03.07.2022
MPs have not decided whether to pass a European Union directive reducing the size of homes eligible for a 5% VAT reduction or face heavy financial penalties, while the construction industry wants the authorities to ignore it.
Arguing that the VAT change would jeopardize the economic recovery, a group of small developers and service providers from Paphos urged MPs not to incorporate the directive into national law.
Even though it is an EU directive, they argue that Cyprus will not be the only EU member not to apply this rule as Bulgaria, Poland, Malta and Germany have different VAT rules ranging from zero to 5% for houses.
Under the directive, Member States are required to introduce legislation on a 5% VAT rate for houses up to 140 square metres.
The Ministry of Finance has submitted a bill that slightly increases the limit.
In Cyprus, a reduced VAT rate of 5% applies to houses up to 200 sq.m.
The cabinet has already agreed on a directive and needs parliamentary approval.
According to the representative of the Ministry of Finance George Panteli, houses with an area of more than 170 square meters. m under the new law are subject to the standard VAT rate of 19% for each square meter in excess of the established 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. With regard to apartments, only the first 90 square meters of an apartment with an area of no more than 110 square meters will be taxed at a rate of 5% VAT. The proposed law provides for a short grace period ending in November.
Leondios Hadjivasili of Hadjivasili Bros Developers, who represents a group calling on Parliament to reject the EU directive, told the Financial Mirror that stakeholders believe Brussels is leading Cyprus down a bumpy road.
“We need to clarify this issue. The proposed housing VAT law would essentially spell the end of Cyprus’ construction industry as it begins to recover from the effects of the golden passport scheme, Hadjivasily said. He acknowledged that the problem arose from the misuse of the previous housing law by investors who took advantage of it by buying luxury properties but paying small amounts of taxes.
Malta, Portugal, Bulgaria, Germany and Greece are said to apply zero VAT on new home purchases.
“Now the industry depends on local buyers, mostly young couples looking to buy a house. With the new law, the dreams of young couples are crumbling along with the hopes of reviving the industry.”
Why Cyprus?
Hadjivasily argued that MPs should look at what applies elsewhere in the EU and go back to the EU demanding answers about why other states got away with a similar or no VAT on housing.
“The deputies should make a strong reference and comparison with other European countries, which mostly have a zero VAT rate,” Hadjivasily said.
According to him, the parties concerned do not understand the purpose of lowering prices when introducing VAT. For houses, the cut-off price is set at 350,000 euros, which means that any housing sold at a higher price cannot qualify for a VAT reduction.
“Worse, the cut-off price for apartments is 200,000 euros. With construction costs up nearly 30% over the past couple of years, and with the war in Ukraine pushing costs even higher, what developer would sell apartments for less than 200,000 euros?”
The group proposes that flats less than 110 square meters purchased as primary residences should not be subject to VAT.
For apartments over 110 square meters and up to 130 square meters, the first 110 must be taxed at a rate of 5% and the rest at 19%.
For houses, as suggested by the group, 5% VAT should be imposed on the first 200 square meters of houses up to 230 square meters. Homes over 230 square meters should be taxed at the full rate of 19%.
“It’s still time. This comes against the backdrop of a crisis caused by the war, the coronavirus pandemic and the use of Cypriots as guinea pigs in 2013, when the authorities, along with EU creditors, forced the Cypriots to bail out the banking system. For this reason alone, an exception should be made for the Cypriots,” Hajivasili said.
In earlier comments, the chairman of the Cyprus Technical Chamber (ETEK), Konstantinos Constanti, said the couple, who are building the 201 sq. m, will pay an additional 42,000 euros.
“Today, the average cost of building such a house will be about 315,000 euros, and VAT – 15,000 euros. If the directive is passed, couples will be asked to pay €42,000 on top of the original €15,000,” Constanti said. He argued that a change in housing VAT legislation would cause many couples to put their dream of owning their own home on hold.
“Young couples have limited choices as rents skyrocket. You can rent a decent apartment in Limassol for a family from 1000 to 1500 euros, and in Nicosia the rent starts from 700 euros.”
The Science and Technology Chamber of Cyprus (ETEK) is the state’s official technical advisor and an organization of Cypriot engineers.
Parliamentary sources said the EU could reject the bill presented by the finance ministry. They said MPs are divided on what action they should take and opposition parties are very wary of their next steps on the issue.
“The EU has even announced that it will file a lawsuit against us in the EU Court. They are in our case, because the state has reduced VAT even on real estate bought by wealthy citizens or foreign investors who bought luxury houses and apartments,” the source said.
If Cyprus fails to implement the EU real estate VAT directive, it may have to pay millions of euros in fines.
“This further complicates the situation, because not voting can increase the state budget, which parliament does not have the power to do.”
