28.12.2022
The European Commission has sent an ultimatum to Cyprus in connection with the island’s violation of the European directive on the reduction of VAT when buying or building a main residence.
This ultimatum requires Cyprus to amend its VAT legislation within two months. If Parliament does not amend the legal framework by February 15, Cyprus will face a significant risk that the case will be referred to the EU Court of Justice. This increases the likelihood of a fine being imposed on Cyprus. The situation comes nineteen months after the European Commission decided to send a letter to Cyprus formally stating that it had not properly applied EU VAT rules for properties purchased or built in Cyprus.
The VAT Directive and its abuse
While the European VAT Directive allows EU member states to apply a reduced VAT rate on housing as part of social policy, the broad scope of Cypriot legislation and its lack of restrictions indicate that this measure goes far beyond the purpose of social policy.
In Cyprus, the first 200 sq.m. subject to VAT at a reduced rate of 5%. dwellings purchased or built as a primary residence. In addition, 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.
But even the current law is being abused. From October to December 2022, the Department conducted 2,171 field audits of taxpayers who took advantage of the reduced VAT rate. 1039 taxpayers were found in the houses; Of these, 391 admitted to breaking the law because the housing in question was not their primary residence. Some of them turned to the tax department, where they paid an additional tax of 14%.
It’s mind-boggling how many more people have abused the VAT system since the reduced 5% rate was introduced more than a decade ago.
A new bill is under consideration in Parliament
The draft law, which is being considered by the Parliament, provides for the collection of 5% VAT on the first 170 sq.m. houses with a total area of no more than 220 sq.m. and a total value of not more than 350,000 euros. In addition, for the first 90 sq.m. A reduced VAT of 5% will be imposed. apartments with a total area of not more than 110 sq.m. and a total value of not more than 200,000 euros. However, this new bill is facing significant opposition from opposition parties and the construction industry and will not pass easily through Parliament.
Since the presidential election will take place on February 5, the government will probably want to buy time from the European Commission. The question then becomes, what will the opposition parties do given the likely reaction from the construction industry?
Regular readers may recall that the late Demetris Christofias borrowed money from Russia rather than turning to the EU for bailouts, a result of the worst economic management of public sector finances and a near-total lack of regulation and control over the banking system. Christofias gave his successor, Nikos Anastasiades , the opportunity to travel to the EU for help. The terms of the bailout included a reduction in bank deposits and the closure of the Laiki Bank , all of which were blamed on President Anastasiadis , not his predecessor.
If the political parties continue to play their games, it is almost certain that Cyprus will be fined millions, which the taxpayers will inevitably have to pay.
