Taxpayers may be asked to pay back VAT to Golden Passport investors and other home buyers who paid the lower 5% VAT rate but were required to pay the full 19% VAT on the purchase of their property.
Cyprus’ decision to violate EU Directive 2006/112/EC by applying a reduced VAT rate of 5% to the first 200 square meters of all dwellings purchased as primary and permanent residences has sparked controversy with the European Union.
The Directive lists the supply of goods and services to which Member States may apply reduced rates, one of which is the “provision, construction, renovation and refurbishment of housing within the framework of social policy”.
But in Cyprus, the reduced rate 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 sent a formal notice to Cyprus that it was not properly implementing EU VAT rules for housing, giving Cyprus two months to take “appropriate steps”.
The risks and consequences of breaching EU Directive 2006/112/EC by Cyprus became known in 2020.In October of the same year, the Auditor General warned that Cyprus taxpayers would be required to cover the VAT saved by investors who bought passports through the disgraced Golden Passport by purchasing expensive houses, showing that a law passed by Parliament in 2015 was implemented in such a way that that investors would also pay VAT at a reduced rate. (In October 2021, the European Commission sent a letter to Cyprus formally notifying its Golden Passport scheme; proceedings are ongoing)
Tax inspector in 2020, Yiannis Tsagaris, said that if the European directive on VAT on home purchases is applied incorrectly, Cyprus will be asked to pay the lost income from its own funds to cover the difference between the reduced and retained normal VAT rate by investors.
According to information available in 2020, investors paid 125 million euros in VAT, while at the standard rate of 19% they would have paid four times as much, leaving a deficit of 375 million euros for regular taxpayers.