25.12.2023
There is a proposal to completely suspend VAT on houses in Cyprus, similar to the 0% VAT rate in Greece on new houses from 1 January 2020 until the end of 2024. The potential benefits of applying such a policy to homes in Cyprus are enormous.
It is expected that the market will experience a sharp increase in supply and demand for newly built real estate, which will lead to a faster stabilization of prices. This phenomenon will also make older properties more affordable, promoting fair competition between new and resale options.
An increase in the supply of rental properties will naturally adjust rental prices, making housing more affordable in the medium term.
Moreover, the reform will force those currently benefiting from the reduced VAT rate to report rental income, which will help create a fair and transparent tax system.
Smarter VAT policy
The current VAT policy for new homes in Cyprus, capped at 130 sqm and priced up to €350,000, fails to combat, among other things, low birth rates.
A more effective solution, based on successful practices in other European countries, would be to remove or improve property size restrictions.
This strategic shift could significantly increase the fertility rate in Cyprus by creating larger families.
More new homes also mean a greener future with less energy consumption and eco-friendly living spaces, in line with global sustainability goals.
Redefining “new”
Eliminating the outdated classification of resale properties is critical to the success of this reform.
Cyprus currently classifies “old” properties as properties that are more than 10 years old. This differs significantly from other EU countries such as France, where old property (exempt from VAT) is considered to be any property built more than 5 years ago. Some countries even set thresholds of 2–3 years.
Revising the definition of the statute of limitations for real estate in Cyprus from 10 years to 4 or 3 years offers a number of advantages.
Owners who have bought or will buy a home with reduced VAT will be able to sell or rent out their property well before the 10 year period expires without facing onerous VAT penalties.
Real estate companies will also be able to sell shares on more favorable terms. This change will provide all buyers with a wider choice of properties and higher quality homes to choose from.
Win-win offer
While critics argue that government revenue will suffer from the VAT suspension, countervailing measures are being proposed.
Firstly, increasing the transfer fee for resale property purchases by removing the 50% discount may partly offset the temporary VAT loss as most sales are subject to a transfer fee.
However, suspending VAT on houses or introducing ultra-reduced VAT not only strengthens the purchasing power of citizens, but also reduces the need for the government to spend money on subsidies for housing, rent or other items such as gasoline and electricity.
When consumers are exempt from VAT on their homes, the money they save essentially replaces traditional subsidies (directly and much more effectively). This not only makes homes more affordable for households, but also reduces the need for government spending on subsidies.
Simply put, by adjusting VAT on houses as proposed, the government can effectively support citizens to purchase houses without negatively impacting public finances. This approach redirects savings to improve the economic well-being of citizens, eliminating the need for significant government spending that was previously earmarked for subsidies.
Moreover, this approach increases consumption, benefiting businesses, and these businesses, in turn, contribute taxes that further support government finances. It’s a win-win that improves both individual well-being and overall economic stability.
