VAT on Mixed Use Property in Cyprus

What is a mixed use property for VAT purposes?

A mixed use property is one that is used for both residential and commercial purposes within the same building or development. Examples include ground floor retail or office units with residential apartments above, a building containing both residential flats and a commercial unit, or a property that is partly used as an office and partly as a home. Each element of the property has its own VAT treatment which must be assessed separately — the different uses cannot simply be averaged or treated uniformly.

VAT treatment of each element

Residential rental is always exempt from VAT — the landlord cannot opt this element to taxable. The first sale of new residential units by a developer is taxable. Commercial letting is exempt by default but can be opted to tax at 19%. Commercial sales are exempt unless opted. Development land may be taxable. A mixed development with ground floor shops let to businesses and upper floor apartments sold to buyers will have: VAT on apartment sales, 19% on commercial lettings if opted or exempt if not opted, and taxable construction costs at 19% across the whole building.

Apportioning input VAT on shared costs

The most complex aspect of mixed use property is apportioning input VAT on costs that relate to the whole building rather than just one element. Construction costs, structural repairs, roof works, external facade — these benefit the whole building but different VAT rules apply to different parts. The apportionment must reflect the extent to which each cost relates to taxable versus exempt activities. Common methods include floor space apportionment, value apportionment or purpose apportionment — the most appropriate method depends on the specific property and its uses.

The option to tax decision in mixed developments

For a developer building a mixed development the option to tax decision on the commercial elements significantly affects the overall input VAT recovery position. Without the option to tax on commercial units input VAT on construction costs attributable to those units is irrecoverable. With the option to tax those costs become recoverable but tenants face 19% VAT on rent. The decision must balance input VAT recovery against the impact on tenant costs and marketability of the commercial units.

Capital Goods Scheme for mixed use

A mixed use building, like all immovable property, is subject to the Capital Goods Scheme. The initial input VAT recovery is based on the taxable use at first use — which may be partial given the mixed nature. Each year the taxable use must be reassessed. If the commercial element becomes exempt through deoptioning or the residential element starts generating taxable supplies through a sale the CGS adjustment changes. Mixed use properties require annual CGS monitoring throughout the 10-year adjustment period.