The rent on a Cyprus commercial lease carries VAT

Most commercial leases in Cyprus are negotiated on a rent per square metre and a term, and the tax treatment is left to the accountants. That order of business has been wrong since 2017. Whether the rent carries VAT is decided by a provision in a Schedule, it is decided by reference to the tenant rather than the landlord, and one of the choices open to the landlord can never be reversed.

Where the rule lives

Section 39(1) of the Value Added Tax Law, 95(I)/2000, provides that transactions concerning immovable property are governed by the Eighth Schedule. Section 39(2) lets the Council of Ministers amend that Schedule by order published in the Official Gazette, which is worth knowing because it means the rule can move without a new statute.

Paragraph 1(a) of the Eighth Schedule states the starting point in six words: the lease of immovable property is an exempt transaction. Everything that follows is a list of exceptions to that.

The six carve-outs

The exemption does not apply to:

• the provision of accommodation in the hotel or a similar sector, including accommodation at camping sites
• the letting of premises or spaces for the parking of vehicles
• the letting of permanently installed equipment and machinery
• the letting of safe deposit boxes
• the lease, with an option to purchase, of the immovable property described in paragraphs 1(b) to 4 of the Schedule
• the lease or rental of immovable property to a taxable person for the purposes of carrying on a taxable business activity, other than immovable property used as a dwelling

The sixth is the one that changed the market. It was inserted by section 3(a) of Law 157(I)/2017, the Value Added Tax (Amending) (No. 3) Law of 2017.

The test is applied to the tenant, not the landlord

Read the sub-paragraph again and note what it asks. It does not ask whether the landlord is in business, or whether the building is commercial, or what the lease is called. It asks two things about the tenant: is the tenant a taxable person, and is the property to be used for the purposes of carrying on a taxable business activity.

So the same office floor, let by the same landlord on the same terms, is standard rated when the tenant is a trading company making taxable supplies and exempt when the tenant carries on an activity that is itself exempt. A landlord who assumes the answer from the nature of the building will get it wrong often enough to matter, and the answer can change on assignment.

Immovable property used as a dwelling is expressly outside the charge, so a residential letting remains exempt whoever the tenant is.

The dates, and why two of them differ

Section 61(1), added to the principal Law by the same amending Law, provides that the provisions of the (No. 3) Law of 2017 come into force on the date of its publication in the Official Gazette, with two exceptions: section 2, and paragraph (b) of section 3, which take effect on 2 January 2018.

The leasing charge is in paragraph (a) of section 3. It is therefore not one of the exceptions, and it came into force on publication. The Law was published in Official Gazette No. 4626 on 13 November 2017.

Paragraph (b) of section 3, which brought the transfer of undeveloped building land into charge, is one of the exceptions and took effect on 2 January 2018. Practitioners who carry one date across to the other transaction are out by seven weeks.

The first proviso to sub-paragraph (vi) then limits the charge by reference to the lease itself: taxation covers a lease or rental whose commencement date falls on or after the entry into force of the amending Law. A lease that started before 13 November 2017 is not brought into charge by the amendment, and does not become chargeable merely because the rent is later reviewed.

The option that cannot be taken back

The second proviso gives the landlord a way out. The lessor may choose to notify the Tax Commissioner that the lease or rental is not to be taxed, under terms and conditions set out in a notice of the Tax Commissioner published in the Official Gazette.

The third proviso is the sentence to read before signing anything: the lessor's initial choice not to tax the lease under the second proviso cannot be varied by the lessor afterwards. There is no annual election, no change of mind when the next tenant is a trading company, and no correction when the building is refurbished and the input tax on the works turns out to be substantial.

Why most landlords decline the option

Section 21(1) allows a taxable person to deduct so much of its input tax as is attributable, under or by virtue of Regulations, to the transactions in section 21(2). Section 21(2)(a) lists taxable transactions made in the course or furtherance of the business.

An exempt rent is not a taxable transaction. The VAT on building the property, refurbishing it, fitting it out, and on the agents and professionals engaged to let it, is therefore not attributable to a taxable transaction and is not deductible. A landlord who exempts the rents on a newly built commercial building is choosing to bear that tax.

Where the tenants are themselves taxable persons who will recover the VAT on the rent, charging it costs them nothing in real terms and unlocks the landlord's own recovery. That is the ordinary commercial answer, and the reason the option in the second proviso is used far less often than it is discussed.

The rate

Section 17 imposes VAT at nineteen per cent from 13 January 2014. The five per cent rate in section 18 applies to the Fifth Schedule and the nine per cent rate in section 18A to the Twelfth Schedule. A commercial rent falls in neither, so the standard rate applies.

What to settle before the lease is signed

• Whether the tenant is a taxable person and what it will use the property for, recorded in the lease rather than assumed
• Whether the landlord has already made an election under the second proviso in relation to the property, because it cannot be undone
• Whether the rent in the letter of intent is quoted inclusive or exclusive of VAT, which is where most disputes on this subject actually begin
• What happens on assignment or sub-letting if the incoming tenant does not meet the test
• The commencement date, since a lease beginning before 13 November 2017 is outside the charge and a renewal is a new lease

We advise landlords and tenants on Cyprus commercial leases and on the tax treatment that goes with them. Write to us at office@kleanthousplatis.com with the names of everyone involved and a short description, and we will reply within one business day.

Questions we are asked

Sources

• Value Added Tax Law, 95(I)/2000, consolidated text
• Value Added Tax (Amending) (No. 3) Law of 2017, 157(I)/2017, Official Gazette No. 4626, 13 November 2017

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

Klitos Platis

Advocate, Partner

Kleanthous & Platis LLC, Nicosia · Published 23 August 2026

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