09.06.2023
Almost unanimously and under close scrutiny from Brussels, Parliament on Thursday passed a law that would cut the 5% VAT rate on the purchase of a first home in Cyprus.
Discounted VAT – the full rate is 19 percent – will be applied to the first 130 square meters of primary housing – both for individual houses and apartments – and up to a value of 350.000 euros, provided that the total transaction value does not exceed 475.000 euros, and the total building area does not exceed 190 square meters. Another paragraph provides that for persons with disabilities, preferential VAT will be applied to the first 190 square meters of the built-up area.
The law also provides for a transitional period so that the new rules do not apply in cases where a town planning permit has been issued or an application for a town planning permit has been submitted within four months of the entry into force of the law.
At the plenary session, 42 MPs voted in favor , while Greens MP Alexandra Attalides abstained. Despite the unanimity in the vote, politicians exchanged sharp statements about who is responsible for the need to change the law, as well as that Cyprus faces the threat of fines from the European Commission.
In his speech, Stavros Papadouris of the Greens , who ultimately voted yes, noted that the bill was passed “under duress”, referring to pressure from Brussels. He attributed this to the “maximum abuse” of the problem in the past. Papadouris noted that when Parliament decided in 2016 to remove the 275-square-meter threshold for the reduced VAT rate, virtually everyone benefited from what should have been targeted social policies.
He also recalled that when the European Commission asked Cyprus to provide data on the reduced VAT rate in 2021, the tax office informed Brussels about the regime that was previously applied, but did not announce the change. Subsequently, Brussels sent an official letter to Nicosia warning about the violation of the first stage of the procedure. This list of mistakes and poor experience with Brussels left the finance ministry with “little bargaining power”, Papadouris said.
On June 1 this year, the European Commission sent Nicosia a reasoned opinion that the latter had incorrectly applied EU VAT rules to houses bought or built in Cyprus. Cyprus had two months to resolve this issue. Had he not taken action within the next two months, the Commission could have decided to refer the case to the EU 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. It is known that the violation case was first initiated in the summer of 2021.
The VAT Directive 2017/541 allows EU Member States to apply a lower rate for primary residences as part of social policy. But the broad interpretation of Cypriot law clearly goes beyond the social policy objective stated in the directive for such an exception.
Cypriot policy was also criticized when it became known that Golden Passport recipients who invested in real estate in exchange for citizenship were also enjoying a lower VAT rate.
