03.01.2023
The Ministry of Finance is keen to push the difficult issue of finding a compromise on reduced VAT for the first homes after the European Commission’s latest warning against Cyprus to the next government.
The European Commission has given lawmakers until February 15 to approve relevant legislation in line with EU housing incentive directives, but the government has asked for an extension.
The administration of President Nikos Anastasiades will step down at the end of February following elections on 5 and 12 February. The new government will be sworn in on 1 March.
The EU directive requires Member States to introduce legislation on a 5% VAT rate on houses up to 140 square meters. In Cyprus, a reduced VAT rate of 5% applies to houses up to 200 sqm .
The European Union directive to reduce the size of homes eligible for a lower 5% VAT caused an uproar in parliament and real estate stakeholders, as they argued that it would jeopardize the recovery of the construction sector and the economy as a whole.
The deputies were not ready to introduce the law, since Cypriot houses are traditionally larger than indicated in the directive. They are calling on the government to convince Brussels not to give Cyprus any breaks as the directive will affect the ability of young couples to buy their first home.
Legal uncertainty
The Treasury bill has been in the House of Representatives for several months, despite the fact that the Cabinet has already agreed to the directive.
According to the bill, houses with an area of more than 170 square meters. m are subject to the standard VAT rate of 19% for each square meter in excess of the 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 a 110 square meter apartment will be taxed at a rate of 5% VAT.
The government drafted the aforementioned bill as a compromise, as the directive allows states to apply a reduced VAT rate on homes if it serves social policies such as promoting affordable housing.
Cyprus may fall under the sanctions of Brussels, since in the summer of 2021 a violation procedure was launched against the republic. The commission sent a warning letter in early December, giving the island until February 15 to pass the bill.
The EU claims it has evidence to show that the government did not use what is considered a social contingency measure in a targeted manner.
In a warning letter, the European Commission made it clear that third-country nationals wishing to obtain a Cypriot passport under its now defunct citizenship by investment scheme benefited from the measure.
Nicosia is also under scrutiny after a report from the Accounts Chamber found that current legislation was violated by foreign investors seeking a golden passport, costing the state millions in unpaid taxes.
According to the data received, the republic suffered losses in the amount of 200 million euros from foreign investors who became Cypriots. Foreign investors seeking Cypriot citizenship have taken advantage of the loopholes in buying luxury apartments to avoid the 5% VAT reduction.
MPs say the government’s offer does not apply to people looking to buy their first home, while the main opposition party, AKEL, has made its proposals.
Green MP Stavros Papadouris introduced a draft law providing for a VAT reduction of 5% for the first 180 sq. m. m of the house, the area of which does not exceed 220 sq.
AKEL’s proposal provides for a reduction in VAT depending on the value of the residence, as well as exemption from it for mansions and luxury homes.
