Cyprus allows a reduced VAT rate of 5% on the first 200 square meters of housing used by the beneficiary as the main and permanent residence, without any other restrictions. This reduced rate of 5% applies regardless of the income, property and economic status of the beneficiary, the family members who will be living in the dwelling and the maximum total area of the respective dwelling.
In July 2021, the European Commission decided to send a letter to Cyprus formally notifying that it is not properly implementing EU VAT rules, which allow EU member states to apply a reduced VAT rate on housing as part of social policy. However, the wide scope of Cypriot legislation and the absence of restrictions indicate that the measure goes beyond the purpose of social policy.
Following official notice earlier this month, a bill was submitted to parliament to reduce the 5% VAT rate on the first 140 square meters of housing. As explained in the memorandum to the bill, this change is in line with social policy and will therefore be in line with EU Directive 2006/112/EC of 28 November 2006 on a common value added tax system.
In 2020, the Auditor General indicated that the reduced VAT rate is outside the scope of the Cypriot social policy. He also pointed out that investors who bought properties under the (now defunct) Golden Passport Scheme would also pay VAT at a reduced rate, and warned of the possibility that taxpayers would be asked to cover the VAT saved by those who bought properties under scheme “Golden Passport”. (Based on information available at the time, investors paid €125 million in VAT, while at the standard rate of 19% they would have paid four times as much.)
However, the Association of Architects of Cyprus called on the government to “revise the bill”. It argues that along with the increase in the cost of building materials, the reduction in VAT will create difficulties in starting new projects, delays in the completion of construction projects and pressure to stop work.