George Coucounis explains the VAT position in Cyprus with regards to resale property.
The issue whether a resale property in Cyprus is subject to VAT or not is of importance to both the original vendor - developer and the original purchaser. It is related to the tax obligations, especially of the vendor who is subject to VAT and therefore he must be very careful when he is dealing with a resale.
According to the law which is applicable, houses, apartments and other buildings which have been constructed or are under construction or are to be constructed in the future for which the relevant application for the issue of the town and planning permit was submitted after the 1st May 2004, are subject to the payment of VAT upon sale.
The resales in the Cyprus property market is a factor which must now be taken into consideration, since purchasers who made an investment on a short or on a long term basis, may decide to resell their property in order to take advantage of the increase of the prices and of the fact that no separate title deeds have been issued. Consequently, people must be aware of their tax obligations and act accordingly so that to avoid being exposed to legal liabilities.
It is not only a matter of inconvenience and liability but also of money, since the amount they will be asked to pay is quite high.
The most common case of resales observed is the one where the original purchaser re-sells his property, house or apartment before settling in and using it. In such a case, the original purchaser requests the vendor to sign a cancellation agreement with him and a new sale agreement with the new purchaser stating therein the new price which is higher than the original one. The vendor - developer co-operates in order to facilitate both the original purchaser to re-sell the property and the new purchaser to buy it directly from him and to enable him to deposit the new sale contract at the Cyprus Land Registry for specific performance purposes, since there is no separate title deed.
Therefore, there is an issue whether the new transaction, the new sale agreement, for the same property is subject to the payment of VAT on the higher price and whether there is an obligation on the vendor to receive VAT and pay it to the authorities.
The answer is positive, there is such an obligation upon the vendor who is considered to deliver the property to the new purchaser before the original purchaser settles in and uses it. The vendor, being subject to VAT, is obliged to receive and pay VAT based on the new price, meaning the higher price of the property which is stated in the new sale agreement. Simultaneously, he is obliged to make the appropriate corrections in his account with the VAT with regard to the original agreement with the first purchaser. Furthermore, he is under the obligation to refund the original purchaser with the balance of the money received, provided no other money is owed to him and the first purchaser has settled all the other taxes regarding the property and in particular the capital gains tax by obtaining the relevant tax release.
Article 3 of Annex 8 of Law 95(I)/2000, as amended, provides that first settlement means the first use in any way of the buildings after their construction, including occupancy or use by the owner, leasing or any other use. The key word is that of "use" of the property, which is interpreted as the constant use or enjoyment of a property, meaning that the property is actually used by the first purchaser who has settled therein. The first settlement can be proved in many ways and there are no restrictions as long as there was "use" of the property for occupancy or use by the owner, leasing or any other use. In case someone is not certain for the above, he should seek advice.
With regard to the case where the first purchaser has already taken possession of the property and there has been actual settlement therein, the original purchaser who re-sells the property is considered to deliver-return it to the original vendor without VAT, because the property has already been used. Consequently, the vendor who is signing a new sale contract with a higher price is not obliged to collect or pay VAT nor is he entitled to make a correction to his VAT account. Since there has been first settlement in the property, it is considered as used and its re-sale is not subject to the payment of VAT.
Under the circumstances, the original purchaser is in an advantageous position because, on the one hand he is facilitated to re-sell the property and receive his money and on the other hand he avoids paying any transfer fees due to the lack of separate title deeds for the property.
George Coucounis is an experienced lawyer practicing in Larnaca, Cyprus.
Educated at University College (London) and Thessaloniki University (Greece), George is fluent in English and has been practicing law in Cyprus since 1982.