In brief

On 12 October 2021 the Tax Department issued Interpretative Circular No.53 ("IC 53") "Abolition of Circular 1987/21, dated 23 July 1987, "Real Estate Developers and Contractors"".

Through IC 53, the Tax Department introduces new guidelines with respect to the tax treatment of Real Estate Developers and Contractors ("REDCs"), as from 1 January 2022.

In detail

Key features of Circular 1987/21 (which is being abolished as from 1 January 2022)

Circular 1987/21 titled "Real Estate Developers and Contractors" ("1987/21 Circular") provided with respect to:

  • Fixed Price Contracts (construction of flats/offices/shops) undertaken on account of a third party, and
  • Development Projects (construction and sale of flats/offices/shops),

the possibility of electing between two distinct methods with respect to the timing of recognition of their profit for tax purposes. These two distinct methods were the following:

  • The substantially completed method (the "90% method"): Profit was recognised for the first time in the year in which certified completed work had reached 90% of the total contract/project price (or 90% of the total project cost); if, for example, 93% was reached, then 93% of the total expected profit of the contract/project was recognised, with the rest to follow as completion progressed further; such profit was recognised only if the project had already been sold. Tax was imposed irrespective of actual cash receipts.
  • The percentage of completion method (the "50% method"): Profit was recognised for the first time from the start of the project/contract but in any case at the time where certified completed work had reached 50% of the total contract/project price (or 50% of the total project cost); if, for example, 53% was reached, then a percentage of the total expected profit of the contract/project was recognised, equal to the percentage of cash that had been received out of the total cash expected to be received, with the rest to follow as completion progressed further and as further cash was received. Once a method was chosen by a taxpayer then this method should be followed consistently for all tax years and for all contracts/projects undertaken.

With respect to Land Development (separation and sale of sites) the 1987/21 Circular indicated that::

  • revenue was recognised as soon as sales of sites began (provided that an application for separation of the sites had been submitted and the procedures for the separation of the sites was in progress);
  • if the separation was performed in phases then each phase was taxed separately;
  • the cost of the project comprised land cost and separation expenses and was allocated to the sites on the basis of their selling price;
  • profit in respect of sites was recognised to the extent of the cash received.

Provisions of IC 53

General

IC 53 introduces a new method for the taxation of REDCs which brings the timing of such taxation in line with the guidance included in Implementing Directive 15/2021 titled "Tax Treatment of the effects on the accounts of persons from the adoption of IFRS 9, IFRS 15 and IFRS 16" ("ID 15").

Tax treatment applicable from tax year 2022 onwards

The recognition of revenue, for tax purposes, from construction projects (we understand that "construction projects" cover Fixed Price Contracts, Development Projects, and Land Development) will have to be aligned with ID 15 (and, by extension, with IFRS 15, which applies as from 1 January 2018; previously, IAS 11 "Construction contracts" applied).

Consequently, any profit recognised in accordance with IFRS 15 for tax years up to and including 2021, but not subjected to tax up to and including 2021 (due to the application of the provisions of the 1987/21 Circular), will:

  1. have to be calculated cumulatively; and
  2. be included in its entirety in the said taxpayer's 2022 income tax return.

IC 53 clarifies that the above cumulative effect will have to be taken into consideration also for the purposes of the said taxpayer's 2022 provisional tax declarations.

Transitional provisions for "old projects", subject to election

The following definitions are provided in IC 53 which are useful for understanding the transitional provisions:

  • Old projects: projects for which construction work started up to and including 31/12/2021;
  • New projects: projects for which construction work will start as from 1/1/2022.

Affected taxpayers have the ability to elect to continue to apply the provisions of the 1987/21 Circular with respect to "old projects" for tax years 2022 and 2023. Any profit recognised up to and including tax year 2023 in accordance with IFRS 15 but not subjected to tax up to and including 2023 (due to the application of the transitional provisions) will:

  1. have to be calculated cumulatively; and
  2. be included in its entirety in the said taxpayer's 2024 income tax return.

IC 53 clarifies that the above cumulative effect will have to be taken into consideration also for the purposes of the said taxpayer's 2024 provisional tax declarations.

It is further clarified that:

  1. any election made will relate to all "old projects" of each taxpayer;
  2. a person may apply the transitional provisions only for tax year 2022 (instead of 2022 and 2023); in such case the relevant tax obligations will have to be adjusted accordingly (i.e. cumulative profit included in the 2023 income tax return and provisional tax declarations);
  3. the election should be made in the income tax return of the relevant tax year.

The transitional provisions are not applicable to "new projects", which will have to follow (as from 2022) the provisions of IC 53.

Amendment to Circular 2009/13

IC 53 also amends the provisions of Circular 2009/13 titled "Tax treatment of businesses engaged in the time sharing sector" by deleting paragraph C.1 which made reference to the 1987/21 Circular which is being abolished.

Notification (ΚΔΠ) 442/2021, of 29 October 2021, issued by the Tax Commissioner

This Notification deletes par. 3 of Notification (ΚΔΠ) 340/89 which was describing the same tax treatment as in Circular 1987/21 which is being abolished.

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.