MPs on Monday continued discussion of a government bill which would impose 19 per cent VAT on land sales for commercial property transactions, amid concerns that this would lead to a cooling off in the property market.
Officials warned that Cyprus is liable to hefty fines from the European Commission unless it transposes into national law the EU VAT Directive of 2006.
On acceding to the EU in 2004, Cyprus was granted a derogation from the directive, allowing the island to continue exempting the supply of building land until December 31, 2007.
At present, when any plot of land is sold it is not subject to VAT.
George Panteli, the finance ministry’s economic director, said a retroactive lump-sum fine from the EU should be expected for the period of non-compliance (nine years), plus anywhere from €100,000 to €300,000 per day of continued non-compliance.
The penalty from the EU would be substantial, he added, but could not give a precise estimate.
The government bill, submitted last June, exempts farm land, protected areas and forest land from the imposition of VAT.
MPs and interest groups said the 19 per cent VAT will have a knock-on effect on the property market but also on banks that hold land as collateral.
For example, where land held as collateral against a loan is worth, say €1 million, were VAT to be levied, the market value of the land will not be €1.19 million. Rather, the value will remain €1 million, but inclusive of VAT.
In turn, this means the bank would need further collateral against the loan. On a national basis, the deficit could run in the hundreds of millions.
Lawmakers asked the Institute of Certified Public Accountants of Cyprus to come up with proposals for offsetting measures in two weeks’ time, when the House finance committee is due to discuss the matter again.
The EU directive imposes VAT on the supply of building land, which affords national governments some leeway in their interpretation of ‘building land’.
MPs are thus contemplating placing a restrictive definition so as to exempt as many land transactions as possible.
Tax commissioner Yiannis Tsangaris said land sales would be examined on a case-by-case basis to determine whether the 19 per cent tax should be levied.
Legislators also discussed other ways of alleviating the impact of the VAT, such as introducing the option for tax leasing/letting of immovable property for commercial purposes.
Another offset measure being mulled is to bring back affected businesses’ exemption from capital gains tax.
This exemption expired on December 31, 2016. There are now thoughts on re-introducing it for one to two years.
Another matter raised was whether incidental transactions in land can be exempted from the VAT. For instance, if a non-taxable person, who does not engage in an economic activity for VAT purposes, chooses to sell a plot of land inherited by him, would this be considered to constitute economic activity and thus subject to VAT?
Last year, parliament passed a law slashing IPT payable for 2016 by 75 per cent. Additionally, MPs voted to scrap IPT altogether thereafter.