By Christos Chrysostomou
Manager, Tax Department
K. Treppides & Co Ltd
The economy of Cyprus is largely dependent on tourism, and this is evident from the fact that government revenues from tourism accounted for over 12% of Cyprus GDP in year 2019 (in accordance with publicly available statistics extracted pre Covid-19 pandemic).
Airbnb and Booking.com. are widely considered as two of the most popular online platforms where anyone can easily access and explore for the accommodation that it suits best to their taste.
Leasing of villas, apartments and other similar establishments in the form of short-term self-service rentals is rapidly growing in Cyprus, thus becoming the first choice for many tourists.
Regulation in Cyprus governing accommodation via Airbnb and other online platforms
The providers of these short-term leasing properties, which are offered through the online platforms, often had an advantage in terms of pricing as compared to the hotels. This was fairly linked with taxes. The income from leasing of short-term rentals is subject to Income tax as well as VAT, in accordance with the provisions of the relevant legislations in Cyprus. However, these short-term rentals operated in an uncontrollable environment, and despite the effort made and resources allocated by the relevant authorities, it was not feasible to properly monitor and assess the supply of short-term rentals for ensuring (i) strict compliance and adherence to the applicable rules and obligations by all providers of self-catering accommodation services and (ii) that each taxpayer paid their fair share of taxes to the tax department.
In addition, the imposition of VAT on the income from short-term accommodation depends on whether the owner (physical person) is deemed to be exercising an economic activity and whether the income earned exceeds the VAT threshold that is provided in the VAT Law. Hence, in cases where such conditions are not met, then no obligation would have arisen for the owner of the property to register and charge VAT for the services offered (e.g. could be applicable in situations of owners letting their summer house on one-off basis).
Such imbalances which were created as a result of the above, led to unfair competition between hotels (where 9% VAT is charged and profits are subject to Income tax) and the short-term self-service rental properties.
The above, in conjunction with other tax compliance irregularities, as well as low quality of services offered and some health and safety factors, has increased the need for such short-term self-catering establishments to be regulated. The rules applicable on these short-term rentals needed to be change and measures to be taken.
In this regard, the House of Parliament has passed a law in an aim to regulate the registration and operation of such establishments, and simultaneously ensure that all conditions and standards are met in terms of quality of services offered and adherence to the health and safety regulations and also to enable incentives for improving the tourism sector in Cyprus.
As per the amending law, the properties being let out to tourists as self-service short-term accommodation properties should be approved by the Cyprus Deputy Ministry of Tourism and owners must register their properties in the ‘self-catering accommodations register’ and obtain an operating license for the business from the Deputy Ministry of Tourism.
VAT obligations in Cyprus for the providers of self-catering accommodations
The leasing of immovable property for residential use is normally an exempt transaction for VAT purposes. However, this is not always the case!
The time frame of the leasing period along with the circumstances per case are important factors which may influence the VAT treatment and should be carefully considered (‘chain transaction’).
As per the VAT Law, the provision of short-term rentals, the kind of Airbnb, Booking.com, etc., should fall under the hotel accommodation and other similar services.
For instance, if a property (e.g. apartment in Protaras) is being let-out though online platforms (i.e. Airbnb or Booking.com) to several different tourists on a nightly basis during the summer months, and the letting period is considered short-term and the additional services offered are similar to those of a hotel, then such transaction described is akin with the offering of hotel accommodation services and the owner should charge the VAT rate applicable for this kind of services (i.e. reduced rate of 9%).
On the other hand, if the owner (either a company or a physical person) gives the right to a management company to use the properties for provision of short-term rental, then such service will be subject to the standard VAT rate of 19%, on the basis of being considered as license to use. If the management company will be further leasing the properties to other parties, or makes it available to tourists, on a short-term basis and in addition to this service will also be offering other services (e.g. cleaning etc.), as a package of services, then this service will be considered as a service similar with hotel accommodation and will be subject to 9% VAT.
Notwithstanding the above, since not all District Offices of the Tax Department may follow the same practice in such cases, considering also its judgmental nature and the vagueness in the VAT law, it is therefore recommended for the VAT treatment for such cases to be confirmed with the Tax Department.
The Tax Department should also be notified for the use of such properties as self-catering short-term accommodation services through online platforms, and the respective income received should be declared to the Tax Department.
The takeaway
Tourism has always been an integral part of the Cyprus economy and, to a great extent, revenues from tourism have boosted Cyprus economy many times in the past years. In order for Cyprus to maintain this status quo, the services offered by both the hotels as well as the self-catering short-term accommodation establishments is imperative to be monitored and regulated on a continued basis so as to ensure the quality of services offered and that all providers of hotel accommodation services fall under the same umbrella by following the same applicable rules and regulations, tax compliance as well as VAT obligations.
Cyprus cannot afford losing tourists, especially during these unprecedent times. Hence, in order for tourists to continue to view Cyprus as an attractive location and tourism to continue to contribute the most in the Cyprus economy, it is essential for all engaged parties to familiarize their selves and adhere with the above rules, regulations and obligations.
K. Treppides & Co Ltd is the largest independent consulting company in Cyprus with an established international presence and offices in Great Britain and Malta. Today the company employs approximately 200 professionals. It offers a full range of consulting, tax, accounting services to groups, companies and investors operating internationally in a variety of financial and business sectors. The Company, which started its operations in 1985, has 36 years of expertise and an elite team of experienced executives who can guide and assist investors and businesses during the establishment process and subsequent investment activity in Cyprus and internationally.
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