Effective from 1 January 2018, Circular EE 218 clarifies how VAT is applied to the leasing and renting of immovable property in Cyprus, based on the amendments introduced by VAT Law N.157(I)/2017.

1. Key Overview

VAT is mandatory on the lease or rental of immovable property when:

• The tenant is a taxable person (i.e. a VAT-registered business),
• The property is used for business or economic activity, and
• The lease begins on or after 13 November 2017.

Exception: Leasing of property used as a residence is not subject to VAT.

2. When VAT Applies

VAT is imposed on rental income if:

• The property is used for commercial purposes (e.g. shops, offices, warehouses, business-use land),
• The tenant conducts taxable business activities, and
• The landlord is a taxable person under the normal VAT regime.

For VAT purposes, a lease is considered a taxable transaction if at least 90% of the tenant's turnover is taxable.

3. When VAT Does Not Apply

VAT is not imposed in the following cases:

• Leasing of property used exclusively as a residential dwelling,
• Lease agreements signed before 13 November 2017, unless cancelled and replaced,
• When the landlord opts not to charge VAT, by submitting Form ΤΦ1220 to the Tax Department.

Once a landlord chooses not to apply VAT to a specific property, this choice cannot be changed later and remains in effect for all future leases of that property, unless the property is transferred to a new owner.

4. VAT Registration Obligations

A landlord must register for VAT if:

• Their taxable rental income exceeds €15,600 in a 12-month period, or
• They lease property in a manner that falls under the VAT rules and are not already under the normal VAT regime.

Landlords registered under special VAT schemes (e.g. farmers, taxi operators) must switch to the normal VAT regime if they lease property subject to VAT.

5. Deducting Input VAT

If a property lease is subject to VAT, the landlord may deduct VAT incurred on:

• Construction costs,
• Renovation or maintenance costs,
• Related expenses proven by valid VAT invoices.

If a property was previously leased without VAT (exempt rental) but becomes subject to VAT after a new lease, input VAT adjustments must be made based on the remaining years of the 10-year adjustment period.

6. Subleasing and Property Use Rights

• If a property is leased to a business, and that business subleases it, both the original landlord and the sub-lessor may have VAT obligations.
• In the case of co-owned property, VAT must be applied jointly, and a single VAT registration is submitted (as a joint venture).

7. Partial Property Leasing

VAT may apply to either:

• The entire property, or
• Specific independent units (e.g. one or more commercial shops in a building).

If the landlord chooses not to apply VAT to certain units, the Tax Department must be notified, and proper accounting records must identify which parts are taxable or exempt.

8. Time of VAT Payment

VAT on rent must be paid at the earlier of:

• The date the VAT invoice is issued, or
• The date the rent is received.

9. Practical Summary

Disclaimer

This article is a general summary of Circular EE 218 and is provided for informational purposes only. It does not constitute legal, tax, or financial advice. For professional guidance specific to your situation, you should consult a qualified advisor or the Cyprus Tax Department.