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November 30, 2021
2021-2154

Cyprus Administrative Court rules on Correction of Error request related to overpayment of VAT later assessed in another EU Member State

Executive summary

The Cyprus Administrative Court recently held that a Correction of Error request to the Value Added Tax (VAT) authorities cannot be approved for claiming allegedly overpaid VAT in Cyprus, later assessed and settled in another European Union (EU) Member State. It was held that the correction process needs to be completed within three years from the payment of VAT and the taxpayer could not subsequently invoke double taxation in Germany to request back VAT already paid in Cyprus.

The fact that the taxpayer at the VAT registration timing considered the place of its transactions (business establishment) in Cyprus charging Cypriot VAT to its consumers and confirming such approach via a VAT Ruling was inadequate when the German VAT authorities assessed German VAT on the basis that the services were predominantly carried out from a German fixed establishment.

Detailed discussion

The Decision

Following a VAT investigation carried out by the German VAT authorities, a Cypriot taxpayer was assessed as supplying electronic (adult content) from its deemed fixed establishment in Germany. The Company sought a Correction of Error in recovering the output VAT (liability in million Euros) paid in its initial consideration that services were carried out from its business establishment in Cyprus. The Cypriot VAT authorities rejected such request and the taxpayer appealed to the Administrative Court.

The Court dismissed the appeal, holding that:

  • The taxpayer voluntarily registered for VAT asserting the supply of its services from a business establishment in Cyprus.

  • Cypriot VAT was paid without prejudice and the taxpayer even confirmed its position in a VAT Ruling request, describing the factual background of its transactions.

  • Cypriot VAT liability was only disputed via an error correction after the German investigation and fixed establishment determination at German level.

  • The error correction request was time barred since three years had elapsed from the time that VAT payment occurred in Cyprus.

  • Double Taxation in two EU Member States could not serve as a defense.

Next steps

Businesses should pre-emptively consider their VAT affairs by:

  • Determining the applicable VAT treatment related to cross-border transactions as a significant liability can be investigated and assessed in foreign jurisdictions.

  • Accurately documenting their supplies through VAT Ruling requests to prevent prospective inconsistencies.

  • Rectifying the earliest identified errors via a structured liaison to the VAT authorities and filing prompt correction submissions.

  • Performing compliance reviews on a regular basis.

EY Cyprus has the experience to assist companies in addressing the impact of payment-related VAT treatment. Specifically, the VAT team can assist with:

  • VAT reviews of agreements and related documentation

  • VAT examinations and discussions with the authorities on the appropriate VAT treatment

  • VAT controversy support

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Indirect Tax, Nicosia

 

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