1. VAT AND THE EU CONFERENCE VAT COMPLIANCE IN CYPRUS Demetra Constantinou Kinanis LLC

2. Introduction to the Cyprus VAT  Cyprus introduced VAT in 1992 by Law 246/90  In order to bring the Cyprus VAT Legislation in line with the EU VAT Directive, VAT Law 95(I)/2000 was introduced along with several Regulations.  The Law and the Regulations made thereunder came into force on the 1st of February, 2002.  As from 1st May 2004 in view of Cyprus accession into the EU, the VAT Legislation (Law and Regulations) were amended in order to incorporate the necessary provisions regarding intercommunity transactions as well as the applicable community acquisition in the field of VAT in force as at that date.

3. VAT Rates Dates / PeriodsStandard RateReduced Rate 1Reduced Rate 2 01/07/1992 - 30/09/19935%--- 01/10/1993 - 30/06/20008%--- 01/07/2000 - 30/06/200210%5%--- 01/07/2002 - 31/12/200213%5%--- 01/01/2003 - 31/07/200515%5%--- 01/08/2005 - 29/02/201215%5%8% 01/03/2012 - 13/01/201317%5%8% 14/01/2013 - 12/01/201418%5%8% from 13/01/201419%5%9%

4. Registration (cont.)

5.  The registration is effective from the end of the month following the relevant month Historic Test The VAT commissioner must be notified (Form VAT101):  Within 30 days after the end of the month in which the taxable turnover in the previous 12 months exceeds the registration threshold, €15.600. The registration is effective from the beginning of the 30day period Future Prospects Test The VAT commissioner must be notified (Form VAT101):  By the end of the 30 day period for which there are reasonable grounds to believe that the registration threshold, €15.600 will be exceeded.

6. Registration for services received from abroad  When testing whether a person is liable for registration or not, it is important to take into consideration that a person is also liable for registration if it receives services from abroad in respect of which the recipient is required to account for VAT under the Reverse Charge Principle.  As by applying the Reverse Charge Principle, a person accounts for a notional sale to itself.

7. Registration for services provided  A person not liable for registration under the past and future tests described before, may be liable for registration, if it provides services to taxable persons established in another EU Member State for business purposes, in respect of which the recipient is required to account for VAT under the Reverse Charge Principle.  The VAT Commissioner must be notified within 30 days after the liability arises.  The registration is effective from the date the liability arises.

8. Acquisitions Any person making acquisitions in Cyprus is liable to be registered:  at the end of any month, the total value of that person´s acquisitions from all other member States in the year beginning from 1 January has exceeded the registration threshold of €10.251,61; or  at any time there are reasonable grounds to believe that the value of the acquisitions that person would be making in the following 30 days will be over the registration threshold of €10.251,61; Such a person is liable to notify its obligation to be registered on Form VAT 106. Failure to comply, renders the person liable to a levy of €85 for every month of the delay or refusal or omission.

9. Distance Sales Any person making distance sales (sales from a person established in another Member State) to individuals in Cyprus, is liable to register for VAT purposes in Cyprus and account for VAT in Cyprus, if in the period starting from the 1st January of the year, the value of distance sales exceeds €35.000. This person is liable to notify liability to register on Form VAT 105. Failure to comply, renders the person liable to a levy of €85 for every month of the delay or refusal or omission.

10. Voluntary Registration Who can register voluntarily?  Actual Traders Traders that are not currently liable for registration under the historic or future tests for registration. They can register form the date of the application for voluntary registration, or a mutually agreed earlier date.  Intending traders Traders who carry on a business and intend to make taxable supplies in the future that are not liable for registration under the future test for registration. Such traders may obtain refund of the input VAT on the purchases of capital equipment for the benefit of its cash liquidity.  Traders making transactions outside Cyprus (International Business Companies) Traders that supply goods or services and their place of execution is or is considered to be outside Cyprus, have the right to get registered with the VAT Authorities in Cyprus voluntarily, if these supplies would have been taxable supplies if they had been executed in Cyprus. Such traders should have their business establishment (branch or agency)in Cyprus or their usual place of residence (where it is legally constituted) is Cyprus.

11. Cyprus VAT returns How often are Cyprus VAT returns required?  The Cyprus VAT reporting is on a quarterly basis.  The VAT period depends on the type of business carried out and is communicated to the taxable person at the time of registration. What are the deadlines for filing Cyprus VAT returns  Any Cyprus VAT must be reported and paid within the forty days following the end of the reporting period. Cyprus VAT penalties  Late filings are subject to a charge of €51 per return.  There is also a charge of €85 per month for not registering with the VAT authorities.  If the payment is delayed, there is a further charge of 10% on the VAT due, with additional interest on the unpaid amount which is currently set at 4%p.a.

12. Recovery of input VAT How are Cyprus VAT credits recovered?  If there is a surplus of VAT inputs over outputs (more VAT incurred than charged), then a Cyprus VAT credit arises. In theory, this is due back to the VAT registered business.  In Cyprus form VAT 4B must be submitted in order to obtain a refund.  There is no time limit after which a person can no longer claim a refund.

13. Cyprus VAT compliance Once registered for Cyprus VAT, you will have to start following the local rules in a number of aspects. This includes:  Issuing invoices with the disclosure details outlined in the Cyprus VAT Act.  Electronic invoices with proper signature, authenticity and agreement by the recipient.  Maintenance of records, which must be held for at least 6 years.  Correct invoicing of customers for goods or services in accordance with the Cyprus time of supply VAT rules.  Treatment of credit notes and other corrections.  Application of foreign currency translation rates.

14. VAT Deregistration Compulsory Deregistration is made if the registered person:  Ceases to make taxable supplies  Is an intending trader and has ceased to have intention to trade  Changes in legal status (e.g. Sole trader to partnership)  The trader must notify the VAT Commissioner of this event within 60 days of ceasing to make taxable supplies or ceasing having the intention to trade.  the deregistration is effective from the date of cessation or a mutually agreed later date. Voluntary Deregistration due to turnover reduction  If the taxable turnover for the following year does not exceed the threshold of €13.668,81.  the deregistration is effective from the date of the application or a mutually agreed later date. 14

15. Intrastat Forms VIES Forms Additional Reporting

16. Cyprus Intrastat  If resident or non-resident companies move goods across the Cyprus national border to or from other EU countries, there may be a requirement to complete monthly Intrastat reporting.  Intrastat filings list the goods sent out of Cyprus, ‘dispatches’, as well as goods brought into Cyprus, ‘arrivals’.  It is a system introduced by Cyprus with the 1993 launch of the EU free trade market since customs borders and reporting were withdrawn.  Intrastat does not apply if the goods are coming in from outside of Europe (‘imports’) or being sent out of the EU (‘exports’).

17. Cyprus Intrastat (cont.) What are the Cyprus Intrastat reporting thresholds?  Intrastat returns only need to be completed once the reporting thresholds are exceeded. In addition the reporting threshold there is also a simplification threshold below which only a limited amount of information is required.  The thresholds for Cyprus Intrastat are as follows: Arrivals:  Exemption threshold: EUR100,000  Simplification threshold: EUR1,850,000 Dispatches:  Exemption threshold: EUR55,000  Simplification threshold:EUR5,800,000 The return must be submitted to the VAT service until the tenth day immediately following the end of the month to which the return relates. There is a penalty of €15 if late submission for each Intrastat return.

18. VIES Form/ EC Sales List/ Recapitulative Statement When do Cyprus VIES forms have to be completed?  If a Cyprus VAT registered business completes an intra-community supply, a sale to another EU VAT registered business of goods or services across the Cyprus border, then this may have to be reported in the VIES.  Registration for VIES will take place automatically when registering with the Cyprus VAT authorities.  There is no reporting threshold.

19. VIES Form/ EC Sales List/ Recapitulative Statement (cont.) When should Cyprus VIES forms be filed?  The filing date is the 15h of the month (or the next business day if this falls on a holiday or weekend) following the reporting  Cyprus VIES forms are made online.  There is a penalty of €50 for late submission of the VIES form  There is a penalty of €15 for corrections to an already submitted VIES form, if the correction is made within the month following the reporting month  The law provides also for criminal offences and serious penalties, including imprisonment for non compliance with the VIES.

20. New Residence Pleasure Yachts Privately Operated Aircrafts Preferential VAT Schemes:

21. New Residence  Supply of NEW buildings (before the first use of them) or parts thereof together with the building site is liable at the standard rate if the application for town planning permission was filed after 01.05.2004.  5% VAT on the new residence  New provisions enacted in the Fifth Schedule to the principal Law, which provide for a 5% VAT on the new residence.  The reduced rate was initially applicable only to Cyprus and other EU citizens but now applies also to citizens of third states who use the new residence as their main and permanent residence while they are in Cyprus.  Approval of the reduced rate is given by the VAT Office on application by interested persons who have to make their application on a special form and provide full detailed information and documentation

22.  Objective  Conditions to admit a pleasure boat to the scheme  Effective VAT Rate  Example Yacht VAT Leasing Scheme

23. Objective:

24. Yacht registration in Cyprus  If a yacht is going to be based in the EU waters, then VAT becomes one of the major considerations, as it is likely, that an EU country, will raise a VAT charge for the importation of the yacht.  The acquisition cost of pleasure craft (private yachts or other vessels used exclusively for pleasure), is subject to VAT if the vessel is brought into the EU and used in EU waters.  Consequently, most yacht owners who would like to move freely within the European Union will seek to minimise their VAT exposure. 24

25. VAT on yachts  The key to reducing the amount of VAT that is due on the purchase of a yacht, is how the yacht is purchased.  Rather than buying the yacht outright and paying the full VAT on the transaction, by establishing a company in Cyprus which can purchase a yacht and leasing it out through that company (for business purposes), you can take full advantage of one of the most advantageous EU yacht leasing schemes.  The aim of the scheme is to assist yacht owners to pay VAT on their yachts at an attractive VAT rate, in order to allow them to circulate freely within the European Union. 25

26. Yacht Leasing structure 26 1.Financing for the acquisition of the yacht i.e. Shareholder Loan 3.Lease of Yacht to BO Lease Payments – VAT paid quarterly at reduced rates 4. Sale of Yacht to BO

27. Conditions of the Yacht Lease arrangement Main Conditions:  The vessel should be put at the disposal of the customer in Cyprus  The lessor to be a Cyprus company 27 Other Conditions LesseeAnyone Initial Lease Payment40% Lease PeriodUp to 4 years Minimum Required Profit5% Option to acquire the yachtYes Purchase Price of the yacht2.5% of the original value

28. Deemed percentage use in EU waters 28 Standard Cyprus VAT Rate: 19% VAT Rate using the scheme - based on "presumed" lengths of stay within EU waters which depend on the type and length of the yacht. TABLE 1: Motor Boats Length of the yachtPercentage (%) of use within EUEffective VAT Rate % More than 65 meters length10%2.42 Length between 45.01 and 65 meters15%3.40 Length between 24,01 and 45 meters20%4.37 Length between 14,01 and 24 meters30%6.32 Length between 8,01 and 14 meters50%10.21 Length upto 8 meters60%12.16 Boat with permitted crusing use only within protected waters100%19.00

29. Deemed percentage use in EU waters 29 TABLE 2: Sailing Boats Length of the yachtPercentage (%) of use within EUEffective VAT Rate % More than 65 meters length10%2.42 Length between 45,01 and 65 meters15%3.40 Length betwen 24,01 and 45 meters20%4.37 Length betwen 20,01 and 24 meters30%6.32 Length between 10,01 and 20 meters50%10.21 Length up to 10 meters60%12.16

30. How the scheme works Example1: Mr. X would like to buy a motor boat of 46 meters length for EUR 15.000.000. He has two options: Either to buy the yacht in his name or in the name of a Cyprus company under the scheme. A. Mr. X buys the yacht in his name 30 € Purchase Price of the yacht15,000,000 Total VAT expense (19%)2,850,000

31. How the scheme works (cont.) 31 B. Mr. X buys the yacht on the name of a Cyprus company under the scheme. Original Value of the yacht15,000,000 Required Profit on installments - 2.5%375,000 Total Value including 2.5% of the profit15,375,000 Less Downpayment -40% of the original cost6,000,000 Due in Instalments (Up to 48 months )9,375,000 Residual Value 2.5% of the original value to be paid along with the final instalment375,000 Total amount including 5% of the profit15,750,000

32. How the scheme works (cont.) 32 B. Mr. X buys the yacht on the name of a Cyprus company under the scheme. (cont.) VAT Calculation€ VAT on downpayment & instalments (€15.375.000*15%*19% VAT)438,187.50 VAT on acquisition of the yacht by the lessee (2.5% of lease will be chargeable to €19%)71,250.00 Total VAT Expense509,437.50 VAT Saving (€2,850,000 - €509,437.50)2,340,562.50 Approx. 82% VAT Saving

33. Aircraft VAT Leasing Scheme Objective Conditions to admit a privately operated aircraft to the scheme Effective VAT Rate

34. Aircraft VAT Leasing Scheme Objective: 34

35. Cyprus Aircraft VAT Scheme The Cyprus VAT Authorities published attractive guidelines which regulate the taxation of aircrafts which are leased to third parties by a Cyprus Company aiming at the reduction in the VAT rate: Standard VAT Rate: 19% Using the scheme, only a proportion of the 19% of VAT is charged, due to the fact that the 19% VAT rate only applies within European Union airspace. 35

36. Cyprus Aircraft VAT Scheme Main Conditions: The aircraft should fly in Cyprus within 2 months from the date the lease-sale agreement of the aircraft becomes effective. Both the lessor and the lessee should be Cyprus companies The Lessor should be registered with the Cyprus VAT Authorities the lessee shall not be eligible to claim input VAT in respect of the lease. Other Conditions: 36 Lease PeriodBetween 3 to 60 months Lease Down payment40% Lease instalmentsmonthly Required Profit5% Option to acquire the aircraftYes

37. Cyprus Aircraft VAT Scheme Since it is practically impossible to establish the period that an aircraft is used within the EU’s airspace, the VAT Department has determined that the percentage of the lease taking place in the EU’s airspace will depend:  upon the type of aircraft involved e.g. Piston, Turbo, Jet and  upon the maximum take-off weight The minimum percentage of time that an aircraft could be deemed to spend within the EU is 20% resulting in a minimum effective VAT charge of 4.37%.

38. Cyprus Aircraft VAT Scheme TYPEWEIGHT (MAX TAKE OFF) PERCENTAGE (%) OF USE WITHIN EU EFFECTIVE VAT RATE% PISTON LARGE: OVER 15.001KG40%8.27 MEDIUM: 5.701KG - 15.000KG60%12.16 SMALL: 3.001-5.700 KG80%16.06 LIGHT: 1KG - 3.000 KG100%19.00 TURBO LARGE: OVER 15.001KG25%5.34 MEDIUM: 5.701KG - 15.000KG35%7.29 SMALL: 3.001-5.700 KG45%9.24 LIGHT: 1KG - 3.000 KG55%11.19 JET LARGE: OVER 15.001KG20%4.37 MEDIUM: 5.701KG - 15.000KG30%6.32 SMALL: 3.001-5.700 KG40%8.27 LIGHT: 1KG - 3.000 KG50%10.21 The following table determine the percentage of lease which is subject to VAT as well as the Effective VAT rates for each type of aircraft:-

39. Cyprus Aircraft VAT Scheme  At the end of the leasing period the lessee will have the option to purchase the aircraft from the Cyprus company.  A VAT paid certificate will then be issued, provided that all the VAT on the lease has been duly paid.  It must be noted that as the lessor will be conducting a business activity, it is expected to make a profit on the aircraft lease agreement over and above the value of the aircraft. 39

40. Aircraft Leasing structure 40 1.Financing for the acquisition of the aircraft i.e. Shareholder Loan 3.Lease of aircraft to CC2 Payments – VAT paid quarterly at reduced rates 4. Sale of Aircraft to CC2

41. Thank you!