Cypriot authorities participated in a VAT fraud investigation led by the European Public Prosecutor’s Office (Eppo) across a number of European countries, it became known on Thursday.

In Cyprus, investigations focused on five companies and one residence, located in Nicosia and Larnaca. Authorities tracked and seized various evidentiary items and electronic data.

In a statement, the Eppo said that it conducted searches, arrests and asset freezes in an investigation into suspected large-scale VAT fraud involving the online sale of mobile phones.

These took place in Austria, Bulgaria, Cyprus and Germany. Four suspects were arrested, including three in Bulgaria and one in Germany.

The investigative court issued asset freezing orders worth approximately €20.5 million against two suspects and two companies.

At issue is a suspected VAT margin fraud scheme involving new mobile phones sold to consumers in Germany. The VAT margin scheme is a special tax arrangement under which VAT is paid only on the seller’s profit margin rather than on the full sales price. It’s intended to prevent double taxation when second-hand goods are resold. Applying this scheme to new goods that do not qualify for it can result in significant losses to public revenues.

According to the investigation, the suspects set up a cross-border trading structure involving companies in Bulgaria, Cyprus and Germany in order to enable the unlawful application of the VAT margin scheme to new mobile phones sold online in Germany.

The evidence gathered indicates that mobile phones were passed through a chain of companies controlled by the suspects before being sold by German online retailers to end customers. By creating the appearance that the phones qualified for the VAT margin scheme, VAT was calculated only on the sellers’ profit margin instead of on the full value of the phones.

The investigation established that the two main suspects, a Bulgarian couple, organised and controlled the companies used in the fraud and applied the unlawful VAT rules across the entire supply chain.

It’s estimated that the fraudulent scheme caused VAT losses exceeding €15.7 million. The final amount of the damage remains subject to ongoing investigations.

Taking part in the investigations in Cyprus were the tax department, the police’s crime prevention department, the office for executing European investigation orders and letters of request, and the police’s cybercrime division.