Capital Goods Scheme in Cyprus: Complete Guide

What is the Capital Goods Scheme?

The Capital Goods Scheme — CGS — is a mechanism in Cyprus VAT law that requires businesses to track input VAT claimed on major capital assets over a defined adjustment period. The scheme exists because capital assets like property are used over many years and the VAT-taxable use of those assets can change over time. Without the CGS a business could claim full input VAT on a property in year one and then convert it to exempt use without any VAT consequence. The CGS ensures the input VAT recovery accurately reflects the actual taxable use over the life of the asset.

Capital Goods Scheme — asset types and adjustment periods

How the adjustment period works

The adjustment period starts in the VAT year in which the capital good is first used. For a property with a 10-year adjustment period each year represents one tenth of the total input VAT claimed. Each year the business must compare the actual taxable use in that year against the original taxable use in the first year. If the taxable use has decreased the business must repay a proportion of the original input VAT claim. If taxable use has increased the business can claim additional input VAT. The adjustment is made annually on the VAT return for the last period of each VAT year.

What triggers a CGS adjustment?

Any change in the taxable use of the capital good during the adjustment period triggers an annual CGS calculation. The most common triggers are: letting a previously owner-occupied commercial property to an exempt tenant, converting commercial property to residential use, changing the proportion of taxable versus exempt activities in a mixed-use building, selling the property, or bringing a previously exempt property into taxable use. The key is the ratio of taxable to total use in each adjustment interval compared to the original year.

Common CGS triggers in Cyprus

• Commercial property let to an exempt tenant — bank, insurer, doctor — after previously being used for taxable activities
• Conversion of commercial property to residential use — residential letting is exempt
• Sale of a property during the adjustment period — the buyer may inherit the CGS obligation
• Option to tax revoked during the adjustment period
• Mixed use building where the taxable proportion changes year on year
• Property originally used for exempt activities brought into taxable use — creates a positive adjustment and additional input VAT recovery

CGS and property sales

When a capital good is sold during the adjustment period the sale itself is treated as a final use in the remaining adjustment intervals. If the sale is taxable — VAT charged at 19% — the remaining intervals are treated as 100% taxable use and no repayment is due. If the sale is exempt the remaining intervals are treated as 100% exempt and a lump sum repayment of all remaining intervals is due in the period of sale. This can create a significant unexpected liability when a commercial property is sold exempt — for example where the option to tax was not in place.

Partial exemption and CGS interaction

For partially exempt businesses — those with both taxable and exempt supplies — the CGS interacts with the partial exemption calculation. The initial input VAT claim on the capital good uses the partial exemption recovery rate in the year of acquisition. Each subsequent annual adjustment compares the current year recovery rate to the original rate. This can create adjustments in both directions — years with higher taxable use generate additional recovery, years with lower taxable use require repayment. Businesses with significant property assets and mixed supplies should model the CGS position carefully before major transactions.