Faced with opposition from MPs and construction industry stakeholders, the government again agreed on Monday to revise parts of a bill that would reduce VAT on first homes.
The case concerns new legislation drafted by the government that aims to find a middle ground between local concerns and the European Commission, which has taken legal action against Cyprus over a VAT rebate.
In February, the government introduced a bill to strike that balance. But opposition within parliament forced him to return to the drawing board and come up with an amended bill, which was shown to MPs on Monday.
This was still not enough for most parliamentarians.
Currently, the law provides for the application of a lower VAT rate of 5 percent (norm 19 percent) for the first 200 square meters of primary housing without any reservations. 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.
VAT Directive 2017/541 allows Member States to apply a lower rate for first homes as part of social policy. But a broad interpretation of the Cypriot provision 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.
The latest amended bill now distinguishes between houses and apartments. VAT exemptions are available for houses worth up to 350,000 euros and up to 220 square meters. And the first 170 square meters will be subject to a lower VAT rate, a compromise between what is currently applied and the position of the European Commission.
Eligible apartments will have a value of up to 200,000 euros and an area of up to 110 square meters, with the VAT discount applied to the first 90 square meters.
In addition, the draft law contains a transitional clause – in order to take advantage of the VAT exemption, an individual must apply to the VAT Service before November 30 of the current year, having previously received a building permit.
The Permanent Secretary of the Ministry of Finance argued that the distinction between houses and apartments gives Cyprus more leeway with respect to the European Commission and increases the area eligible for the VAT rebate.
But the Scientific and Technical Chamber (STP) immediately foresaw problems. Its head, Konstantinos Constanti, said it would be impossible for a young couple who want to build their first home to get a building permit by the end of November. Instead, he proposed changing the requirement to obtain a town planning permit by that cut-off date.
Constanti also cited rising material prices , which led to a 20 percent increase in construction costs.
The representative of the association of developers agreed, noting that with the current inflation, no one will find a house or apartment with the square meters and cost specified in the bill, which makes the legislation a crude squib.
The Ministry of Finance agreed to postpone the adoption of the bill for the time being and continue consultations with ETEK.