Understanding VAT rules in Cyprus for property transactions, rentals

By Ioannis A Pitsillos

Navigating the VAT regulations in Cyprus is essential for anyone involved in property transactions or short-term rentals. This article provides a detailed overview of the VAT rules applicable when buying property, managing short-term rentals and taking advantage of the reduced VAT rate for first-time buyers.

VAT on purchases

When buying property in Cyprus, the standard VAT rate is 19 per cent on the selling price. This rate applies to the acquisition of new properties, which are defined as those sold for the first time following their construction or significant renovation. The VAT must be paid by the buyer, typically included in the property’s purchase price and divided across each payment.

Cyprus offers a reduced VAT rate of 5 per cent for first-time home buyers under specific conditions:

• Primary residence: The property must be used as the buyer’s primary and permanent residence
• Size limitations: The reduced rate used to be applicable for the first 200 square metres of the property’s covered area. Any area exceeding 200 square metres was subject to the standard VAT rate of 19 per cent. However, since June 2023, Cyprus has implemented changes to the reduced VAT criteria for primary residences. Under the new rules, the reduced 5 per cent VAT rate applies to the first 130 sqm of a primary residence if the primary residence has a value of up to €350,000 and the total transaction value does not exceed €475,000
• Citizenship and residency: The reduced rate is available to Cypriot citizens and residents, as well as non-EU citizens intending to use the property as their primary residence in the Republic.

To qualify, buyers must submit an application to the Tax Department, providing documentation that proves the property will be their primary residence. This process involves several steps, including obtaining a confirmation from the local municipality or other relevant authorities.

Since May 27, it is only possible to apply for the preferential 5 per cent VAT electronically through the Tax For All (TFA or ‘Taxes For All’) digital portal. It is also only feasible to obtain the relevant certificate, once the application process has been completed though the Tax For All website.

VAT on short-term rentals

Short-term rentals, such as those listed on platforms like Airbnb, are subject to a VAT rate of 9 per cent. This rate applies to rental income from properties rented out for periods shorter than 30 days.

Property owners engaged in short-term rentals must adhere to several VAT-related obligations:

1. VAT registration: Owners must register for VAT if their annual rental income exceeds the registration threshold, which is currently set at €15,600. Registration involves submitting the necessary forms to the Tax Department and obtaining a VAT number.
2. Charging VAT: Once registered, property owners are required to charge VAT at the rate of 9 per cent on their rental income. This VAT should be clearly stated on rental invoices or receipts issued to tenants.
3. Filing VAT returns: Property owners must file regular VAT returns, typically on a quarterly basis. These returns must detail all rental income and the corresponding VAT collected. Failure to file returns or pay the due VAT can result in penalties and interest charges.
4. Bookkeeping: Maintaining accurate records of all rental transactions is essential. This includes keeping copies of rental agreements, invoices, receipts and any correspondence with tenants. Proper record-keeping ensures compliance with tax regulations and facilitates the VAT return filing process.

While short-term rentals can be a profitable business, understanding and complying with VAT obligations is significant to avoid legal issues.

The 9 per cent VAT rate is relatively low compared to other services, making short-term rentals an attractive option for property owners. However, the administrative burden of VAT registration and filing can be challenging, particularly for individuals who manage multiple properties or have significant rental income.

To benefit from the reduced VAT rate or ensure compliance with VAT rules for short-term rentals, property owners and buyers must follow specific procedures and maintain proper documentation. This includes:

• Applications for reduced VAT: Submit the necessary forms and documentation to the Tax Department to qualify for the 5 per cent VAT rate
• VAT registration for rentals: Register with the Tax Department if rental income exceeds the threshold and ensure VAT is charged and remitted appropriately
• Record-keeping: Maintain detailed records of all transactions, including sales contracts, rental agreements, and VAT returns

Understanding the VAT rules in Cyprus is crucial for property buyers and owners engaged in short-term rentals.

Taking advantage of the reduced VAT rate for first-time home buyers can lead to significant savings on their financials.

Ensuring compliance with VAT regulations on property purchases prevents any legal complications and financial penalties.

For short-term rental owners, registering for VAT and adhering to the 9 per cent VAT rate is essential for maintaining lawful operations and maximising profitability. Proper documentation and regular VAT return filing are critical components of this compliance.

Overall, adhering to VAT regulations not only safeguards legal compliance but also enhances the financial viability of property investments in Cyprus.

For comprehensive examination, tailor made guidance and to navigate the complexities of VAT rules, consulting with a tax professional or referring to official resources such as the Cyprus Tax Department’s website and the Cyprus VAT Act is advisable as this article provides a more general interpretation of the law and regulations.

Ioannis Pitsillos is a senior associate at Polycarpos PHILIPPOU & Associates LLC, www.philippoulaw.com