Rental tax in Cyprus, affecting all property owners who rent out their properties.

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Tax treatment of rental income

This article will explain the tax treatment between a company or/and individual who owns property that is rented out to residential tenants, provided it is their primary source of income (i.e. turnover of more than 15,600 euros per year).

Reader's Notes:

NDS

• Tax treatment: the taxation of VAT and SDD differs depending on whether such income is classified as short-term or long-term residential rental.
• A VAT liability arises if rental income exceeds the normal VAT registration rate of 19%. If this threshold is not exceeded, the property owner is not required to register for VAT, although voluntary registration is possible.
• VAT is a very complex area and this article should be used as a brief introduction to its application. VAT taxation can vary greatly depending on each case and scenario; a free consultation is available by emailing Mr. Tramountanelli at [email protected].
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• If you have a property that is not required to become subject to VAT, ignore all references to VAT and read the other taxes that may apply.

Other taxes

Other taxes, such as corporate income tax, National Health Service contributions and personal income tax, depend on whether the property owner is a company or an individual (section C below). SDD, personal income tax and National Health System contributions apply to individuals, while corporate income tax and SDD apply to companies. Individuals who are tax residents of Cyprus but are not resident at their place of residence are exempt from the SDD, but not from the National Health System.

Terms

• VAT - Value Added Tax (for companies and individuals)
• SDDD - Special Defense Tax (for companies and individuals)
• NDFL - Personal Income Tax (for individuals)
• Corporate Income Tax (for companies)

Analysis of VAT taxation (short-term vs. long-term leases)

Short term lease

Short term rentals as part of vacation accommodation are subject to VAT at a reduced rate of 9%. Long-term rentals are exempt from VAT.

What is recognized as a short-term vacation rental. Although VAT legislation does not clearly define short-term and long-term leases, a short-term lease will be any short-term lease (ie. up to a month), which is usually on a per night basis. Such a rental must also be self-supporting; the rental will be accompanied by other services similar to those of a hotel, ie. The accommodation is expected to be furnished, utility costs are included, linen and cleaning services are provided, and services such as Wi-Fi are provided. These transactions can be done through online platforms such as booking.com or Airbnb, or through property managers or directly by the owner. It is not always clear whether a transaction is a vacation rental and such transactions are easier to prove in tourist areas such as Limassol compared to Nicosia city center.

An example of short-term accommodation

Tax appeal for Airbnb

• Reduced VAT of 9% but no SDD for companies and individuals with registered properties in Airbnb status.

In accordance with the law on the establishment and operation of hotels and tourist accommodation, in the last few years, more and more individuals and companies that own properties have started renting them out to other tenants (for short periods of time), which creates a more competitive environment compared to hotels. Tax treatment for a property that is classified as an Airbnb, without an owner or management company involved, is not subject to the special defense tax, as it is exempt under the law in this case. For a property or portions thereof that qualify as an Airbnb to be considered self-sufficient and have the above tax treatment, all of the following shall apply to the property/parts:

• Must be insured.
• Must be VAT registered.
• Must be registered for self-service and have an authorized number.
• Must be listed with the Cyprus Tourism Organization.

If the above applies, short-term rental income will be subject to a reduced VAT of 9% but will not be subject to the special defense tax (3%).

What is recognized as a long-term rental of a dwelling (excluding VAT)

Long-term rental of residential property can be defined as any form of tenancy where the tenant will actually use the property as their main residence (for an extended period of time, e.g. six months, a year, etc.). Usually a good indicator of such a lease is whether the contract mentions electricity costs and who bears them. Long-term tenants usually pass on the electricity bills to their long-term tenants.

A landlord has the right, subject to conditions to be imposed by the Commissioner of Taxes in the relevant Notice, to waive the charge of VAT to a tenant of a property. The option is irrevocable. No VAT! Other taxes apply as per section C below.

Detailed analysis of VAT taxation (short term rentals vs long term rentals)

Short-term rentals

Short-term rentals of vacation accommodation are subject to VAT at a reduced rate of 9%, provided they meet the criteria for the provision of accommodation similar to those of hotel establishments. Vacation accommodation services must be supplied directly by the owner to the end user (ie. owner bills and receives money directly from customers) so that services are subject to a reduced rate of 9%. Cyprus VAT at the standard rate applies to rental income received by the owner for providing various property managers for subsequent vacation rentals.

Long term rentals

Long-term rental of residential property is exempt from VAT. This can be any form of tenancy where the tenant will actually use the property as their primary residence. However, effective November 13, 2017, long-term leases of real estate, excluding buildings used as residential premises, for taxpayers engaged in taxable business activities are subject to VAT at the standard rate of 19%. The Cyprus VAT Authority will treat as a taxable transaction the letting of real estate when the taxable services of the tenant constitute at least 90% of its total services. A landlord charging VAT on rental income will be entitled to a refund of VAT paid in connection with the property. VAT paid on the acquisition or construction of real estate and other capital expenditure can be recovered under the capital goods tax scheme, which allows for VAT adjustments over a 10-year period. The levy of VAT applies to lease contracts concluded on or after the entry into force of the Act.

B. Taxation of rental income

All rental income is taxed either through personal income tax or corporate income tax and may be subject to SDD and NDT depending on the status and tax residency of the landlord/property owner.

1. SDD (Special Defense Tax)

The SDD applies to all individuals who are tax residents of Cyprus and Cypriot companies subject to the following:

• As with VAT, SDD does not apply if the rental income is short-term and registered according to the local Airbnb status (see the following. Section A above).
• But if the above does not apply, rental income is subject to a 30% rebate and a special defense tax of 3%.
• In addition, according to the Law on the Establishment and Operation of Hotels and Tourist