MPs discussed on Monday how to amend the government’s VAT bill on homes to make it compatible with EU law.
The case concerns a bill submitted just earlier this month to amend the law governing VAT. It provides for the collection of 5% VAT only on the first 140 square meters of the main housing with a maximum area of 200 square meters.
Currently, the law provides for the application of a reduced VAT rate of 5 percent (norm 19 percent) on the first 200 square meters of primary residential buildings without any qualifications. This lower rate applies regardless of the income, property, or economic status of the person or family living in the home. In this case, the total area of \u200b\u200bthe house does not matter.
But last July, the European Commission said it was taking action against Cyprus over its failure to comply with EU rules on VAT on houses.
The Commission sent a warning letter to Cyprus, asking for the government’s position. If the response does not satisfy the Commission, it may issue an informed opinion and even apply to the Luxembourg Court.
It is alleged that Cyprus has not properly applied VAT rules to houses bought or built here.
The EU VAT Directive allows Member States to apply a lower rate for first homes as part of social policy. But a broad interpretation of the position of Cyprus clearly goes beyond the social policy objective stated in the directive for such an exception.It is also understood that recipients of citizenship under the Golden Passport scheme benefited from the lower VAT rate. But legislative amendments proposed by the government since then – in an attempt to soften the EU – have created other complications.
For example, the office of the auditor general said on Monday that testing should be applied in determining eligibility for a lower VAT rate on homes.
“A wealthy citizen buys an apartment of 200 square meters for €2 million, and instead of €260,000 VAT, he will pay only €70,000 for the first 140 square meters. Is this a social policy? For us, definitely not,” said an employee of the Accounts Chamber.
Some MPs suggested that the new bill, once passed, should not apply immediately, but rather be subject to a transitional clause. But a tax department spokesman said the European Commission would likely reject the idea of a transitional phase.
The lawmakers have asked the finance ministry to share its correspondence with the European Commission in order to get a clearer picture of how much leeway the government has.