In its effort to clarify the meaning of the new subparagraph (st) of paragraph 3 of Schedule Two, which comes into force on 1 January 2019 as per the amending Law 39 (I) of 2018, the Tax Department (TD) circulated on 27 December 2018 Circular 229 under the heading "Substantial transfer of the right to immovable property".
Due to the addition of sub-paragraph (st), the same amending law also amended subparagraph (a) of paragraph 1 of Schedule Eight so that transactions falling under subparagraph (st) are subject to VAT provided that the immovable property was delivered before first occupation.
What was the tax treatment before the introduction of subparagraph (st)
All leases of immovable property, regardless of time, value or method of payment of the lease (by installments or lump sum), were exempt from VAT, with the result that input tax on acquisition or construction could not be claimed as a credit.
What are the changes with the amendment?
a. Transactions falling under subparagraph (st) are considered to be supplies of goods rather than services.
b. By adding point (vii) to subparagraph 1 (a) of Schedule Eight, the supply of goods falling under subparagraph (st) is no longer exempt from VAT.
c. As a result of (a) and (b) the long-term assignment of a right to possession (long-term lease), whether the right is granted by the owner of the property or by the person to whom the owner has granted such a right, is considered a taxable supply of immovable property subject to a positive rate of VAT
Analysis of the main points of the circular
- The transfer of the ownership of a property, in addition to the usual meaning of the term, also includes the ‘in essence transfer of the right’ to another person who may use the property at will, even though he is not the legal owner.
- The term 'in essence' refers not only to the possession of the property but also to other rights derivable from the possession which are enjoyed by a legitimate owner and are equivalent to free possession. Therefore, the long-term right over immovable property amounts to free possession
- The long-term lease of, e.g. for 99 years, to constitute a supply of immovable property, must be accompanied by a large one-off payment that is in essence equal to the current market value of the property (at least 90% of the market value) accompanied or not with an annual low rent.
- Long-term leases which do not go along with an one-off payment equivalent to at least 90% of the market value of the property are not considered supplies of goods falling under sub-paragraph (st).
Place and time of supply under subparagraph (st)
Where the long-term lease falls under subparagraph (st) and therefore is treated as a supply of immovable property, the usual rules governing the place and time of supply of goods apply:
Since the subject matter is an immovable property:
- The place of supply is always where the property is located
- The time of supply is the earliest of the
- Transfer of possession or prior to possession
- Receipt of payment or
- Issue of a tax invoice.
Therefore, on the basis of time of supply in relation to the transfer of ownership or “in essence transfer of the right to dispose of the property”, is considered to take place when the contract for the sale of the property is concluded, regardless of whether the ownership title is transferred at the same time or at a later stage.
Consequently, if the transfer time is identified after 1/1/19, the transaction is subject to either the standard rate of 19% or the reduced rate of 5% in the case the property will be used as the lessee’s of main residence.
Transitional provisions – special rules for the time of supply
A property is deemed to be made available to the buyer prior to 1/1/19 and therefore considered exempt if
a) the immovable property is made available to the interested party before the amendment date even if the invoice is issued or the payment is paid after the amendment date
b) a contract is signed between the parties that includes a condition stipulating that the property is reserved for a particular client (reservation agreement).
c) upon agreement of the parties, certain funds have been deposited into an escrow account to be released after the performance of the agreed terms
d) the agreement for the transaction is concluded before 1/1/19 but due to special conditions the agreement must be ratified by a State Authority and the approval is granted after 1/1/19
e) the contract has been stamped and filed with the Department of Lands and Surveys or with the Tax Commissioner before 1/1/19
A Company constructs a building in a tourist area on a freehold land. Upon completion, the company plans to lease the resulting 10 apartments for up to 99 years. The estimated market value of the 10 apartments at the time of completion varies, depending on their size and orientation, between € 2m and € 4m each.
The company advertises the long term leasing of apartments at prices starting from €2m and €4m. When the lease agreement is concluded, a deposit of 20% of the value is required and the remaining amount when the apartment is delivered.
Tax treatment of the long-term leasing of apartments
1. Nature of the transaction
First of all, it is emphasized that the lease agreement does not merely give possession of the apartment, but also other rights which in fact make the lessee as the owner rather than the tenant. One of the rights given is for the lessee to be able to transfer its right to another person without the lessor's consent. Additionally, the total value of the lease, deposit, and balance on delivery is the same as if the apartment was to be purchased outright instead of being leased.
Therefore, the transaction is that of a supply of goods falling under sub-paragraph 3 (st) of Schedule Two.
2. Time of supply
Three different cases of one of the apartments are examined
a) Construction began before 1/1/19 and was completed before 1/1/19
b) The construction began before 1/1/19 and was completed after 1/1/19
c) The construction began after 1/1/19 and was completed after 1/1/19
Facts for the three cases
1. The total value of the lease amounts to € 4m
2. The rental agreement is concluded *:
a. Before 1/1/19 and an advance payment of € 800,000 is paid and delivery of possession is given either before or after 1/1/19
b. After 1/1/19 and an advance of € 800.000 is paid and delivery of possession is given after 1/1/19
* In both cases the lease agreement is filed with Land and housing departments or stamped with the Department of Taxation (TD)
Time of supply and payment of VAT *
In case (a) the time of the supply is identified before 1/1/19 when the agreement was submitted with the Land and Housing or the TD. This means that neither the down payment nor the subsequent delivery is subject to VAT.
In case (b) the time of the supply is identified after 1/1/19 since the agreement and the deposit were submitted / paid after 1/1/19. This means that the corresponding VAT rate (5% or 19%), first on the down payment and then when the possession is given must be accounted for, regardless of whether the remaining amount of € 3.2m is paid.
* The tax point which is created by the filing of the contract with the Department of Lands and Housing or with the Tax Commissioner is provided in the interpretative circular 229 in the paragraph under the Title 'Transitional Provisions'.
A business established in Cyprus deals with import and exports and needs newly built storage facilities to carry out its activities. To this end, it approaches a warehouse owner and submits the following alternative suggestions.
i. To lease the warehouse for 30 years for € 15,000 per year and to undertake the maintenance of the building or
ii. To lease the warehouse for € 17,000 per year and maintenance is the responsibility of the lessor or
iii. To lease the warehouse for € 12,000 per year, take over maintenance and prepay rent for 15 years i.e. € 180,000
All three of these proposals have the characteristics of the lease and not the ‘essential transfer of immovable property’. The prepayment of the amount of € 180,000 is essentially given to motivate the lessor to reduce the value of the rent.
On 10 December 2018, the investor agrees with the lessor to pay the amount of € 100,000 to a special account held by a lawyer until the lessor obtains permission from the local authorities to add a window to one of the bedrooms in the apartment.
According to the wording of circular 229, the deposit of the specified amount into an escrow account, creates a tax point.
The long-term lease agreement is concluded on 10 December 2018 under the condition that the lessor will secure the relevant State authority’s permission to extent the lease period of the state land on which the apartment has been erected for at least 20 years.
As per the wording of circular 229, the conclusion of the agreement in question, which contains the said term, creates a tax point.
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