10.01.2023
The European Commission has given Cyprus until mid-February to pass new legislation governing the collection of reduced VAT on real estate, otherwise it will advance the infringement case.
Brussels tells Nicosia that if it does not amend the current legislation by February 15, it will file an infringement case initiated last summer. Further complicating the situation is that the parliament is not currently functioning due to the upcoming presidential elections.
In a letter to the legislature dated December 16, 2022, Treasury Department Permanent Secretary Giorgos Panteli warned deputies that time was short. The message was also copied to the Attorney General and the Tax Commissioner.
Brussels claims that Cyprus does not properly apply VAT rules to houses bought or built here. The VAT Directive allows Member States to apply a lower rate for first homes as part of social policy. But a broad interpretation of the Cypriot provision clearly goes beyond the social policy objective stated in the directive for such an exception.
The policy was also highlighted when it was revealed that Golden Passport scheme recipients who invested in real estate in exchange for citizenship also benefited from the lower VAT rate.
In the meantime, the government has come up with a middle ground, a bill that would change how the reduced 5 percent (as opposed to the full 19 percent) VAT rate on homes is levied. Brussels has given the go-ahead to the proposal, media reports say, but the February 15 deadline has still been set.
According to the government’s proposal, the reduced VAT rate will apply to the first 170 sq. m of a house with a total area of 220 sq. m and real estate value up to 350,000 euros. For apartments, the lower rate will apply to the first 90 square meters of a total area of 110 square meters and property values up to €200,000. In addition, a special paragraph provides that the criterion of total area does not apply to persons with disabilities.
However, this idea met with stiff resistance from several organizations – the Federation of Employers and Industrialists, the Chamber of Commerce, the Cyprus Land and Property Owners Organization and the Association of Real Estate Appraisers.
Instead, they proposed to raise the value of the relevant property – both houses and apartments – to 500,000 euros. And they note that with the current inflation and the rising cost of building materials, no one will find a house or apartment with square meters and the cost specified in the bill.
Also against the opposition parties, including the most visible AKEL and EDEK. The latter have made it clear that they will vote against the bill if it is considered at the plenum as it is.
Daily Politis contacted Pantely at the Treasury Department to ask if the government would be open to a new round of negotiations with stakeholders. Panteli said no. “The Ministry of Finance will not discuss this bill with interested parties. The deputies themselves must assume their duties by voting either for or against.”
Meanwhile, Christian Erotokritou , DIKOMP and chairman of the House Finance Committee, said lawmakers would be ready to call an emergency meeting to discuss the issue despite the recess.
In February last year, the government came up with a bill designed to find a compromise. But opposition within parliament forced him to return to the drawing board and propose an amended bill, which was first presented to MPs at the end of June.
The law currently provides for a lower VAT rate of 5 percent for the first 200 square meters of primary housing without any qualifications. This lower rate applies regardless of the income, property, or economic status of the person or family living in the home. In this case, the total area of the house does not matter.
