If you’re here because you’re interested in doing business in Cyprus, or maybe you’re already doing business in Cyprus, we have some more useful tax-related information for you. In previous blog posts we looked at why Cyprus is a business-friendly tax haven and we also shared a comprehensive guide on corporate income tax in Cyprus. This article will demystify all things VAT-related when running your business in or from Cyprus. From VAT rates to registration, compliance, exemptions and recent developments, we've got you covered.
İlayda Birol
What is VAT?
Value Added Tax, commonly known as VAT, is a consumption tax imposed on the value added at each stage of production or distribution. It's an indirect tax that's ultimately borne by the end consumer. You need to understand the ins and outs of VAT for businesses as it will affect your pricing, cash flow and financial compliance.
VAT rates in Cyprus
Cyprus, like many countries, applies different VAT rates to various goods and services. For your business to properly calculate and collect VAT on transactions you’ll need a good understanding of how the system works. Below is information on some of the main VAT rates in Cyprus.
Key VAT rates in Cyprus:
Cyprus has a tiered VAT system to categorise goods and services based on their associated VAT rates. Let’s take a look…
Standard VAT rate (19%): This is the default VAT rate that applies to most goods and services, except for those specifically exempt or subject to reduced rates.
First reduced VAT rate (9%): This rate applies to services like hotel accommodation, restaurant services (excluding alcoholic beverages) and taxi transport.
Second reduced VAT rate (5%): Goods like food products and medicines fall under this reduced rate.
Third reduced VAT rate (3%): Effective from July 21, 2023, this rate applies to specific items, including newspapers, books, magazines (unless used for advertising), medical equipment for disabled individuals and admission tickets to cultural performances.
Zero-rated (0%) and 3%: Some products, like medical equipment for disabled people, are zero-rated. The 3% rate also applies to certain goods, including books and admission to cultural and amusement park services.
Exempt from VAT: A range of services and activities, like postal services, public interest activities, financial and real estate services, medical services and insurance operations, are entirely exempt from VAT.
Specific examples of VAT rates in Cyprus:
- Food: 5%
- Water supplies: 5%
- Pharmaceutical products: 5%
- Medical equipment for disabled people: 3% (zero-rated)
- Children's car seats: 5%
- Passenger transport: 5% and 9%
- Books, newspapers, periodicals: 3%
- Admission to cultural services (theatre, etc.): 3%
- Admission to amusement parks: 5%
- Pay TV/cable: 19%
- TV licences: 19%
- Writers/composers: 5%
- Hotel accommodation: 9%
- Restaurant and catering services: 9%
- Medical and dental care: Exempt
- Repair of shoes and leather goods: 19%
- Repair of clothing and household linen: 19%
- Hairdressing: 5% and 19%
VAT compliance and invoicing
VAT compliance is a vital aspect when you’re running a business in Cyprus. There are specific obligations to meet related to reporting, record-keeping and invoicing. We’ll share more details with you below.
Key aspects of VAT compliance:
VAT invoicing: Proper invoicing is a legal requirement. VAT-registered businesses must issue invoices that include specific information, such as the VAT registration number of both the supplier and the customer. These invoices need to be accurate for VAT calculations and transparency.
VAT returns: VAT-registered businesses are obliged to submit regular VAT returns. The frequency of these returns, either monthly or quarterly, depends on the business's turnover. VAT returns report the output VAT (VAT collected from customers) and input VAT (VAT paid on expenses). The difference between these two figures determines the net VAT payable or refundable.
Record-keeping: Businesses must maintain accurate records of their VAT-related transactions, including invoices, receipts and financial documents. These records are essential for audits and ensuring compliance with VAT regulations.
VAT compliance checks: Cyprus tax authorities may conduct VAT compliance checks to verify that businesses are accurately reporting and remitting VAT. To avoid penalties and legal consequences, making sure you’re compliant is important.
Electronic filing: Cyprus has implemented electronic filing systems for VAT returns. Registered businesses are often required to submit their VAT returns electronically, making it more efficient and reducing the risk of errors.
VAT exemptions: Businesses that provide VAT-exempt services or goods must clearly distinguish these transactions in their records and reports to ensure proper compliance with Cyprus's VAT regulations.
İlayda Birol
Exemptions and special schemes
Most goods and services are taxed with VAT but Cyprus also offers exemptions and special schemes that affect specific categories and transactions. Take a look below at what is included in the exemptions and special schemes to help you properly manage your VAT obligations.
Key aspects of VAT exemptions and special schemes:
Exemptions from VAT: Some categories of goods and services are entirely exempt from VAT in Cyprus. These include activities in the public interest, financial and real estate services, medical services and insurance operations. Businesses engaged in these exempt activities do not charge VAT on their sales and cannot claim back input VAT on related expenses.
Reduced VAT rates: As discussed earlier, Cyprus applies reduced VAT rates to specific goods and services, such as hotel accommodations, restaurant services and food products. Understanding which reduced rates apply to your business is essential for pricing and compliance.
Flat-rate scheme: Cyprus offers a Flat-Rate Scheme for small businesses with a turnover of up to €70,000. Under this scheme, businesses pay a fixed percentage of their turnover as VAT, simplifying VAT calculations. This scheme is optional for eligible businesses.
Margin scheme for second-hand goods: Businesses involved in the sale of second-hand goods may opt for the Margin Scheme. This scheme allows VAT to be calculated on the profit margin (the difference between the purchase and selling price) rather than the full selling price.
Intracommunity supplies and acquisitions: For businesses engaged in cross-border transactions within the European Union (EU), specific VAT rules and schemes apply. Understanding these EU VAT rules is essential for compliance and managing international transactions.
VAT exempt supplies: Some supplies of goods and services are considered VAT-exempt without the ability to deduct input VAT. This includes financial and insurance services, healthcare services and more.
VAT implications for cross-border EU transactions
In the context of the European Union (EU), VAT rules become more intricate when conducting cross-border transactions. Cyprus, being an EU member state, adheres to specific regulations that businesses must consider when trading with other EU countries. Here are key points regarding the implications of VAT for cross-border EU transactions:
Intra-community supplies and acquisitions: When a business in Cyprus sells goods or services to another EU member state, it is considered an "intra-community supply." Conversely, when a business in another EU member state sells goods or services to Cyprus, it is an "intra-community acquisition." These transactions are subject to specific EU VAT rules.
VAT identification numbers: Businesses involved in cross-border transactions must ensure they have valid VAT identification numbers (VAT IN) for themselves and their EU trading partners. These numbers are used for invoicing and reporting to the tax authorities.
VAT reverse charge mechanism: For certain cross-border services, the reverse charge mechanism may apply. This means that the recipient of the service, rather than the supplier, is responsible for reporting and paying the VAT. It's crucial for businesses to understand when this mechanism is applicable.
EC sales list: Businesses making intra-community supplies must submit an EC Sales List (ESL) to the tax authorities. The ESL provides details about the value and nature of the supplies made to other EU countries.
VAT exemptions and thresholds: Thresholds for VAT registration in other EU countries may differ, so businesses need to be aware of the thresholds in the countries they trade with. Transactions below certain thresholds may not require VAT registration in the destination country.
VAT refunds and reclaims
VAT-registered businesses in Cyprus often have the opportunity to claim VAT refunds or reclaims. Here's a look at the procedures and considerations for reclaiming input VAT:
Input VAT refund: VAT-registered businesses incur input VAT when they purchase goods or services. They can often reclaim this input VAT by including it in their VAT returns. The input VAT is deducted from the output VAT collected from customers.
Conditions for refunds: In Cyprus, certain conditions must be met to qualify for input VAT refunds. Typically, the expense must be related to the business's taxable activities, and proper documentation, such as valid invoices, must be maintained.
Reclaim period: The timeline for reclaiming input VAT is critical. VAT-registered businesses usually reclaim input VAT in the VAT return corresponding to the period when the expenses were incurred.
VAT reclaim forms: Businesses may need to complete specific VAT reclaim forms to initiate the refund process. These forms require details about the business, the expenses and supporting documentation.
Documentation and records: Proper record-keeping is essential for successful VAT reclaims. Businesses must keep organised records of their expenses, invoices and VAT-related documentation.
Electronic filing: Cyprus has introduced electronic filing for VAT returns, making the refund process more efficient and reducing the risk of errors.
VAT reclaim audits: It's important to note that VAT reclaims are subject to audit by tax authorities. Therefore, accurate documentation and compliance with VAT regulations are crucial to avoid issues during an audit.
Recent VAT developments and reforms in Cyprus
Tax regulations are not static but rather change over time. It’s important to be aware of any changes in order to remain compliant and minimise tax liabilities. Here are some recent VAT developments or reforms that have recently taken place in Cyprus:
Anti-tax avoidance directive (ATAD): Cyprus, like other EU member states, has implemented measures to comply with the EU's Anti-Tax Avoidance Directive (ATAD). These measures include rules on controlled foreign companies (CFCs) and the interest limitation rule, which may affect businesses' VAT obligations.
Economic substance rules: In line with international efforts to combat tax avoidance, Cyprus has introduced economic substance rules. These rules require certain businesses to demonstrate substantial activities and presence within Cyprus to access tax benefits. Compliance with these rules can impact a business's VAT position.
Beneficial ownership register: Cyprus has established a beneficial ownership register to enhance transparency and combat money laundering and tax evasion. Businesses must ensure that their ownership information is accurately reported, as this can affect their VAT obligations.
Changes in VAT rates: VAT rates can change as part of fiscal policies. It's important to be aware of any changes in VAT rates that may impact your business's pricing and compliance.
By now you should have a solid understanding of all things VAT-related in Cyprus. We do recommend that you consult with tax professionals where needed, to make sure your business is always tax compliant and that you can maximise your business earnings. Remember to check out our other articles on doing business in Cyprus on the wamo blog!
