21.02.2023
MPs on Monday again turned to the issue of reducing VAT on homes, fearing that the EU will start legal proceedings in the case of violation of the rights of the Republic.
“In fact, we are planning to have a plenum at the end of March,” said Edek MP Elias Mirianthus on the House Finance Committee. He added that a few days ago, the European Commission contacted the finance ministry, informing the latter that, given the circumstances surrounding the elections, they would wait until the end of March, when Cyprus passed the law, before proceeding with the infringement case.
Committee chairman Christiane Erotokritou also said that to date the government has not received a reasoned opinion from Brussels. A reasoned opinion is the second stage – a formal request to the national government to comply with EU law. If a country continues to fail to comply within a certain period of time – usually two months – the Commission may decide to take the case to the European Court of Justice. In practice, most cases are resolved before going to trial.
In the worst case scenario, Brussels could fine the country for non-compliance. According to Erotokritou, such fines can be “significant”. It is known that the violation procedure was first launched in the summer of 2021.
Brussels claims that Cyprus does not properly apply VAT rules to houses bought or built here.
The European 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.
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.
In February last year, the government came up with a bill designed to find a balance. But opposition within parliament forced him to propose an amended bill, which was first presented to MPs at the end of June.
Opposition MPs such as Myrianthous Edeka argue that the provisions of the government bill will exclude many young people who want to buy or build their first home. And some deputies want the lower VAT rate to apply to extensions to houses. Other MPs are even suggesting that the government try to reconsider the issue with the European Commission, pointing to the example of Greece, which previously managed to get considerable freedom of action from Brussels.
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 \u200b\u200bthe house does not matter.
Editor’s Note on the VAT Fiasco
In July 2021, the European Commission decided to take action against Cyprus by issuing a letter formally notifying it of its non-compliance with EU VAT rules for housing as follows:
“The European Commission has decided to send a formal notice to Cyprus in connection with non-compliance with EU VAT rules in relation to housing purchased or built in Cyprus.
“Cyprus allows a reduced VAT rate of 5% on the first 200 m2 of housing used by the beneficiary as the main and permanent residence, without any other restrictions. In particular, the reduced rate applies regardless of the income, property and economic status of the beneficiary, the family members who will be living in the dwelling, and the maximum total area of the respective dwelling.
“The VAT Directive allows Member States to apply a reduced VAT rate on housing as part of social policy. However, the wide scope of the Cypriot legislation and the lack of restrictions in it indicate that this measure goes beyond the purpose of social policy. Consequently, the Commission considers that Cyprus has failed to comply with its obligations under the VAT Directive.
“Cyprus now has two months to remedy the deficiencies identified in this legal notice. If Cyprus does not take appropriate steps within the next two months, the Commission may decide to send a reasoned opinion.”
