Unlocking the Intricacies of Tax Compliance. In this publication, we delve into the critical subtleties of Cyprus VAT regulations, break down the complexities of the VAT reverse charge mechanism, examine the impact of VAT on international transactions, and offer essential guidance for obtaining VAT refunds
In general, Value-Added Tax (VAT)
Different countries have various VAT or GST systems, each with its own rules and rates. Ensure compliance with local VAT/GST regulations when selling goods or services internationally. VAT regulations apply to persons performing a business activity importing goods and receiving services from other Member States of the European Union as well as from non-member States.
In most countries VAT is obligatory on persons performing a business activity and is applicable on the supply of goods and provision of services and on imports into/from non-member States of the European Union.
A taxable person can be an individual or a company, a partnership, or a self-employed person including clubs, associations, institutions, and others.
Taxpayers charge VAT on their taxable supplies (output tax) and are charged VAT on goods or services they receive (input tax). If the output tax in a VAT period exceeds the total input tax, such excess is paid to the government. If the input tax exceeds the output tax, the additional input tax is carried forward as a credit and is offset against future output VAT.
Identifying VAT transactions and implications
Usually in identifying VAT implications on transactions, certain criteria have to be taken into account the persons involved (Business to Business – B2B), the type of transaction whether the transaction is a supply of goods or services, whether the transaction is an intra-community acquisition of goods, whether there is an import of goods, Identify the place of supply and the place of transaction is taxed and possible exemptions.
The Value Added Tax (VAT) reverse charge mechanism
Generally, Cross-border services generally are subject to VAT reverse-charge. The customer will be regarded as a taxable person in respect of all services received unless the person does not carry out an economic activity for example a holding company.
The Value Added Tax (VAT) reverse charge mechanism is a tax collection method used in certain transactions to shift the responsibility for paying VAT from the supplier to the recipient of goods or services. This mechanism is employed in the EU and many third countries to address specific issues and achieve several objectives. The rationale behind implementing the VAT reverse charge mechanism primarily includes:
Addressing Cross-Border Transactions: In international trade, the reverse charge mechanism can simplify VAT compliance in cross-border transactions. It allows businesses to account for VAT in their own country rather than dealing with the complexities of VAT in multiple jurisdictions.
Combating Tax Evasion and Fraud: One of the primary reasons for using the reverse charge mechanism is to prevent tax evasion and fraud. In some sectors or industries, unscrupulous suppliers may underreport their sales or manipulate invoices to avoid paying VAT. By shifting the tax liability to the recipient, tax authorities can reduce the opportunity for such fraudulent activities.
Leveling the Playing Field: In cases where tax evasion or underreporting is prevalent among suppliers, compliant businesses may face a competitive disadvantage. Implementing the reverse charge can help level the playing field, ensuring that all businesses pay their fair share of VAT.
In Cyprus, Value-Added Tax (VAT) and the burden of obligation to discharge the VAT
The burden of obligation to discharge the VAT, the supplier, or the recipient under the reverse charge mechanism – VAT EU Directive and Cyprus VAT
VAT reverse charge transactions apply when:
- VAT is paid by the Cyprus recipient for (B2B) transactions where the services are supplied by a taxable person not established within the Member State of the recipient (subject to conditions)
- VAT is paid by the Cyprus recipient for (B2B) intra-community transactions where the customer is established (subject to conditions).
The above applies if a recipient is a taxable person the place of supply of the services is Cyprus and the services are of any description of Parts I and II of the Thirteenth Annex of the Cyprus VAT Law
The above does not apply to services described in the Sixth and Seventh Annex of the Cyprus VAT Law
Where the supplier is not established in Cyprus where the VAT is due, Cyprus opted to extend the reverse charge to apply to those described in Parts I and II of the Thirteen Annex of the Cyprus VAT Law for example in installation supplies, services relating to immovable property, transportation of passengers, transportation of goods, services relating to the hiring of goods subject to conditions, telecommunications services, and short-term hiring of means of transport
In Cyprus, other VAT Important aspects
The standard rate of Cyprus VAT
The standard rate of Cyprus VAT rate is 19%
Input VAT recovery following input tax apportionment
When the input tax does not entirely concern the purchase of goods and services for the purposes of the business or does not entirely concern supplies with the right to deduct VAT, then an apportionment is made to calculate the amount of input tax that can be recovered. The apportionment is done as follows:
- Apportionment between economic and non-economic activity e.g., a company that carries out activities and owns investments in subsidiary companies
- Apportionment between income with the right to deduct VAT and income without the right to deduct VAT e.g., a company that carries out exempted activities inside and outside the European Union.
Cyprus VAT returns and payments
All persons liable to Cyprus VAT must file a quarterly return within 40 days following the end of each quarter and pay the balance between output VAT (collected) and input VAT (paid).
Refund of VAT in Cyprus
Claim for a VAT refund is made electronically by completing the relevant forms. Every taxable person who makes a claim for a VAT refund will be entitled to repayment of the VAT amount with interest, if the repayment is delayed for a period exceeding four months from the date of the submission of the claim. In case a VAT audit regarding the claim is conducted by the Commissioner, the time of four months is extended to eight months. VAT refunds are made via bank transfer. To obtain the refund, Form T.D.1900 must be completed and submitted to the relevant district VAT office along with an IBAN certificate or equivalent documentation issued by the bank showing the bank details.
As of 20 August 2020, the following also apply regarding VAT refunds:
- VAT refunds will be suspended where income tax returns have not been submitted by the submission date of the VAT refund claim. In addition, no interest will be payable on a VAT refund for the period during which the refund is suspended; and
- VAT refund applications cannot be submitted after six years after the end of the relevant tax period. Any requests submitted after the six-year period has elapsed will be examined at the discretion of the Tax Commissioner.
More information on Cyprus VAT
For more information on Cyprus VAT refer to our publications following the links below
In general, fixed place of establishment (FPE) for VAT purposes
A fixed place of establishment (FPE) is a concept used in Value Added Tax (VAT) and other indirect tax systems to determine where a business is liable to pay VAT or GST (Goods and Services Tax). It is essential for establishing the tax jurisdiction and obligations of a business, especially to determine where a business is liable to register for VAT and account for VAT on its supplies. The specific criteria for what constitutes an FPE can vary from one country’s tax laws to another, but common characteristics include:
Physical Presence: An FPE typically involves a physical location, such as an office, shop, warehouse, factory, or other identifiable place of business. It is a place where business activities are conducted.
Permanent or Fixed Nature: The establishment is considered permanent or fixed in the sense that it is not a temporary or transient location. It is a place where the business regularly carries out its operations.
Control and Use: The business has control over the FPE, and it is used during its economic activities. It is not merely a passive asset but actively contributes to the business’s operations.
Independence: An FPE is often distinct from the personal or residential properties of the business owner or employees. It is a separate, identifiable location dedicated to business activities.
Duration: The FPE is not necessarily open every day or at all hours, but it is a location where business activities occur at intervals during the tax period.
The concept of an FPE is particularly important in the context of international transactions and cross-border VAT or GST. When a business has an FPE in one country, it may be required to register for VAT or GST in that country and collect and remit the tax on sales made from that location. Conversely, when a business acquires goods or services from a supplier in another country, the tax treatment may depend on whether the supplier has an FPE in the buyer’s country.
The determination of whether an establishment qualifies as an FPE can be complex and may vary between countries. Tax authorities often provide guidelines and criteria to help businesses assess whether they have an FPE for VAT or GST purposes.
In Cyprus, fixed place of establishment (FPE)
In Cyprus, the concept of a “fixed place of establishment” for Value Added Tax (VAT) purposes is used to determine where a business is liable to register for VAT and account for VAT on its supplies. A fixed establishment is a specific, identifiable place of business where the business carries out its economic activities. The definition and application of a fixed establishment in Cyprus for VAT purposes are in line with European Union (EU) VAT rules.
In conclusion, understanding Cyprus VAT regulations, the VAT reverse charge mechanism, and their implications for international transactions is vital for businesses operating in a globalized economy. The ability to secure VAT refunds can also significantly impact a company’s financial health. By navigating these complexities and staying compliant, businesses can thrive in the complex world of tax compliance.
Take charge of your VAT compliance in Cyprus.
Stay informed about VAT regulations, maximize the benefits of the reverse charge mechanism, and ensure your eligibility for VAT refunds.
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The authors expressly disclaim all and any liability and responsibility to any person, entity, or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication.
Accordingly, no person, entity, or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.