Finance Minister Konstantinos Petrides warned MPs that any interference with a European Union directive to reduce the size of homes eligible for a 5% VAT reduction could lead to sanctions.
Responding to MPs’ concerns about the implications for the economy, the finance minister said the directive could result in the EU withdrawing funding provided to Cyprus through the Recovery and Resilience Fund. A recent EU directive obliges member states to introduce legislation on a 5% VAT rate on homes up to 140 square meters. In Cyprus, a reduced VAT rate of 5% applies to houses up to 200 sq.m.
However, stakeholders and MPs warned that the directive endangered the recovery of the construction sector. Builders and real estate stakeholders fear that the new directive will lead to an increase in construction costs, which are already rising due to a 15-20% increase in the cost of building materials.
The treasury secretary, speaking before the House Finance Committee on Monday, made it clear that playing with the directive was out of the question. He said the government is ready to introduce a grace period before the law goes into effect. “This should be done soon and can only be taken by the EU if any decision to delay the implementation of the directive is justified by social policy,” Petrides said. He stressed that no changes to taxable area specifications, as described in the directive, should be relaxed. The directive has already been passed by the cabinet and needs parliamentary approval, but MPs do not seem to want to pass the bill as it stands. Opposition parties have identified weaknesses in the bill, calling it “problematic”, while the ruling party has said it is ready to look for ways to improve the law.
According to the new law, houses with an area of more than 140 square meters. m are subject to the standard VAT rate of 19% for each square meter in excess of the limit. But a house over 200 square meters will not be eligible for the lower 5% VAT rate, but will instead incur 19% for the entire project. This is currently applicable for homes larger than 275 square meters.
In earlier comments, the Chairman of the Cyprus Technical Chamber (ETEK), Konstantinos Constanti, stated that the construction of the 201 sq. m will cost an additional 42,000 euros. “Under the current conditions, the average cost of building such a house will be about 315,000 euros, while VAT payable will be about 15,000 euros. If the directive is passed, couples will be asked to pay €42,000 on top of the original €15,000,” Constanti said. He argued that new housing VAT legislation would force many couples to put their dream of owning their own home on hold.