VAT on the supply of building land –  Cyprus

According to the eight schedule of the Cyprus VAT Law, the supply of Land is exempt from VAT, hence any sale of plot of land in Cyprus is not subject to VAT. But this is the current case, which may be changed as per the EU VAT Directive.

In particular, as per the Article 383 of the EU VAT Directive (Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax), which has been granted following Cyprus accession to the EU, any sale of plot of land was exempt from VAT until 31 December 2007. This derogation has however been expired nearly 10 years now. Therefore, Cyprus should amend its VAT legislation and introduce provisions that would subject the supply of (building) land to VAT.

Important also to note that the supply of land is not one of the transactions listed under Annex III of the EU VAT Directive and therefore reduced rates of VAT do not apply on these transactions but standard rate should be charged at the flat rate of 19% instead.

So, what is the impact on the Cyprus economy of imposing the VAT at 19% and where do this delay relates to?

Every time that the amended law is going to be submitted to the House of Representatives, there are last minute changes that requires the law to be sent back to the relevant parliamentary committee for further discussions and negotiations, thus creating this long delay of submission.

The impact on the Cyprus economy of imposing the VAT on the supply of Land is significant.

The highest impact will definitely be on the banking sector which holds land as collateral. In particular, when imposing the VAT on the building land, any land that has been used as collateral on a loan amounting €1 million, if the VAT is imposed, the market value of the land will not be €1.190.000 but will remain at €1 million instead, inclusive of VAT. Based on the VAT rate of 19%, the VAT charge on the collateral will amount to approximately €160.000 which means that the bank will require from the borrower a further collateral of €160.000 against the loan. To this turn, if we accumulate all these cases, the total deficit would be significantly high, amounting to hundreds of millions of euros.

Further to the banking sector, other parties affected by the imposition of the VAT on building land are the construction and property development sectors. The development and property industry is one of the major industries whose contribution to the Cyprus economy is significant. Therefore, the law should be amended so as not to ‘destroy’ the parties involved as this would likely lead to a negative impact on the local economy and a drop of the Cyprus GDP.

Important however to know that VAT is a consumption tax and as such is always borne by the end-consumer.

In addition, we should note that the imposition of the VAT on the building land is not an option but an obligation and the delay on the amendment of the law will sooner or later cause penalties.