VALUE ADDED TAX

VAT is imposed on the provision of goods and services in Cyprus, as well as on the importation of goods into Cyprus and on the acquisition of goods from the European Union.

Taxable persons charge VAT on their taxable supplies (output tax) and have the right to claim VAT suffered on goods and services, which they receive (input tax) for the purpose of their business.

If output tax in a VAT period exceeds total input tax, a payment has to be made to the state. If input tax exceeds output tax, the refundable amount is transferred to be set against any payable amount in future VAT returns. A payment is due from the state according to the following criteria:

• a period of three years has elapsed since the date the VAT became refundable;

• input VAT which cannot be set off against output VAT until the last VAT period of the year which follows the year in which the VAT period in which the credit was created falls;

• the input VAT relates to zero rated transactions;

• the input VAT relates to the purchase of capital assets of the company;

• the input VAT relates to transactions which are outside the scope of VAT but would have been subject to VAT had they been carried out within Cyprus;

• the input VAT relates to exempt financial and insurance services provided to non EU resident clients (services for which the right to recover the related input VAT is granted).

The new VAT package came into effect as of 1st January 2010 establishing Cyprus as an EU regulations compatible member state. Changes brought about mainly concern:

• The place of services supplied;
• The reverse charge mechanism;
• The VAT refunding procedures.

The following VAT rates apply to the taxable supplies:

• Zero rated (0%)
• Reduced rate (5%)
• Reduced rate (8%)
• Standard rate (15%)

Zero rated goods and services include the following:

• Exports
• International air and sea transportation of persons, goods and related services
• Ship management services

Goods and services subject to the reduced rate of 5% include the following:

• Animal feeding stuffs;
• Fertilizers;
• Services of road cleaning;
• Funeral services and supply of coffins;
• Services of authors, composers, artists and critics of works of art;
• Supply of seeds;
• Supply of live animals of a kind generally used for human consumption;
• Newspapers, magazines and books;
• Bottled and non-bottled water, ready made drinks and juices (excluding refreshments and alcohol
beverages);
• Ice-creams, ice-cream products and similar products;
• Dry nuts, potato crisps, cheese puffs, cereal and similar products;
• Donuts
• Gas irrespective of packaging;
• Rural and urban bus services;
• Hairdressing services;
• Entry fees to theatres, circuses, festivals, Luna parks, concerts, museums, zoos, cinemas, exhibitions and
similar circular events and related places;
• Entry fees at sports events and fees for using athletic centers;
• Goods used by disabled persons;
• Supplies of medicines and vaccines excluding those which are subject to the zero rate of VAT;
• Repair and maintenance of private residences after three years of first occupancy (subject to certain
conditions);
• Importation of items of archaeological value (code CN 9706 00 00).

As of 10 January 2011 subject to the reduced rate of 5% are:

a) Supply of foodstuff for human consumption including beverages but excluding alcoholic beverages and refreshments which are subject to the standard rate of 15%
b) Supply of drugs and vaccines used in medicine and veterinary
c) Supply of drugs used for medical treatment and decease prevention both in medicine and veterinary
d) Supply of food and beverages for take-away and delivery including beverages but excluding alcoholic beverages and refreshments which are subject to the standard rate of 15%.

Goods and services subject to the reduced rate of 8% include the following:

• Taxi services;
• Hotel and tourists accommodation including renting of camping sites and camping for caravans; 
• Tourist, excursion and long distance bus services;
• Catering services and supplies of goods in the course of catering
• Air and sea transportation services within Cyprus.

From 10 January 2011 supply of alcoholic beverages and refreshments in the course of catering services is subject to the reduced rate of 8%.

Standard rated (15%) goods and services not covered by any of the aforementioned.

Exemptions
Certain goods or services are exempted from VAT including:

• Rents;
• Medical services;
• Insurance and financial services;
• Educational services (including music academy);
• Building land;
• Supply of immovable property for which a valid application for planning permission was submitted before first of May 2004.

Difference between zero rate and exempt supplies
Zero rate is a taxable rate and an obligation for registration is compulsory once the criteria for registration are met whilst businesses engaged in only exempt activities are not eligible for registration.

Irrecoverable input VAT

Input VAT cannot be recovered in a number of cases, which include the following:

• When businesses make only exempt supplies; 
• Purchase, import or hire of saloon cars;
• Expenditure for entertainment of persons other than staff;
• Housing expenses of directors.

Registration
A person/company is obliged to register for VAT when:

• At the end of any month, if the value of the taxable supplies (supplies taxed at the rates of 0% and/or 5% and/or 8% and/or 15%) exceed € 15,600 during the 12 preceding months.

• At any time, if there are reasonable grounds for believing that the value of the taxable supplies in the following 30 days then beginning will exceed € 15,600.

• Receives services from abroad (EU and non EU) if the value exceed € 15,600.

• Provides services to businesses established in EU member States.

• Purchases goods from businesses established in EU member States (Intra-Community acquisitions) the value of which exceeds €10.251,61

• Distance selling to consumers in the Republic of Cyprus starting 1st January each year which exceeds the threshold of €35.000 

Businesses with turnover of less than €15,600 can be registered voluntarily if they are involved in taxable activities.

VAT declaration, payment/return of VAT
VAT returns are submitted quarterly within 40 days from the end of each quarter. The payment due to the authorities must be made prior submitting the return. 

Where in a quarter input tax is higher than output, the difference is either refundable or is transferred to the next VAT quarter to be credited against any payable amount.

International Business Companies (IBCs)
IBCs are subject to the same registration rules as companies involved in taxable activities locally. However the activities of most IBCs fall outside the scope of VAT thus there is no obligation for registration. IBC’s have the option of voluntary registration; this enables them to be refunded VAT paid on Cypriot expenses.

(a) Intra-community trade 
This refers to supply of goods between EU Member States and their VAT treatment. The sale is taxed at zero rate if the following criteria are satisfied:

-The seller has adequate proof that the goods have left the State.

-The goods have been transferred to another Member State. 

- The buyer is an EU VAT registered person and the VAT number of the buyer is recorded on the invoice.

-The goods sold are not goods for which the seller is taxed under the provisions of the margin scheme.

- The seller maintains adequate evidence that the goods have been transferred to that Member State.

With regard to intra-community acquisitions the trader does not pay VAT on the receipt of the goods in Cyprus but instead accounts for VAT using acquisition accounting. This involves a simple accounting entry in the books of the business whereby he self-charges VAT and at the same time claims it back if it is related to taxable supplies thereby creating no cost to the business (reverse charge rule).

b) Triangular trade
This is the case where three Member States are involved and there is only one actual movement of goods but two invoices are issued, one from the first country to the intermediary and another from the intermediary to the recipient of goods.

The intermediary supplier must apply the simplification procedures and the invoice issued to the recipient must include the phrase “VAT, EU Article 28, Simplified Invoice”.

(c) Provision of services

I. General Rule / Place of supply of services
The main rule states that services are taxable in the country where the recipient of the service is established.

Examples of services:

a) transfers and assignments of copyrights, patents, licenses, trademarks and similar rights
b) advertising services
c) the services of consultants, engineers, consultancy bureau, lawyers, accountants and other similar services, as well as data processing and the provision of information
d) banking, financial and insurance transactions, including reinsurance, with the exception of hire of safes
e) the supply of staff
f) the hiring out of movable tangible property
g) the provision of access to, and of transport or transmission through, natural gas and electricity distribution systems and other services directly linked thereto
h) telecommunication services
i) radio and television broadcasting
j) electronically supplied services
k) the supply of services by intermediaries in the name and on behalf of other persons, where those intermediaries take part in the supply of the services referred to in this paragraph. 

Exemptions

a) services relating to immovable property 
b) access to cultural, artistic scientific, educational, entertainment and similar services, the organisation of trade and other exhibitions
c) ancillary services relating to the above  
d) passenger transport
e) restaurant and catering
f) restaurant and catering on board a ship/aircraft/train
g) short-term hiring of means of transport (continues use for up to 30 days for motor vehicles and 90 days for vessels).

As of 1 January 2011 services relating to cultural, artistic scientific, educational, entertainment and similar services, the organisation of trade and other exhibitions and ancillary services that do not consist of access to the events, are taxed according to the provisions of the main rule.

II. Additional Reporting requirements

VIES (VAT Information Exchange System)

VAT registered businesses involved in intra-community trade, triangular trade and the provision of services within European Union territory, summary details of those supplies must be returned to VAT authorities on a monthly basis, electronically through Taxisnet website, 15 days following the month of reporting. This return, known as the VIES return, was created to enable the authorities in each EU Member State to ensure that Intra-Community transactions are properly recorded and accounted for.

INTRASTAT (Intracommunity Statistics)

Businesses engaged in intra-Community trade are also obliged to make a periodic INTRASTAT return, for statistical purposes, where the value of goods acquired by them from other Member States for 2011 exceeds €85,000 per annum or the value of goods supplied by them to other EU Member States exceeds €55,000 per annum. The statistical thresholds are subject to annual changes.

Intrastat return is submitted monthly, 10 days following the month of reporting.

PENALTIES AND INTEREST

8th Directive Refunds

As of the 1st of January 2010, EU companies are able to reclaim foreign VAT, by applying electronically in their own state, meaning that there will not be any obligation to file a VAT refund application in each member state where the VAT incurred.
The resident member state will forward the VAT refund claims electronically to the member states concerned by 30 September of the calendar year following the period to which the VAT relates. Minimum amount for an application per member state is €400 (or equivalent).

VAT Grant for acquisition of first residence

The grant is available to eligible persons, for the acquisition or construction of a new house used as the primary place of residence. The application for the grant is submitted to the Ministry of Finance.  

Qualifying for the grant is property for which an application has been submitted for the issue of a planning permission after 1 May 2004 and it is given for houses whose total covered area is up to 250m2.  Eligible persons are individuals who are citizens of the Republic of Cyprus or of any other EU member state residing permanently in the Republic and have reached eighteen years of age at the time of the application.

The level of the grant is limited to 130m2 (extended for families with more than three dependants) and depends on the type of the property and if the property is purchased or constructed. The grant is adjusted annually for the increases in the Retail Price Index.