Indirect tax snapshot
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Value Added Tax (VAT) is the main type of indirect taxation in Cyprus and in other European Union (EU) countries.
It is a tax on consumption which is applied during the production and distribution process to most goods and services. It is also applied to goods, and certain services, entering the country. Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the process in most cases rests with the business making the supply ie the sale.
A business registered for the tax will charge VAT (output tax) on its sales, and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input tax exceeds the output tax, a refund can be claimed.
A transaction is within the scope of Cyprus VAT if the following conditions are met:
- it is a supply of goods or services
- it takes place in Cyprus
- it is made by a taxable For this purpose, a taxable person is a person or entity who is or ought to be registered according to the provisions of the Cyprus VAT law
- it is made in the course of furtherance of a business.
There are four rates of VAT that are applied to goods and services in Cyprus; the standard rate, the higher reduced rate, the lower reduced rate and the zero rate. In addition, some goods and services are exempt from the tax.
Businesses that make exempt supplies in most cases are unable to claim all of the input tax that they incur, so the VAT paid to suppliers will be a ‘real’ cost.
Most goods imported into Cyprus from outside the EU are subject to VAT. The tax will have to be paid by the importer at the time of importation. Where the importation is for business purposes and the importer is registered for VAT, it may be possible to reclaim the tax (subject to certain rules).
It is also important to note the interaction between VAT and Customs duty. Customs duty is levied across the EU at the place where goods are imported into the community. It is levied in order to bring the cost of goods produced outside the EU up to the same level as those produced within. Once duty (and VAT) has been paid by the importer, the goods are in ‘free circulation’ and they can then be released for use in the common market.
Unlike other indirect taxes, such as VAT, once duty has been paid it is not usually recoverable by the importer.
It therefore represents a bottom line cost to the importing business if it cannot be passed on in higher prices. It is therefore very important to ensure that the correct rate of duty is applied. VAT is charged on the value of the importation, including any custom duty.
A ‘person’ who either makes or intends to make taxable supplies of goods or services in the course or furtherance of a business must register for VAT if the value of its taxable supplies in Cyprus at any point in the previous 12 months exceeds the registration limit of €15.600, or at any point it is expected that the aforementioned limit will be exceeded in the next 30 days.A business can register on a voluntary basis even if the registration limit has not been exceeded.
A business also needs to register for supplies of services to other Member States irrespective of their value, or for acquisitions of goods from other Member States exceeding €10.251,61.
A business established within the EU opting for the One Stop Shop (please see below) may, under some circumstances, utilise an EU wide threshold of €10.000.
For these purposes, a ‘person’ includes any legal entity. Therefore, once a person is registered for VAT, all of his business activities will be covered by the registration – even if the nature of some of those activities are very different.
A penalty may be imposed by the tax authority if a business fails to register at the correct time.
Two or more corporate bodies can be registered together as a VAT group if:
- each of the bodies is incorporated in Cyprus
- there are financial, economic, and organisational ties. Financial ties exist where certain elements of ‘control’ exist between the members, economic ties exist where the nature of the activities of the parties are similar or supplementary and organisational ties exist where there is a common management/governance
A corporate body cannot be treated as a member of more than one VAT group at a time.
The main advantage of a VAT group registration is that, apart from a few limited exceptions, any supply of goods or services by a member of the group to another member of the group is disregarded for VAT purposes. This reduces the risk of VAT being accidentally omitted on supplies between separately registered connected companies.
However, there are some disadvantages and any decision on whether to group register should be taken with care. For example, all VAT group members (including former members) are jointly and severally liable for the VAT debt of the group during the period of their membership.
The normal VAT registration limit does not apply to businesses who are not established in Cyprus, but for the purposes of the tax are making taxable supplies there. Those businesses will need to register for VAT as soon as they commence trading in Cyprus, irrespective of the level of turnover.
OSS and IOSS
Registration in Cyprus may be opted for by businesses not established in the EU supplying services to non-taxable persons (consumers) within the EU. The VAT due on these supplies can be declared and paid in one single Member State (Member State of identification) via the One Stop Shop (OSS, non-Union scheme).
Similarly, under the One Stop Shop (OSS, Union scheme) registration in Cyprus may be opted for by businesses established within the EU supplying B2C services which take place in a Member State in which they are not established, as well as intra-Community distance sales of goods. The same scheme may be used by a taxable person not established in the EU to declare pay VAT for intra-community distance sales of goods, and also by electronic interfaces (established in the EU or outside the EU) facilitating supplies of goods (deemed supplier) for intra-community distance sales of goods and certain domestic supplies of goods.
Registration in Cyprus may also be opted for by businesses under the Import One Stop Shop (IOSS). This applies to online sellers who sell goods from a distance (e.g. online traders) which are dispatched to the EU from outside the EU, the dispatch is a consignment with a value which does not exceed EUR 150 and is not subject to excise duties. IOSS also applies to electronic interfaces facilitating the sale of goods imported to the EU by a supplier, who are considered for VAT purposes to become a “deemed supplier” of those goods.
No threshold applies for persons who are not established within the EU who utilize OSS or IOSS.
The VAT authority in Cyprus may direct a person to appoint a VAT representative to act on his behalf for VAT purposes where the person:
- is a taxable person, or without being a taxable person carries out taxable supplies or acquires goods in Cyprus from other member states
- is not established, and does not have a ‘fixed establishment’ in Cyprus
- is established in a country or territory which is not an EU country (or part of such a country) and where it appears to the Cypriot authorities that there is no provision for mutual assistance similar to that which provided between Cyprus and other EU countries
- in the case of an individual, he does not have his ‘usual place of residence’ in Cyprus
The appointment of a representative is not required under the OSS Non-Union scheme but may request the appointment of an intermediary for transactions under the scope of IOSS.
VAT returns normally cover an accounting period of three months, ending on the last day of a calendar month.
All VAT returns have to be submitted on the 10th day of the second month after the end of the relevant period.
A default surcharge penalty is imposed by the tax authority if VAT returns are not submitted on time, or the related tax is not paid by the due date.
There is a late submission penalty of €51 if a VAT return is not submitted on time. There is also a default surcharge for late payment equal to 10% of the unpaid tax. Interest is imposed on the unpaid tax and late payment surcharge according tothe government interest rate which is announced each year (currently 1.75% per annum). This is calculated on a monthly basis.
Businesses that are registered for VAT in Cyprus, and make supplies of goods or services to traders registered for the tax in other EU countries are required to complete and submit EC Sales Lists (ESLs). The ESLs must show details of the recipients of the goods and services.
ESL’s must be submitted on a monthly basis, by the 15th of the following month, regardless of the value of goods or services which are supplied.
In addition, if the value of the intra-EU trade in goods dispatched or arriving from other EU Member States is above an annual threshold, a supplementary declaration (referred to as an Intrastat declaration) has to be submitted for either or both. These declarations have to be submitted on a monthly basis, by the 10th of the following month.
Businesses which supply certain services to, or engage in e-commerce with consumers residing in the EU are required to report these supplies to each Member State via the One-Stop-Shop (OSS) or Import-One-Stop-Shop (IOSS). The submission and payment for these supplies is due quarterly within 20 days following the end of each quarter.
Yes. A range of penalties can be imposed where businesses do not comply with the VAT rules.
Civil penalties and interest can be applied for errors and omissions made on tax returns, or where the tax is paid late. Penalties can also be applied in certain situations including where the business has failed to apply the reverse-charge, to maintain adequate records, provide information (including additional declarations), issue a legal receipt or comply with any of the directions or regulations of the commissioner.
Criminal proceedings may be brought in the case of more serious matters.
Yes, it may be possible to reclaim the VAT incurred in certain circumstances.
Two schemes exist, one for businesses established in the EU and another for businesses established elsewhere.
The EU cross border refund scheme is available in all EU member States, and enables a business established in another EU country to recover VAT incurred in Cyprus. To be eligible to make a claim, the claimant must be a taxable person established in an EU member State other than Cyprus and in addition the claimant:
- must not be registered, liable, or eligible to be registered in Cyprus
- must have no fixed establishment, seat of economic activity, place of business or other residence in Cyprus
- during the refund period they must not have supplied any goods or services in
The amount that is refundable is determined by the deduction rules that apply in Cyprus and the claim is submitted electronically to the tax authority from whom the repayment is being sought.
The refund period must not cover more than one calendar year or less than three calendar months – unless it is covering the remainder of a calendar year. The claim has to be made by 30 September of the year following that in which the VAT was incurred.
Businesses established outside of the EU can, subject to certain conditions, also reclaim the VAT incurred on imports into Cyprus or purchases of goods and services used in Cyprus.
The scheme is available to any person carrying on a business established in a third country ie outside the EU, provided that in the period of the claim:
- they were not registered or liable to be registered for VAT in Cyprus
- they were not established in any EU country
- they made no supplies of goods and services in Cyprus
- where they are established in a third country having a comparable system of turnover taxes, unless the Cyprus tax authority allows otherwise, that country provides reciprocal arrangements for refunds to be made to taxable persons established in
The claim period in Cyprus is from 1 January to 31 December each year. Claim forms must be submitted to the Cyprus tax authority no later than 30 September of the following year.
A VAT invoice must normally show:
- an invoice number which is unique and sequential
- the invoice date
- the seller’s name and address
- the seller’s VAT registration number
- the time of supply (also known as tax point) if this is different from the invoice date
- the customer’s name and address
- the customer’s VAT registration number where applicable
- a description sufficient to identify the goods or services supplied to the customer
- for each description the number of goods or the unit price or the extent of services, the VAT rate and the net payable in Euro
- the total net amount without VAT
- the portion of any discount offered
- analysis of each VAT rate and the total amount payable thereon, for each rate
- the total amount of VAT in Euro
- where any of the margin schemes are used adequate reference should be made on the invoice, eg Margin Scheme – Travel Agents
- where the cash accounting scheme is used the invoices should state ‘Cash Accounting Scheme’
- where self billing is being applied the invoices should state ‘Self Billing’
- where the recipient in another Member State is responsible for accounting for the tax the invoice should state ‘Reverse Charge’.
- Where domestic reverse charge applies relevant reference must be made as the case may be.
Where a VAT invoice includes zero-rated or exempt goods or services, it must:
- show clearly that there is no VAT payable on those goods or services
- show the total of those values
VAT invoices can be issued, received and stored in electronic format and there is no need to notify the tax authority.
Electronic invoices must contain the same information as paper invoices. The method used to ensure the authenticity of origin, the integrity of content and legibility of the invoices is a business choice and can be achieved by any business controls which create a reliable audit trail between an invoice and a supply of goods or services.
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