On 1 January 2010, a number of important VAT rules will change following the implementation of various European Directives and Regulations (the “VAT Package’), mainly concerning the place of supply rules for services.
These changes may have an impact on Cyprus companies if such companies receive or provide services. Such services, for example, include fees for consultancy, management, administration, professional, royalties, telecommunications, broadcasting, freight, transport, and catering.
The most important changes that would affect Cyprus companies are the following:
Place of supply of services rules:
- For services provided from one taxable person to another taxable person situated in another country either within EU or outside EU (Business to Business or B2B) the place of supply will be where the customer is situated. In other words, Β2Β services will be taxed where the customer is established, or where the establishment is based for which the services are provided. Almost all services will now be subject to the reverse charge provisions.
- For services provided from one taxable person to a non-taxable person (Business to Customer or B2C), the place of supply will be where the supplier is situated and thus VAT may have to be charged if the supplier is situated in Cyprus. Thus, Β2C services will be taxed where the service provider is established, or where the establishment is based on where the services are provided.
- Services provided to third countries are outside the scope of Cyprus or EU VAT.
There are exemptions to the above rules that include property-related services, transportation of goods, passenger transportation, short-term hiring of means of transport, restaurant and catering services, scientific and educational services, sporting and cultural services. These services will be taxed at the place of consumption.
In order to assess whether a supply of service is a B2B or a B2C supply, it must be considered whether the recipient of the services is a taxable person or not.
In general, a “taxable person” is any person engaged in an economic activity (i.e. any person trading in goods, providing services, or is VAT registered in an EU Member State).
Evidence required in order to treat a supply as a B2B supply include the following:
- If it is an EU person situated in another Member State you need to request for its VAT number.
- If it is a non-EU person, you need to request for its VAT number (if any), tax number or other relevant information obtained from the customer’s competent tax authorities.
Under the new rules, a “taxable person” is obliged to register for VAT purposes when:
- It acquires services over €15.600 per year from other EU entities (B2B supplies)
- It acquires services over €15.600 per year from non-EU entities (B2B supplies)
- It provides services to other EU entities irrespectively of the volume or amount (B2B supplies)
A Cyprus company engaged in a non-economic activity (e.g. a holding company) is not considered as a taxable person. However a Cyprus company engaged in a non-economic activity (e.g. a holding company) together with an economic activity (e.g. providing loans or services to other entities), is considered as a taxable person for all services it acquires from abroad. Consequently, this holding company would be obliged to register for VAT and apply the reverse charge provisions (and account for VAT) if the services received from abroad exceed €15.600 per year. This company may need to pay over the Cyprus Authorities 15% VAT on the whole or part of the value for all services acquired irrespective of whether such services are related to its economic activity or not.
Basis of allocation of Input VAT to business and non-business activities
- Input VAT relating to non-business activities cannot be recovered.
- Only Input VAT relating to business activities can be recovered.
- Input VAT on common expenses must be apportioned in a two-way process.
VIES (VAT Information Exchange System)
From 1 January 2010, businesses will be required to complete and submit a declaration for the intra-community supply of services that are taxed under the reverse charge provisions in another Member State. This new declaration is VIES II.
The services which must be included in this new declaration are solely the services that will be taxed for VAT purposes in the other Member State. Services that are supplied to persons established outside the EU must not be included.
Services that are exempt from VAT in the country of the recipient must not be included in the new declaration for the intra-community supply of services. Consequently, these rules require businesses to have a full understanding of the VAT treatment of the services in the Member State of the recipient.
The new declaration will be submitted on a monthly basis. In accordance with the provisions of the proposed legislation, the declaration will be submitted by the 15th day of the month which follows the month for which it relates. Consequently, the declaration for January 2010 will be submitted by 15 February 2010.
From 1 January 2010, the VIES returns for the intra-community supply of goods must also be submitted on a monthly basis. These returns are currently submitted on a quarterly basis.
The VIES declaration for intra-community supplies of goods will also need to be submitted electronically.
If the VIES declaration form contains any errors, the corrections will have to be made in the Correction Statement until the end of the month following the month to which the statement contains the errors. The penalty for late submission of the form is €50 for each form and €15 for every corrective form.
Time of Supply of Services
The time of supply of services which are subject to VAT by the recipient under the reverse charge provisions will as from 1 January 2010 be the earlier of the:
- Date in which the supply of the service was completed, and
- Date of payment
In the case of the supply of services continuously over a period of more than one year, for which no obligation for periodic payments exists, the VAT will be due at the end of the calendar year. The VAT that will be due will be the VAT which is attributable to the value of the service provided.
Reclaim of VAT paid in another EU member state
The existing procedure for refund of VAT paid in another Member State will be replaced with a new electronic procedure. The purpose is a faster refund of the VAT to the claimants. In addition in case of delay in the refund of the VAT by a Member State, interest will be paid to the business for the period of the delay. The deadline for the submission of the claim for the VAT refund is extended by 3 months from 30 June of the next year to 30 September.
Below are some examples which may help you get a better understanding of the new regulations:
- Example 1 A Cyprus holding company that also provides loans or services to other entities receives consultancy services from a BVI company. This company must register for VAT and apply the reverse charge provision and possibly account for VAT to the Cyprus Authorities if the services received exceed the amount of €15.600 per year. If the services provided by the holding company are in any other EU Company it must be registered in VAT irrespectively of the amount and VIES form must be submitted.
- Example 2 A Cyprus holding company, with no other activities at all, receives consultancy services from a BVI company. This company will not need to register or account for any VAT in Cyprus unless the services received exceed the amount of €15.600 per year. The same applies if the consultancy services acquired come from an EU company.
- Example 3 A Cyprus Company provides services to another EU company registered for VAT in the EU. This Cyprus company needs to register for VAT and VIES and submit VIES declaration forms every month.
- Example 4 A Cyprus Company provides services to non-EU companies. This Cyprus Company does not need to register for VAT and VIES.
- Example 5 A Cyprus dormant Company receives services from a BVI or EU Company. This company will not need to register or account for any VAT as long as it remains dormant. Dormant companies are considered non-economic activity entities.
This VAT circular is meant for information purposes only and cannot be regarded as a binding legal, financial, tax or any other advice. If you believe any of the above changes affect your business and you would like further information on the topics discussed above, please do not hesitate to contact us.