Refusing a VAT Objection Takes Reasons, Not a Formula

A land development company registered for VAT since 2008 built two villas at Armou in the Paphos district. On an audit, the Paphos office of the Tax Department found that the villas, put up for sale, were in fact being used by the company's directors, and treated that own use as a supply of goods on which output tax was due. An assessment followed on 26 June 2014. The company objected on 23 August 2014, setting out some twenty grounds. On 2 September 2016 the Commissioner of VAT rejected the objection in a letter which said, in substance, that since no new evidence had been produced the company's contention was not accepted.

On 7 September 2026 the Administrative Court of Appeal held that this was not a lawful answer to an objection. It also held that the court below, having correctly annulled the decision for that reason, then went further than it was entitled to go.

The issue was not the production of new evidence, but the assessment of the evidence already held and its application to the right legal framework.

Who this matters to

Any Cyprus company that builds and holds property, and any business that has ever received a tax assessment and objected to it. Two separate things are decided here, and each carries a practical warning.

The first concerns developers directly. Erecting new dwellings for sale and then allowing directors, shareholders or family to live in them is not a neutral event for VAT. Paragraph 3(e) of the Second Schedule to the VAT Law 95(I)/2000 treats self-occupation, own use, letting or use for any purpose of new buildings as a supply of goods, and output tax follows. Whether the paragraph was correctly applied to this company remains undecided, but the risk it describes is real and is routinely overlooked when a development does not sell and the units are put to use.

The second concerns anyone who objects to an assessment. The objection stage is where the case is either properly answered or quietly deferred for a decade, and the difference shows up in the costs schedule rather than in the law.

The formula that was not a decision

The company's objection was not a request for indulgence. It raised specific points going to the heart of the dispute. It said the co-owners of the plot had never parted with possession or ownership of the land and had never delivered possession to the company. It said no agreement for the exchange of land for units between the company and the owners had ever been activated. It said the planning permit had been applied for and issued in the names of the co-owners. It said the construction had been financed by a loan the co-owners took in their own names. Read together, those points asked a single question: was there a supply by this company at all, or had the department simply identified the company with its directors.

The Commissioner's letter did not engage with any of it. It recorded that the assessment had been made under Article 49 of the VAT Law by an authorised officer exercising judgment to the best of her ability within the bounds of good administration, that it had been duly served, and that since no new evidence had been produced supporting examination of the objection, the contention was not accepted.

Article 51A of the VAT Law provides that where the Commissioner rejects an objection, the decision on it expressly includes the reasons on which it was based. The Administrative Court of Appeal held that a general reference to the absence of new evidence, given when there was sufficient material on which the administration could form a view on the grounds raised, cannot be read as a reasoned rejection following adequate investigation of all the facts. The court also noted a contradiction in the Republic's own argument: counsel submitted that the department already held everything needed to examine the objection, yet the objection was refused precisely because nothing further had arrived.

On the standard, the court repeated the settled position, citing Republic v. Community of Pyrgos and others (1996) 3 A.A.D. 503, that the final assessment of the facts and the taking of the decision are the duty and the obligation of the competent organ, and that the measure of a sufficient inquiry is the investigation of all the material elements. The company had also relied on article 46 of Law 158(I)/1999, which addresses decisions taken under a material error of law or of fact.

The part of the win that was taken back

Having found that no inquiry had been carried out, the first instance court did not stop there. Noting that the Republic was answering the grounds of objection for the first time in the recourse, it went on to examine the substance. It held that the conclusion that there had been a supply of goods by the company to its directors was wrong and taken under a misapprehension, that the determination of the value of the supply breached the relevant statutory provisions, that the Commissioner was wrong to identify the company as a legal person with its directors, and that the Land Registry and Surveys Department was not the competent authority to fix the value.

The Administrative Court of Appeal upheld the annulment but set that further part aside. The remaining grounds of appeal, it held, concerned matters of substance which the company had raised in its objection and on which the administration had exercised no primary judgment. The first instance court had therefore gone wrong, and largely outside the annulment nature of its jurisdiction, in pronouncing on them.

That is the sentence with the practical sting in it. The company won, the decision is gone, and nobody has yet decided whether output tax is due on those two villas or what the value of the supply would be. The matter returns to the Commissioner to be examined properly, twelve years after the assessment was issued. Costs of 3,000 euro plus VAT were awarded in the company's favour.

What this means in practice

1. Treat own use of unsold units as a VAT event, not an accident. If a development does not sell and directors, shareholders or relatives move in, or the units are let, paragraph 3(e) of the Second Schedule is engaged. Decide the position and document it before an audit decides it for you.
2. Keep the ownership trail straight from the start. The arguments that gave this company its case were documentary: whose name was on the planning permit, who took the construction loan, whether possession was ever delivered, whether the exchange agreement was ever activated. Those facts are fixed years before any assessment, and they are what the objection will live on.
3. Put your full case in the objection. The grounds filed in 2014 are the grounds that carried the company through the recourse and the appeal. An objection that merely asks for reconsideration gives the Commissioner nothing to answer and gives you nothing to complain about.
4. A decision that says only that you produced nothing new is challengeable. Article 51A requires express reasons. If your objection turned on material the department already held, the absence of new documents is not a lawful reason to refuse it.
5. Do not expect the court to decide the tax. Annulment sends the matter back to the Commissioner, and the Administrative Court cannot substitute its own judgment on whether there was a supply or what it was worth. Plan on the assumption that winning the recourse restarts the process rather than ending it.

Assessments of this kind sit at the junction of tax and title, which is where advice on property and on construction has to be read together with the VAT position of the company that holds the development.

Questions we are asked

Sources

• Republic of Cyprus through the Minister of Finance v. Fondo Developers Ltd, Appeal against a judgment of the Administrative Court 73/2022, Administrative Court of Appeal, 7 September 2026
• The Value Added Tax Law of 2000, 95(I)/2000, CyLaw
• The General Principles of Administrative Law Law of 1999, 158(I)/1999, CyLaw

This article is provided for general information purposes only and does not constitute legal advice.

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