VAT regulation for villas to let remains unclear
There are many questions which are not answered by the new VAT authority regarding real estate.
Residential lets are exempted from the 19% VAT charge, but then this directive goes on to say that if the landlord carries out a business activity, he is most likely responsible for charging it. The 19% VAT charge is high, but if villa/apartment owners let their units out as a business e.g. seasonal lets as well as AirBnB, will they not be liable for the VAT charge? If this is the case (we are waiting for the VAT people to let us know) the rental cost will be increased by this (19%) amount, making the cost of renting for holidays etc quite high, reducing their tourist demand.
Villas to let (AirBnB) is big business and bearing in mind this source of demand in Cyprus, with approximately 20 per cent of tourists opting for it you can appreciate this problem. Of course, most of these lets are done through the internet and foreign specialised firms and nobody declares the income. Tax fraud it is indeed, but so far nobody in government has bothered about it.
If the VAT is an allowable expense by the tenant to be deducted from the VAT received, in this case there is no particular problem. But as most of the lets are to individuals, especially foreign tenants who are not VAT registered it is a problem.
Since 2008 Cyprus has avoided to have VAT in place for lets, land sales etc and for one reason or another it has managed to bypass it. Now with the EU is demanding there will be no more postponement, the government produced a rush job law so that we are not charged with a hefty penalty. Being a rush job there are still many loose ends.
The director of the VAT department suggests any ambiguities are referred to him. That is okay, but what about in the meantime until all or most questions are answered? So no one is 100% clear whether to charge VAT or not. If not charged and it ought to have been charged, the authority may come back after several years to impose the VAT plus penalties, interest on non paid amounts etc.
Unlike other tax authorities, the VAT department is one of the most uncompromising and non payment is considered to be a criminal offence. In one case where we sold three properties and we duly charged VAT on our commission but then the deals fell through and we duly refunded the reservation paid and cancelled the bill, the VAT people opted to visit our accounts department for two days with three staff to investigate the matter. Nothing was done wrong but it just show that they mean business.
We are not sure whether most of the questions/uncertainties will be addressed over the next six months or so, but we are concerned what will be the situation in the meantime. For those that do not act “correctly” there is no excuse that “the law was not clear”. Unfortunately we were informed by our legal consultants there is no difference if clear or not!!
The need to exercise caution is underlined by the case of a kebab house in Nicosia. The shop was quite busy but the VAT/Tax returns declared were next to nothing. The authorities had difficulty pinpointing the volume of the shop’s business until they came up with the idea of calculating the volume of the wrapping paper the shop bought! Based on this it was calculated that the shop was selling approximately 1,000 kebabs per day. The end result tax and VAT charges to the proprietor reached €250,000!
Source: Antonis Loizou & Associates Ltd