Press Release
In the digital age, Electronic Money Institutions (EMIs) have become an integral part of the financial ecosystem, offering a range of services that facilitate digital transactions. In the last few years, the financial landscape in Cyprus has evolved rapidly, with EMIs playing a pivotal role in facilitating digital transactions and financial services. Currently in Cyprus there are 29 licensed EMIs in accordance with the information available from the Central Bank of Cyprus.
An EMI is a financial institution that is authorized to issue electronic money and provide payment services such as domestic and international electronic fund transfers, e-bank accounts, and e-wallets. The main services offered by EMIs include online account opening and management, quick money transfers, multicurrency accounts, payment cards, and customer support.
It is worth noting that newly established businesses prefer to use EMIs instead of traditional banks since it is easier to set up an e-bank account, and they provide digital native services as well as innovative financial products such as virtual cards and advanced payment processing solutions. Also, EMIs usually provide more user-friendly online banking interfaces, making it easier for customers to manage their operations digitally.
As EMIs continue to grow, understanding the Value Added Tax (VAT) treatment applicable to their services becomes increasingly important. Herewith, the VAT treatment applicable for EMIs in Cyprus is being elaborated, highlighting the exemptions that businesses should be aware of to ensure compliance and optimize their operations.
In Cyprus, financial services, including those provided by EMIs, are generally exempt from VAT, and this exemption helps reduce the cost of providing financial services and enhances the competitiveness of Cypriot EMIs. However, there are some financial services that are excluded from the exemption as stated in the Cyprus VAT law N95(I)/2000 (“Cyprus VAT law”).
Given the range of services offered by EMIs, it is crucial to understand how those services are treated under VAT regulations since part of the services offered by Cyprus EMIs based on the license obtained may not fall under the VAT exemption. In this respect, it is important to evaluate the services an EMI provides, as it might only offer some of the services listed on its license. It is imperative to note that the VAT treatment is dependent on the license under which an EMI is operating as well as on the operating process used to provide its services. Hence the VAT treatment might be differentiated and not be applied in a general manner to all EMIs.
It should be noted that services offered by EMIs that are not directly related to the transfer of money and are considered purely administrative or technical or in the form of a gateway rather than financial may not qualify for the exemption and could be subject to VAT. As a result, a detailed review of the services offered by EMIs should be undertaken to ensure that the correct VAT treatment will be applied to such services.
In accordance with the Council Directive 2006/112/EC (“EU VAT law”), which is applicable among the EU member states, the provision of certain financial services, such as transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, checks, and other negotiable instruments, but excluding debt collection, is VAT exempt.
As per the VAT committee of the European Commission, an e-money provider is a regulated legal entity providing financial services that performs an economic activity as defined in the EU VAT law and can be considered a taxable person. In this respect, it is important to assess if the provision of e-wallet services should be treated as VAT exempt as stated in the EU VAT law.
To assess if the VAT exemption applies, the VAT committee referred to various legal cases of the Court of Justice of the European Union (“CJEU”). The CJEU ruled that for a transaction concerning transfers, the services provided must therefore have the effect of transferring funds and entail changes in the legal and financial situation. A service that is exempt under the EU VAT law must be distinguished from a mere physical or technical supply, such as making a data-handling system available to a bank. On the other hand, the provision of electronic messaging services to financial institutions (SWIFT) does not fall under the VAT exemption as per the CJEU since the specific services are considered to be of a technical nature and hence a vatable supply.
In relation to other services offered by e-money providers, such as management dashboards and advisory services, those services constitute administrative services that do not fulfill the specific, essential functions of an exempt transaction concerning payments and transfers. Similarly, risk management and data processing for detecting fraudulent transactions prior to approval of a payment are vatable supplies.
Based on the above, it is necessary for EMIs to assess whether such services are ancillary to the payment services and therefore treated as a single supply with the main element being the VAT-exempt service, which is the transfer of money, or whether the transfer of money is the result of processes that a merchant wishes to apply in order to ensure that it is not related to fraudulent or non-approved transactions.
A reference to the VAT law in other EU member states where many EMIs have been established indicates that the VAT treatment applicable for financial services is in line with the EU VAT law, where the payment processing services are treated as VAT exempt on the basis that there is an actual transfer of money and provided that the result for the provision of those services changes the legal and financial situation of the parties involved.
In comparison to the EU VAT law, the Cyprus VAT law treats the processing, clearing, and authorization services for money transfers in relation to credit cards as taxable. This is the result of an exemption to the exempted services within the VAT law.
As a result, there may be contradictions in the interpretation of the VAT law, and for this reason, the Cyprus Tax Department may consider the need for the issuance of circulars indicating the VAT treatment for each type of service offered by such companies to ensure that the regulations are correctly applied by the businesses.
In conclusion, as the regulatory landscape evolves, staying informed about changes in VAT treatment is vital for businesses to maintain compliance and optimize their financial strategies. By navigating the complexities of VAT regulations and applying the correct treatment to EMIs, businesses can avoid potential pitfalls and leverage opportunities for tax efficiency. Seeking professional advice, when necessary, will help businesses manage their VAT obligations effectively and contribute to their overall financial and tax compliance.
K. Treppides & Co. Ltd. is the largest independent consulting firm in Cyprus with an established international presence and offices in Cyprus, the United Kingdom, and Malta. The company was established in 1985 and employs approximately 200 professionals. A full range of consulting, assurance, tax, accounting, and fund services are provided to groups, companies, and investors operating internationally in a wide range of financial and business sectors. The company has decades of proven track record of delivering high-quality services and solutions to our clients, and through this experience, investors and businesses are guided and assisted during the establishment process and subsequent investment activity in Cyprus and internationally.
Contact Details:
Theano Orinou
VAT Manager
torinou@treppides.com
www.treppides.com
Nicosia: Treppides Tower, Kafkasou 9, Aglantzia, CY 2112, Nicosia, Cyprus
Limassol: Andrea Kariolou 38, Ayios Athanasios, CY 4102, Limassol Cyprus
London: Office 920, 15-19 Bloomsbury Way, London WC1A 2TH
Malta: Level 1, Somnium, Tower Road, Swatar, Birkirkara BKR 4012
