The Tax Department has recently issued a new interpretative circular in relation to the tax treatment of profits for enterprises engaged in real estate development and construction, by replacing the circular 1987/21 titled ‘Real Estate Developers & Contractors’ from 1 January 2022.
The new Circular states that as of 1 January 2022 the recognition of income from construction projects for tax purposes will be governed by circular 15/2021, issued by the Tax Department on 17 May 2021.
Tax treatment until the tax year 2021
The recognition of profit for income tax purposes in relation to ‘old construction projects’ (i.e. projects which commenced before or at 31 December 2021, the profits of which have not been fully subjected to income tax) should be consistent with the accounting treatment based on IFRS 15 and any profit, which was recognised for financial reporting purposes in prior years, but not recognised for income tax purposes based on circular 1987/21 should be included in the 2022 income tax return and taxed cumulatively in that year.
Tax treatment from the tax year 2022 and onwards
The recognition of profit for income tax purposes in relation to ‘new construction projects’ (i.e., projects commencing after 31 December 2021) must be made in accordance with the provisions of IFRS 15 – Revenues from Contracts with Customers. Effectively, the income tax treatment should follow the accounting treatment.
Transitional rules about ‘old construction projects’ for the years 2022 and 2023
In addition to the above, the Circular provides transitional rules about ‘old construction projects’, applicable for tax years 2022 and 2023.
The taxpayers may continue to apply the provisions of Circular 1987/21 for tax years 2022 and 2023 but in any case, the taxpayers must follow the IFRS treatment as of tax year 2024 onwards.
The profits on ‘old construction contracts’ which have not been taxed as at
31 December 2023 must be included on a cumulative basis in the 2024 income tax return.
It is noted that if taxpayers elect to apply the transitional rules on ‘old construction contracts’ only for tax year 2022, then those profits not taxed as at 31 December 2022 would have to be included in the 2023 income tax return.
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