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Cyprus Indirect Tax Update - Services for servicing the immediate needs of ships

Services for servicing the immediate needs of ships

On January 22, 2018, the Cyprus Tax Department, VAT Service, issued the Circular 224 under the subject "Services for servicing the immediate needs of ships

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In general, the circular clarifies that supplies of goods and services falling within the scope of:

a) Paragraph 3 (a) of Schedule Six  of the Cyprus VAT Act, which refers to supplies, conversions, repairs, maintenance, chartering and hiring of ships used in offshore navigation and involved in passenger transport operation at a fare or with which commercial, industrial or fishing activities are carried out, as well as other ships such as salvage and coastal fishing vessels.

b) Paragraph 5 (a) of Schedule Six of the same Act, which refers to services related to the direct needs of ships referred to in paragraph 3 (a) when provided at a port in the Republic.

In addition to the above, the circular also clarifies that they are subject to the zero rate, port charges in relation to the aforementioned category of ships as they are identified in the English terminology:

  • Landing charges
  • Free out charges
  • Wharfages
  • Delivery porterages
  • Terminal handling charges and
  • Destuffing

Next, and in particular point 4, the circular refers to specific services provided by port management companies, which are related to the servicing of ships' immediate needs and therefore subject to the zero rate:

  • The mooring of the eligible vessels referred to in paragraph 3 (a) of Schedule Six
  • Carriage of passengers on board (passenger handling) in respect of a contract between the managing company and the ship's owning or the ship's management company.

KPMG Comments

1. With the above wording it is noted that the distinction between services for the direct needs of ships and passengers no longer exists as it has been the case to date. That is, it is confirmed that all services supplied by management companies, provided they take place in a port and which concern ships falling under paragraph 3 (a) of the Schedule Six, are treated as supplied for the servicing of the ship and not the passengers.

The main message of the circular is that management companies no longer have to separate their services to those relating to the servicing of the vessel and those relating to the servicing of passenger and impose VAT on those relating to passengers.

However, in order to apply the zero rate, services must be provided under an agreement with the ship-owner or the owner’s ship management company. If the charge is made directly to the passenger, the zero rate is not valid.

2. Because circulars have retroactive effect, the following issue arises, which is normally resolved by the issuing of a credit note by the management company:

The VAT that has been wrongly charged in relation to the passenger services, either to the ship-owner or to the ship owner’s management company, should normally be returned to the recipient of the service in the form of a credit note. In order for the credit note to apply, the amount of the VAT must actually be refunded or offset against other amounts due to the management company.

Regardless of the above, in a relevant question we have put forward to the Tax Department, the oral reply was that it is not necessary for the affected taxpayers to issue a credit note for revious transactions for which they have imposed VAT.

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