In order to harmonize the Acquis Communautaire on the Taxation of untapped and undeveloped plots of land, the Cyprus Government enacted, on 03/11/2017, relevant legislation for the imposition of 19% Value Added Tax (VAT) on these properties, with a date of enforcement being 02/01/2018. The relevant legislation refers to plots/pieces of land offered and/or provided for construction for economic purposes.
This Legislation limits the imposition of VAT on certain pieces of land. In particular, under the Law, land that is taxed may be considered to be a piece of land intended for the construction of buildings, however, this excludes, for example, livestock zones, environmental protection zones, archaeological and rural areas.
It is of particular interest that in land containing an incomplete building or a building that has been allocated for demolition the land is considered a plot intended for building construction purposes. The same applies in cases where the building situated on the plot does not exceed 10% of the designated area. Therefore, in the aforementioned cases the intended Purchaser, as reflected by the Law, buys the land rather than the building. Nevertheless, all cases and/or purchase of land/property should be considered individually and independently.
A basic prerequisite for imposing VAT on plots is that the seller of the plot is liable to the VAT Authorities. What does the notion of a taxable person mean? It is a person which is registered with VAT and/or carries out a business for VAT purposes. The Legislation regarding Companies clearly provides that in the case where land constitutes an asset of a Company its disposal will always be considered as a taxable transaction, irrespective of the Company’s type of economic activity.
The same, however, could not be claimed for the sale of land by individuals and/or persons which are not registered for VAT, due to the vagueness of the Legislation. Each case has to be assessed and evaluated separately. The particulars in each instance will be evaluated by the Tax Department and a decision will be made as to whether the sale will be subject to VAT.
The parameters that will be considered are:
- The number and scale of the sales
- The separation of land into plots
- The period during which the transactions are carried out
- Income from these types of sales? Whether similar methods were applied to those used by a Land Development Entrepreneur?
- The initial intent to purchase the immovable property
A typical example of an opportunistic sale of land is where the sale is for non-profitable purposes and there is not continuous commercial activity in real estate sales (where sales are undertaken every 7-10 years).
If the same person, however, were to sell another plot in a shorter period of time, could it be assumed that he is pursuing an economic and/or commercial activity? In this case, would the Tax Commissioner ask for the payment of VAT for the first sale? Probably yes! According to the new Legislation, it is at the discretion of the Tax Commissioner to decide and answer these questions in the light of the parameters mentioned above. In addition, the Tax Commissioner will decide whether to retrospectively request the taxation of 19% on the sale of the first plot.
It is worth mentioning how the amendment of the Legislation has put in place certain transitional provisions concerning the timing of the transactions in particular,
the levying of VAT that is exempted when the delivery of undeveloped building land has either been transferred to the Purchaser before 02/01/2018, or a Sales Contract has been submitted to the Department of Lands and Surveys or to the Tax Commissioner before the aforementioned date.
In conclusion, could one assume that imposing 19% VAT on undeveloped buildable land treats all citizens and businesses equally? In my view it favours and promotes the sale of property by Companies that are active in the field of property sales.
Someone who wishes to purchase land for the purpose of building a first house will prefer to buy and construct their residence from a Company that operates in this area in order to benefit from the Levy of 5% VAT on the total value of the sale. Otherwise the purchase of land and construction of a building from a different Company and/or person may lead to the purchase of land with 19% VAT, and 5% VAT will be imposed on the construction of the house.
Furthermore, the owners of a single piece of land will be able to more easily carry out the procedures for selling their property, since the Legislation protects them against the imposition of such taxation.
In the current situation, as the new Legislation is progressing, for the purpose of protecting the Purchaser and/or even the Seller, meetings with the Tax Commissioner should be carried out in order to determine the enforcement of VAT, or not, from the sale of a plot. Both parties must act together to ensure the right conditions and obligations, in order to defend their rights and avoid unnecessary penalties, costs and future conflicts between themselves and the Public Authorities.
The content of this article intends to provide a general guide to the subject matter. Specialist advice should be sought on each particular case.
For any further information, please contact Machi Kleanthous.