Date: 21 July 2021

A very interesting decision of the Cyprus Administrative Court (hereinafter “the Court”) was released earlier this month urging the local Tax Authorities to re-organize their internal applicable practices when examining taxpayers’ books and records prior to concluding on an assessment. More precisely, on 8 July 2021, the Court rendered judgment in the Apollonion Private Hospital case (case no. 883/2017). The dispute in the case was as to whether the taxpayer had to register for VAT purposes retrospectively on the basis that it was hiring space to doctors, a service which was considered to be taxable by Tax Authorities.      

The Court ruled in favor of the taxpayer not based on the facts on the specific case but on the grounds that the VAT assessment lacked legality and correctness. Specifically, the Court held that Tax Authorities did not perform a ‘proper investigation’ over the facts of the case and proceeded issuing a VAT assessment in which they failed to provide adequate justification for their position. 

Background facts

During March 2016 the Tax Authorities examined the financial statements of a locally based medical institution and urged its retrospective registration with the VAT Register as of 1/1/2010. The reasoning behind the backdated VAT registration was the rental income which the institution generated on a monthly basis from doctors hiring space within its premises so as to practice their profession, activity which was treated as taxable for VAT purposes.  

On 26/11/2016 the Tax Authorities sent a notification letter to the institution regarding its backdated VAT registration since 1/1/2010 and the imposition of administrative penalties due to late registration amounting to €6.970. The Tax Commissioner’s decision about the retrospective VAT registration was challenged by the institution through the submission of an objection to the Minister of Finance on 28/11/2016 supporting the VAT exempt nature of the rental income generated. 

In response to the objection, the Tax Authorities prepared a report which included 1) the facts of the case, 2) the legal background, 3) the arguments raised in the objection by the taxpayer and 4) the VAT Officers’ handling the case position on the issue.  More precisely, the Tax Authorities based their position on paragraph 2 of Part A of Schedule 7 of the Cyprus VAT Act according to which hospital and medical care, as well as closely related activities supplies of goods and services, undertaken by public hospitals or private hospitals registered with the Register maintained by the Department of Medical Services, according to the applicable Law for Private Hospitals, consist VAT exempt services. However, it was decided that the common expenses paid by doctors in return for maintaining and operating offices within the premises of the institution, together with the right to use the institution’s telephone infrastructure and personally allocated office space did not fall under the definition of “closely related activities” and should therefore be treated as taxable falling under the standard VAT rate of 19%. The Tax Authorities’ position was fully adopted by the General Director of the Ministry of Finance who rejected the objection on these terms, announcing his relevant decision through a letter dated 12/4/2017. The relevant decision was challenged, through the submission of an appeal before the Administrative Court.

Taxpayer’s arguments before the Court

   1. The decision of the General Director of the Minister of Finance was not in compliance with the provisions of the Cyprus VAT Act (95(Ι)/2000).

   2. The VAT treatment applied by the Tax Authorities to the rental income generated by the medical institution from doctors was not correct, as the relevant services should have been treated as VAT exempt rather than taxable.

   3. The decision of the General Director of the Minister of Finance was not adequately justified and/or was not justified at all.

   4. The Tax Authorities failed to conduct a thorough investigation when examining the case and prior to releasing the VAT assessment.

   5. The disputed decision is not abiding to the relevant decisions of the European Court of Justice on similar matters.

The Administrative Court’s decision

In examining the case the Court observed that the Tax Authorities’ assessment was issued without having conducted a thorough examination and satisfactory justification of their position on the taxable nature of services involving the lease of/granting of the right to use office space to practicing doctors. Therefore, they failed to explain the reason why such services did not fall under the definition of “closely related services to hospital and medical care”, in which case they would benefit from the VAT exemption.

The Court also made reference to the interpretation of the term “closely related services” given by the European Court of Justice which seemed not to have been taken into consideration by the Tax Authorities. (Refer to ECJ Cases C-394/04 and C-395/04 Diagnostiko & Therapeftiko Kentro Athinon-Ygeia AE v Ypourgos Oikonomikon).

In addition to the above, the Court also came to the conclusion that the taxpayer’s objection, although submitted to the Minister of Finance was nevertheless examined by the General Director of the Ministry of Finance based on whose decision it was rejected. Consequently, the relevant decision violated a fundamental principle of the modus operandi of local Administration, that of the incompetence of the administrative organ which took it. 

Why is case 883/2017 important?

It seems that the Tax Authorities followed the same practice when examining the books and records of other locally based medical institutions, issuing thus assessments on similar terms.  Under this assumption, we would expect numerous other cases to be challenged before the Cyprus Administrative Court and ultimately led to withdrawal and re-examination. In any case, this entire process may increase the level of taxpayers’ disbelief towards Administration causing thus a significant breach in the fundamental principle of protecting legitimate expectations.

How can KPMG assist?

Should you like to further discuss the content and potential impact of the Circular to your business, please contact one of our trusted advisors from the Indirect Tax Department at KPMG Cyprus.

KPMG’s Indirect Tax team provides advice and assistance at the Cyprus and international level. We structure our effort to dovetail with your business issues and strategy. Our focus is on supplying value adding and pragmatic advice rather than just a list of recommendations.

Our tax professionals are able to review your company’s current tax position and provide relevant advice and planning on a range of indirect taxes, including VAT, customs duties and excise taxes (such as tax audits, reorganizations and acquisitions, etc.). Furthermore, we can help your company with its administrative obligations and contacts with administrative bodies.

Connect with us