Cyprus: VAT Impact Of Non-Business Activities, VAT Deduction Right Of Holding Companies And The Recovery Of Common Input VAT

Last Updated: 13 September 2017
Article by Charles Savva
  1. VAT Impact of non-business activities

As a general term, a Holding Company is defined in the applicable tax legislation as a company that holds shares in one or more companies.  There are however different types of holding companies such as Pure Holding Companies and Mixed Holding Companies.

A Pure Holding Company is one that only holds shares and has no other activities.

A Mixed Holding Company is one that, in addition to the holding of shares, performs other activities as well, e.g. financing, supply of services, etc.

As it is difficult to determine the VAT status of a Holding Company, the activities of a Holding Company should be carefully evaluated in order to decide if they qualify as an "economic activity" and hence fall under the scope of Cyprus VAT.

Pure Holding Companies, whose basic role is to purchase shares for long-term investment, receive dividends, protect itself and its subsidiaries from buyouts and sale of shares, however, on a non-recurring basis, cannot be regarded as taxable persons for VAT purposes.

Mixed Holding Companies, on the other hand, may be considered as taxable persons for VAT purposes.  Therefore, any potential VAT obligations, e.g. VAT registration, filing of VAT returns, etc., may arise.

It is also worth noting that, in case a Holding Company is involved in the "Active Management" of its subsidiary, then it may qualify as a taxable person.

"Active Management", is when the Holding Company is not involved only in the holding of shares and/ or the exercise of the rights as a shareholder, but rather provides other services to its subsidiaries such as administration, accounting, etc., having as a result the issuance of invoices from the Holding Company to its subsidiaries, i.e. a consideration is charged for such services.

Important Note – In case dividends received from the subsidiary company are re-invested as a loan and this loan bears interest, then it would not qualify as an economic activity for VAT purposes (however it requires to be a direct link between the dividends and the loan granted).

  1. Right to deduct input VAT of Holding Companies

A Holding Company has the right to claim input VAT (i.e. VAT charged on the supply of goods and services either locally or from another member state and VAT charged at the customs for imported goods), if these goods and/ or services were used to carry out taxable transactions, out of scope transactions however being taxable if these were carried out in Cyprus, or exceptional financial transactions to non-EU clients (such as granting of loans, sale of securities, banking services, etc.).

A Holding Company does not have the right to claim input VAT (as described above), if such VAT relates to, amongst others:

  • Expenses for private purposes;
  • Accommodation costs of directors;
  • Entertainment expenses (excludes said expenses if relate to employees and directors);
  • Saloon cars;
  • Exempt supplies;
  • Expenses directly connected with long-term holding activities (with the exemption in cases where the Holding Company is actively involved in the management of its subsidiaries) Etc.

In the case of Mixed Holding Companies, the concept of "Direct and Immediate" link applies.  This concept is required to be established in order to identify the amount of Input VAT that is allowed to claim.  In general Input VAT which relates to transactions subject to VAT is recoverable. Input VAT which relates to exempt transactions cannot be recovered.

The below steps serve as a guideline on the recovery of input VAT:

  • Step 1 – Direct allocation of input VAT to specific transactions
  • Step 2 – Direct allocation to a specific group of activities
  • Step 3 – Allocation of input VAT which is common between business and non-business activities
  1. Common VAT recovery

Mixed Holding Companies are required to allocate input VAT initially between business and non-business activities and then between business activities that have the right to claim input VAT and business activities that do not have the right to claim input VAT.

Allocation between business and non-business activities

When it comes to services there is no mention in the legislation the method that a Company may use to apportion the common expenses between business and non-business activities, however it is required to lead to fair and reasonable result and should be used consistently. Also justification is required as to why the method chosen is the appropriate one.

There are however two main methods when it comes to the apportionment of services, the Balance Sheet and the Profit & Loss methods (other methods may also be used but these need to be considered on a case by case basis).

When it comes to goods, based on the announcement on the Official Government Gazette, the following methods may apply:

  • Fixed percentage based method
  • Turnover based method
  • Expenses based method
  • Time-spent based method
  • Transactions-based method
  • Area based method

Allocation between activities

Pro-rata ratio method can be used for the second level of apportionment (i.e. allocation between activities with the right to claim input VAT and activities with no right to claim VAT). Any other method can be used as long as it leads to fair and reasonable results.  Written approval by the VAT authorities is always suggested before proceeding.

  1. Conclusion

Inefficient structures may have as a consequence inevitable VAT costs. Hence careful planning is required in order to avoid any unpleasant surprises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Charles Savva
Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions