus exit taxation provisions in cases where assets are transferred outside the Cyprus income tax net (outbound transfers) in any of the following circumstances:
- The assets are transferred from the taxpayer’s head office (HO) in Cyprus to its PE outside Cyprus, insofar as Cyprus no longer has the right to tax the transferred assets due to the transfer.
- The assets are transferred from the taxpayer’s Cyprus PE to its HO or another PE outside Cyprus insofar as Cyprus no longer has the right to tax the transferred assets due to the transfer.
- The taxpayer transfers its tax residence outside of Cyprus and acquires tax residence in another jurisdiction (assets which remain effectively connected to a Cyprus PE following the transfer are excluded from the exit taxation provisions).
- The taxpayer’s business carried on by its Cyprus PE is transferred to another jurisdiction and in doing so the taxpayer ceases to have a taxable presence in Cyprus whilst acquiring a taxable presence in another jurisdiction without becoming tax resident in that other jurisdiction, and Cyprus no longer has the right to tax the transferred assets due to the transfer.
Under certain conditions, temporary transfers of assets falling within the above-mentioned categories are excluded from the scope of the exit taxation provisions.
Amount subject to tax
In the circumstances outlined above, at the time of the transfer the taxpayer is deemed to have transferred the assets at an amount equal to their market value at that time, such that any profit thereon is calculated as the difference between that market value less their value for tax purposes at that time. Such profit is subject to CIT law provisions (e.g. the transfer of a qualifying ‘title’ [such as shares in a company] will be exempt upon transfer as qualifying titles are exempt from Cyprus income tax).
Deferral of payment of tax
Where there is a transfer subject to Cyprus CIT (see above), it is chargeable to tax at the time of transfer. In certain cases, the taxpayer has the choice to make the relevant CIT payment in instalments over a period of five years. Deferral of payment is a possible option for the taxpayer only in cases where the transfer is to another EU member state, or an EEA state with which Cyprus (or the European Union) has an agreement on the recovery of tax claims equivalent to the mutual assistance provided for in the EU Directive (2010/24/EU) concerning mutual assistance for the recovery of claims relating to taxes, duties, and other measures.
When a taxpayer opts for payment of tax in instalments, then the Cyprus tax authorities will charge interest. Additionally, the Cyprus tax authorities may, in certain cases, request a guarantee.
If certain future events occur, deferral of payment of tax will be immediately discontinued and the balance of the tax debt will become immediately payable.
Where assets are transferred to Cyprus from another EU member state under the same scope as for outbound transfers (see above), then the assets’ starting value for tax purposes in Cyprus is the value at the time of transfer as established by the transferor EU member state (unless this does not reflect the assets’ market value at that time).