05.09.2022
The government has reintroduced a bill to reduce VAT on first homes, seeking to find a middle ground between MPs’ concerns and the European Commission, which has filed legal proceedings against Cyprus over the discount.
A European Union directive to reduce the size of homes eligible for a lower 5% VAT caused an uproar from the House of Representatives and real estate stakeholders as they argued it would jeopardize the recovery of the construction sector and the economy.
Cyprus also came under the microscope after a report from the island’s Accounts Office claimed that current legislation had been violated by foreign investors eyeing the golden passport, costing the state millions of euros in unpaid taxes.
According to the data received, the republic suffered losses in the amount of 200 million euros from foreign investors who naturalized as Cypriots. According to state auditors, foreign investors eyeing the Cypriot passport used the current legislation to purchase luxury apartments in the towers, getting by with a low VAT rate of 5%.
In a warning letter, the European Commission emphasizes that third-country nationals also benefit from what is considered a social contingency measure. Now the House of Representatives is poised to reopen the file, examining the proposal, which has yet to be made public, but in reports the government is splitting the difference.
Under a recent EU directive, member states are required to introduce 5% VAT legislation for homes up to 140 square meters.
In Cyprus, a reduced VAT rate of 5% applies to houses up to 200 sq.m. The cabinet has already agreed on a directive and needs parliamentary approval.
According to reports, houses with an area of more than 170 square meters. m under the proposed bill will be subject to the standard VAT rate of 19% for each square meter in excess of the established limit. But a house larger than 220 square meters will not be eligible for the lower VAT rate of 5%, but will instead incur 19% for the entire project. This is currently applicable for homes larger than 275 square meters. For apartments, only the first 90 square meters of an apartment of no more than 110 square meters will be taxed at a rate of 5% VAT.
The Accounts Chamber sent a note to Parliament with its position on the revised bill, expressing concern about whether it complies with the republic’s European obligations.
The auditors expressed doubt that the introduction of a ceiling on the built-up area and the total value of real estate without reference to the income of buyers and other social criteria would satisfy the EU. In addition, the Accounts Chamber emphasized that under no circumstances should the VAT reduction measure be applied to property for investment purposes.
The Cyprus Technical Chamber (ETEK), advising the government, has proposed applying reduced VAT to houses valued up to 450,000 euros and apartments valued up to 275,000 euros.
