28.03.2023
The application of urbanly correct and socio-economically fair criteria when levying VAT on new residential units used as the main and permanent residence recommends the Pancyprian Association of Land and Construction Entrepreneurs, emphasizing the importance that changes in legislation meet the real needs of the inhabitants of Cyprus .
The three axes of the new policy proposed by the Association in a memorandum presented last September before the Parliamentary Finance Committee focus on non-separation by type of property, limiting only the sale price, and proportionality, that is, proportional application when the sale price exceeds the limit.
Among other things, the Association believes that the current cost cap should be set at 500,000 euros, emphasizing that the principle of proportionality addresses important issues that may arise.
At the same time, the bill on VAT on the first or main residence, which is before Parliament, must be adopted immediately, in order to avoid any consequences for the state, the Minister of Finance stressed, warning of possible sanctions and measures, since the deadline granted to Cyprus by the Commission expired in February .
Regarding the reduced VAT rate of 5% on the first residence, Makis Keravnos clarified that while he understands the concerns, he believes that tax measures like the one that will be applied over time should not be based on temporary circumstances that led to higher prices at that level, recalling that inflation has come down.
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Without division into apartments and mansions
Developers characterize as incorrect and, ultimately, problematic any division of apartments and private houses with the logic of setting limits on square meters of premises by type. They explain this by saying that such a division can exacerbate one of the most fundamental problems of urban planning, the problem of urban sprawl, that is, geographical spread beyond the existing fabrics of cities.
It should be expected that preference will be given to single-family homes if the purchase of a single-family home has more advantages in providing a reduced VAT rate on the first home, since virtually all “single-family homes” can be purchased at lower prices when they are located far from urban centers.
The position of the Association is that in this case, the geographical dispersion and abandonment of cities will increase, but at the same time, new needs will arise, such as the constant creation of new residential areas on the site of former agricultural zones, the spread of the road network and urban infrastructure with negative the consequences they entail for the environment as well as for the quality of life.
At the same time, such development is expected to burden the state budget due to ongoing investment needs in infrastructure, cleaning, policing, education, healthcare and other services that these new areas will require.
Restriction on sale price only
According to the Pancyprian Association of Entrepreneurs in Land Management and Construction, just as apartments and houses should not be separated, there should be no restrictions on square meters or the cost per square meter.
In their memorandum, the association explains that taxing VAT is about amounts, just like providing an “incentive” through a reduced VAT rate, and therefore the only reasonable limit that should be set is about the monetary value of buying a house.
Based on the offer presented, with reference only to the price, each buyer will be able to freely choose his first home, according to his needs and financial possibilities, taking advantage of the right to a reduced VAT rate, without restrictions either on the type of property or in the area he chooses .
In addition, the developers emphasize that the only parameter that needs to be determined and revised from time to time in accordance with real market conditions is the marginal cost.
Even without providing for a mechanism for adjusting the limit initially, the legislation could refer to the value limit on the condition that it would be determined by a decision of the Council of Ministers or otherwise.
The principle of proportionality
Developers are in favor of applying the principle of proportionality in relation to the imposition of VAT on the first residence.
Proportionality refers to taxation at a reduced VAT rate for a price that will be equal to the amount set by law, and if there is an additional price in excess of this amount, it should be taxed at the normal rate.
The practice, land surveying entrepreneurs say, is a very simple application for calculating VAT due, allowing each buyer of a newly built first home to choose what they really want and can afford.
Tax evasion excluded
The benefits of this offer include, among other things, equal rights to use the reduced VAT measure on the first home, encouragement for all potential buyers, and the elimination of any tax evasion phenomena, since there is no reason to hide the real value of the purchase.
Buyer of real estate worth 550,000 euros, with proportional VAT of 500,000 euros x 5% + 50,000 euros x 19%, i.e. 34,500 euros, and without proportionality, VAT will be 550,000 euros x 19%, i.e. 104,500 euros.
Basically, for a house that costs only €50,000 more, the buyer will pay an additional VAT of €70,000.
In this case, the buyer will either be forced to buy something cheaper than he wanted, or try to present a deal at a price lower than the real one, that is, turn to the shadow economy and tax evasion.
