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Imposing VAT on land sales

Cyprus is facing hefty fines from the European Commission if it does not impose VAT on land sales, but the imposition of VAT will have knock-on effects on the property market and the banks.

VAT on land sales in CyprusMPs ON MONDAY continued discussion of a government bill which would impose 19 per cent VAT on land sales for commercial property transactions, amid concerns that this would lead to a cooling off in the property market.

Officials warned that Cyprus is liable to hefty fines from the European Commission unless it transposes into national law the EU VAT Directive of 2006.

On acceding to the EU in 2004, Cyprus was granted a derogation from the directive, allowing the island to continue exempting the supply of building land until December 31, 2007.

At present, when any plot of land is sold it is not subject to VAT.

George Panteli, the finance ministry’s economic director, said a retroactive lump-sum fine from the EU should be expected for the period of non-compliance (nine years), plus anywhere from €100,000 to €300,000 per day of continued non-compliance.

The penalty from the EU would be substantial, he added, but could not give a precise estimate.

The government bill, submitted last June, exempts farm land, protected areas and forest land from the imposition of VAT.

MPs and interest groups said the 19 per cent VAT will have a knock-on effect on the property market but also on banks that hold land as collateral.

For example, where land held as collateral against a loan is worth, say €1 million, were VAT to be levied, the market value of the land will not be €1.19 million. Rather, the value will remain €1 million, but inclusive of VAT.

In turn, this means the bank would need further collateral against the loan. On a national basis, the deficit could run in the hundreds of millions.

Lawmakers asked the Institute of Certified Public Accountants of Cyprus to come up with proposals for offsetting measures in two weeks’ time, when the House finance committee is due to discuss the matter again.

The EU directive imposes VAT on the supply of building land, which affords national governments some leeway in their interpretation of ‘building land’.

MPs are thus contemplating placing a restrictive definition so as to exempt as many land transactions as possible.

Tax commissioner Yiannis Tsangaris said land sales would be examined on a case-by-case basis to determine whether the 19 per cent tax should be levied.

Legislators also discussed other ways of alleviating the impact of the VAT, such as introducing the option for tax leasing/letting of immovable property for commercial purposes.

Another offset measure being mulled is to bring back affected businesses’ exemption from capital gains tax.

This exemption expired on December 31, 2016. There are now thoughts on re-introducing it for one to two years.

Another matter raised was whether incidental transactions in land can be exempted from the VAT. For instance, if a non-taxable person, who does not engage in an economic activity for VAT purposes, chooses to sell a plot of land inherited by him, would this be considered to constitute economic activity and thus subject to VAT?

Last year, parliament passed a law slashing IPT payable for 2016 by 75 per cent. Additionally, MPs voted to scrap IPT altogether thereafter.

Further reading

Imposing VAT on sale of land in Cyprus by Panayiotis Panayi, BA, ACA

Readers' comments

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  • Peter Davis says:

    “A knock-on effects on the property market and the banks”.

    As a taxpayer I don’t pay taxes to contribute towards fines to the EU so that the bankers and developers can buy new Mercs. If they can’t take the heat best they move out of the market.

    If they can’t sort out their problems they should not be building. After all how many more empty buildings do we need?

    Strange how other countries mange to follow the rules.

  • Richard says:

    Thank you for clarifying – appreciated.

  • Richard says:

    I have some questions:

    i) I assume this VAT liability ONLY applies on land secured for building AFTER 31-12-2007?

    ii) Is the liability applied when the land is PURCHASED or when the properties on the land are COMPLETED? I.e: if the land was secured before 31-12-2007, but the properties were completed after 31-12-2007 – will the land be subject to a retrospective VAT claim?

    I had no idea this ‘time-bomb’ were still ticking, however – I’m not at all surprised they’ve fallen foul of the directive. I was under the apprehension that the Republic was a “net contributor” to the E.U? This was what was slowing down any progress with the likes of Viviane Reding et al when some people were attempting to get redress through the E.C.J?

    How can the island be a “net contributor” if it just totally failed to pay their VAT bill on something as huge as this for years on end? Is it that they are a net contributor ‘on paper’? That’s a wholly different kettle of fish! If I didn’t pay any tax or VAT in the UK for a decade – the only ‘on paper’ people would see – would be a summons!

    What on earth have all these ‘someone’s cousins’ in various government departments been DOING for the last 10 years?

    I’ll leave the commentary about the E.U giving them an amnesty for a decade for another day (especially as quasi-communist Catastrophias was president for a year during this period). Suffice to say – if that’s their idea of a ‘fair and equitable union’ – thank God we’re leaving!

    Ed: As Cyprus was granted a derogation from the directive until December 31, 2007 VAT would not be imposed before that date and I doubt the ‘new’ law would be applied retrospectively. (You couldn’t pass a law abolishing capital punishment and apply it retrospectively.)

    The ‘tax point’ is the date that VAT becomes due – and this will be the date when transaction takes place – i.e. when it’s purchased.

  • Campbell Findlay says:

    The last paragraph of the editors Comment to Readers post says it all.They do not do what they are told on “principle” and wonder why they are in the doo doo.

    Campbell.

  • who gives says:

    This is Cyprus we talking about do not comply to any rules & regulations as third world mentality should not be part of the EU as fails to implement any EU laws except signing MOU with other third world Countries.

  • Reader says:

    Thank you.

    “I think the major problem here in Cyprus is the properties that banks & other credit institutions own following debt to asset swaps with their debtors. They could be effectively reduced in value by 19% – oops!”

    But how does this relate to “19 per cent VAT on land sales for commercial property transactions”?

    The question is how much land is in the books to which this applies. And again it is difficult to imagine why the value would change.

    A commercial buyer would basically get the land for 19% less as she can deduct the input VAT while a private buyer would still pay the same?

    And would VAT be applicable to a private buyer anyway as we are talking about “commercial property transactions”.

    An interesting topic which is worth following up.

  • Reader says:

    “MPs and interest groups said the 19 per cent VAT will have a knock-on effect on the property market but also on banks that hold land as collateral.

    For example, where land held as collateral against a loan is worth, say €1 million, were VAT to be levied, the market value of the land will not be €1.19 million. Rather, the value will remain €1 million, but inclusive of VAT.”

    That’s an interesting view as in most jurisdictions and banking systems it is handled the other way around. I.e. VAT is actually part of the collateral (for private owners). For commercial businesses it is a wash-through anyway.

    It is difficult to imagine why the (gross) MV should not change when VAT is added. EUR 1m is a million and especially when companies can deduct input VAT for commercial properties the actual MV should not change at all but VAT is simply added to the bill.

    It would be interesting to get other views on this topic.

    Ed: I can only speak on the system in the UK, where it’s discussed at VAT Notice 742: land and property.

    I think the major problem here in Cyprus is the properties that banks & other credit institutions own following debt to asset swaps with their debtors. They could be effectively reduced in value by 19% – oops!

    If Cyprus had introduced VAT on commercial land sales in December 2007 as it was obliged to instead of faffing around for the last ten years there would be no problem.

  • embapaphos says:

    Also some mention of this 19% being offset by reducing transfer fees.

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