04.04.2023
The Treasury is seeking a compromise with the House of Representatives on the thorny issue of lowering VAT on first homes by raising real estate values, rather than changing tax rate criteria.
The authorities raised the issue again after the expiration of the grace period granted by the European Commission. The European Commission has given MPs until February 15 to approve relevant legislation in line with EU housing incentive directives, but the Anastasiades administration asked for an extension, leaving the matter to the next government. Brussels has extended the grace period by another month to allow newly elected President Nikos Christodoulidis to act.
The EU directive requires Member States to introduce legislation on a 5% VAT rate on houses up to 140 square meters.
According to the bill proposed by the Ministry of Finance, houses with an area of more than 170 square meters will be subject to the standard VAT rate of 19% for each square meter above the limit of up to 200 square meters. But a house larger than 220 square meters is not eligible for the lower VAT rate of 5%, but is instead subject to 19% for the entire project.
For apartments, only the first 90 square meters of a 110 square meter apartment will be taxed at a rate of 5% VAT.
This currently applies to houses and apartments over 275 square meters.
Social politics
The government prepared the bill as a compromise, as the directive allows a reduced VAT rate to be applied to homes if it serves social policies such as promoting affordable housing.
However , if the EU-approved legislation is not adopted, Cyprus could be subject to sanctions by Brussels, as in the summer of 2021 a breach procedure was initiated against the republic.
The Treasury Department has submitted an updated proposal to the Chamber that increases the value of eligible homes in an attempt to soften criticism from the real estate sector.
A Treasury spokesman informed the House of Representatives that, according to official data, the cost of building materials increased by 10% in 2022, which justifies the increase in cost criteria. That is, the value of real estate, which will be subject to reduced VAT, will rise to about 400,000 euros for houses and 230,000 euros for apartments.
The previous proposal of the Ministry of Finance concerns real estate transactions up to 350,000 euros for houses, as well as apartments with a total value of up to 200,000 euros.
The MPs called for expanding the size criteria included in the legislation to meet the specifications of the Cypriot market for large houses. However, the government was unwilling to go beyond the size criteria set out in the bill, which was already in violation of the EU directive.
The EU argued that it had evidence showing that the government did not use the social contingency measures purposefully to propose lower VAT rates.
In a warning letter, the European Commission made it clear that third-country nationals wishing to obtain a Cypriot passport under its now defunct citizenship by investment scheme benefited from the measure.
Nicosia has also come under scrutiny after a report from the Accounts Chamber claimed that current legislation was violated by foreign investors seeking a golden passport, costing the state millions in unpaid taxes.
According to the data received, the republic suffered losses in the amount of 200 million euros from foreign investors, who later became Cypriots. Foreign investors wishing to obtain a Cypriot passport have taken advantage of the loopholes in the purchase of luxury apartments by avoiding the 5% VAT reduction.
