Introduction
Value Added Tax (VAT) is a key component of the tax regime in Cyprus, governed primarily by the Cyprus VAT Law (N.95(I)/2000), as amended, duly harmonized with EU directives. While the sale of goods and the provision of services typically attract VAT, the treatment of the rental of immovable property requires special consideration due to its unique legal and economic implications.
This article provides a comprehensive overview of how VAT applies to the rental of immovable property in Cyprus, focusing on the general rules, exceptions, and recent amendments affecting both commercial and residential leases.
General VAT Rules for Rental of Immovable Property
Residential Rental
The rental of residential property for use as a dwelling is exempt from VAT under Article 3 of the Cyprus VAT Law. This means landlords do not charge VAT on rent payments, and they cannot reclaim input VAT on related expenses. Key conditions include:
- The tenant must use the property as a residence.
- The exemption does not apply if the property is used for business purposes.
Commercial Rental
As of 13 November 2017, an important legislative amendment introduced mandatory VAT at 19% on the rental of commercial immovable property, unless an exemption applies.
Key Features:
- Applies to leases for business or economic activity.
- The landlord must register for VAT if the threshold is exceeded or if they opt in voluntarily.
- The tenant must also be a taxable person using the premises for business activity.
- In cases of leasing to exempt persons (e.g., public bodies or non-profit organizations), the VAT may still apply based on use.
Short-Term Rentals (e.g., Airbnb, Holiday Homes)
Short-term rentals of furnished property for holiday accommodation are considered a taxable supply subject to the standard VAT rate (19%), if:
- They include services similar to hotel accommodation (cleaning, reception, meals).
- The property is marketed as a tourist facility.
However, private short-term rentals without ancillary services may still be treated as exempt if they resemble residential use.
Mixed Use and Partial Exemption Rules
In instances where a property is used for both residential and commercial purposes, landlords must apportion input VAT based on the actual or estimated use. The partial exemption rules of the Cyprus VAT regime then apply, often requiring complex calculations and potential VAT adjustments at year-end.
VAT Treatment of Rental Income
Clause 6 of the Cyprus VAT Law outlines the conditions under which the rental of immovable property is subject to VAT. According to this clause, as of 13 November 2017, the rental of immovable property to a taxable person for the purpose of carrying out taxable business activities, is subject to VAT at the standard rate of 19%. This applies to rental agreements entered into after this date.
Taxable person as per the relevant law is someone who is registered or liable to register, for VAT purposes in Cyprus.
The law provides an option for the landlord to opt not to charge VAT on the rental. To exercise this option, the lessor must submit a declaration to the Tax Commissioner using the prescribed form (TD1220). Once this option is exercised, it is irrevocable for that particular property, and the lessor cannot recover any input VAT related to the property.
Verification of the Tenant status by the Landlord
At the time of signing of the tenancy agreement the landlord must:
- Determine whether the tenant is a “taxable person”
(as defined under the VAT Law), i.e. someone:
- Who is VAT-registered, or
- Obliged to register for VAT due to their business activities and turnover.
- Identify the intended use of the property by the tenant:
- Business/economic activity → Clause 6 may apply.
- Private or residential use → Exempt from VAT.
To comply with this obligation and reduce audit risk, landlords should:
- Request the tenant's VAT certificate or VAT number.
- Obtain a written declaration from the tenant stating:
- Their VAT registration status.
- The purpose of the lease (business or private).
- Whether the use of the property will be for taxable activities.
What if the tenant is NOT registered for VAT
When the tenant is not a VAT-registered person (and is not required to be), Clause 6 does not apply, and the lease remains VAT-exempt. This applies in several scenarios:
- Private Individuals or Consumers
- If the tenant is a private person renting for personal or non-business purposes, the rental is treated as exempt from VAT.
- The landlord cannot charge VAT, nor can they recover input VAT on costs related to the rental.
- Non-VAT Registered Businesses
- If a business tenant has not reached the VAT registration threshold (i.e. €15,600 in turnover over 12 months) and is not voluntarily registered, the landlord may not impose VAT under Clause 6.
- The transaction is outside the scope of Clause 6, and VAT cannot be charged on the rent.
- NGOs or Public Bodies
- Even if an organization carries out some form of activity, if it is not a VAT-registered taxable person, the lease remains VAT-exempt.
- However, special caution is needed, as some hybrid-use cases may trigger different rules under the partial exemption regime.
Recent Developments and Tax Authority Guidance
The Tax Department regularly issues interpretative circulars clarifying VAT treatment in niche areas, such as:
- Warehousing and logistics properties.
- Parking space leases.
- Letting of land used for commercial development.
It is advisable for businesses and landlords to monitor such publications for compliance and planning purposes.
Conclusion
VAT implications for rental activities in Cyprus hinge on the type of property, the use by the tenant, and whether the landlord has opted to tax. Understanding these distinctions is essential for legal compliance and for leveraging possible VAT input recoveries.
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.
