VAT changes in relation to tax evasion
The main aim of the new Law the Cyprus Parliament is considering passing is to change the existing one that has inadequate provisions as to the VAT treatment in relation to the B2B transactions. This loophole in the legislative framework provided the opportunity to Cyprus Companies for tax evasion.
More specifically Cyprus Companies were invoicing legal entities outside E.U. for services that actually were carried out/used in the Republic (Cyprus) with the ultimate goal to avoid paying the VAT that normally should do. This was done by changing the place where the services actually were carried out, and hence no VAT should be paid since the transaction is outside the scope of the VAT being outside the E.U.
In order to have a more clear view of the problem I describe a common transaction that a lot of companies are adopting taking advantage the loophole that the Law allows them. If a Cyprus Company is actually invoicing another Cyprus company for services used in the Republic then the relevant VAT should be claimed and charged accordingly. On the contrary in order to avoid paying VAT they invoice companies that are not members of the E.U. and hence no VAT can be charged. This is on the basis that B2B transactions are taxed in the place of the actual services being carried out. So if the Cyprus Company is invoicing a company outside the E.U the whole transaction is considered to be outside the scope of VAT and hence no VAT is charged.
The government in order to prevent the Companies in performing these actions covered by the non existence of specific Law, has prepared a new legislative framework that specifically amend the Article 10A of the current VAT Law and adopting more specific guidelines how the B2B transactions can be taxed. This Law will be based upon the principles of “Use and Enjoyment” meaning that we will have guidelines where the service is actually been used or enjoyed and hence taxed accordingly.
Since the legislative framework has not yet passed from the Cyprus Parliament we don’t know the exact provisions that will be included in this. We expect that after the Law comes to effect the VAT department will issue a Circular explaining in detail what services fall within the provisions of the Law.
In conclusion the substance of this potential amendment is to ensure that the supply of services provided by Cyprus companies to non E.U. companies if are used and enjoyed in the Republic to be subject to VAT.