16.03.2022
An amendment to the VAT legislation regarding the introduction of a reduced rate for the purchase or construction of a first residence has recently been at the center of discussions by the Parliamentary Finance Committee, with as a starting point a possible action by the European Commission (EC) against Cyprus in connection with the current regime. But how did we get here?
Reason
The problem began with amendments to the Cypriot legislation in 2016, which were almost unanimously approved by the Parliament. Prior to that, a reduced VAT rate of 5% was applied to the first 200 sq.m. in cases of first residence not exceeding 275 sq.m. After the amendment, the limit on the square footage of the house was lifted, and most MPs agreed that this would work positively mainly for young couples who want to start a family and for people who live outside the urban fabric.
A stern letter from the European Commissioner for Finance, Paolo Gentiloni, sent in mid-2021 addressed the issue, stating that one of the most important issues to be corrected in VAT legislation was the absence of a property ceiling. At this point, the European Commission (EC) reasonably raised the question of whether this meant implementing a social policy for 300 sq.m. if not older. As announced, there was a previous correspondence between Cyprus and the EU in which the position of the Republic of Cyprus was not conducive to establishing confidence for a dialogue on this issue.
What is the EU asking for?
The entry of Cyprus into the European Union, in addition to the benefits, entails obligations.Compliance with European law and transposition of European directives are among them. Both the treatment of Cyprus, which was perceived as an attempt to mislead European institutions, and the current legislation do not meet European requirements.
Therefore, Cyprus should amend the law in such a way as to allay the fears of the Europeans. But how will it be done?
Considering that the European Commission adopted the legislation of 2011 and its regulation on the establishment of a ceiling of 275 sq.m. the solution is obvious. This was also evident from the positions of most professional organizations and people in the market, who documented to the Cypriot MPs the implications for all buyers and the distortions that would be caused in the market by the possibility of a radical change in the VAT regime, when in fact Europeans are not required to do so.
What needs to be done?
During the discussion of the issue in the Finance Committee, proposals were made, for example, on the introduction of the maximum value of a square meter, as a parameter that will determine the introduction of reduced or exempt VAT, in the context of social policy. Such proposals may sound good for part of the world, but they can easily hurt the economy.
This, after all, was proved when each of the defenders of this proposal, never put forward by the Europeans, cited their sum as the ideal limit. In the context of the exchange of opinions, the average sale price was just over 1,000 euros per square meter, which is completely untrue.Has anyone really bought a new house for about 1000 euros per square meter? Other institutions even quote a cost of about 2,500 euros. Let me also dispute this amount, which is well known to those who have recently bought a home. But what is mainly reflected in the discrepancy between the two figures is the lack of an objective basis for the calculations. Is it possible to pass a law with approximate calculations?
The unpredictability of such claims illustrates the problem itself: there is no reliable data on sales prices, let alone a definition of what it means to be an “average home” under which price caps can be set.
If the goal of VAT reduction is to be pursued as a social policy to improve the living conditions of young couples, it must be done in the context of real square meters of building area and a documented study based on the current cost of construction and sales. Of course, a robust model must also be created to calculate adjustments to the original value proposition at regular intervals, as prices change based on market conditions, inflation, location, and other factors. Such repricing will be difficult to carry out on a regular basis in the future.
As the VAT reduction policy seems to be formulated, a comparative disadvantage is created in the development of certain urban areas compared to new areas on the periphery of the Development Plans, in contrast to the vision, strategy and policies defined in the Development Plans. As a result, high taxes will be paid for development that is desirable/sustainable in the central areas, and low taxes for the development of former agricultural areas that have arisen from unjustified urban expansion/sprawl. This spread amplifies the budget deficit as it disproportionately burdens urban development with socio-economic impacts (environmental, urban, social, political issues) and costs Cyprus taxpayers.
The problem is exacerbated not only by differences between urban and non-urban areas, but also by differences in prices between cities. Inclusion of such a provision would in effect deprive residents of some cities of their property rights.
The development of the issue so far shows that the Ministry of Finance has caught the pulse of the market. What remains to be proven is the result of the finance minister’s efforts in Europe, and whether DISY, AKEL, DIKO, ELAM, EDEK, DIPA and environmentalists will keep their distance from the unrealistic approaches that are heard inside and outside the parliament.
* Director of FOX Smart Estate Agency and President of the Cyprus Private Property Association
