MPs work on making VAT on houses EU compatible

Lawmakers on Monday discussed how to tweak a government bill on VAT on houses so as to make it compatible with EU law.

The matter relates to a bill tabled only earlier this month amending the law governing VAT. It provides for levying 5 per cent VAT only on the first 140 square metres of a primary residence with a maximum area of 200 square metres.

Currently the law provides for the application of a lower rate of VAT of 5 per cent (the norm is 19 per cent) for the first 200 square meters of primary residences homes without any qualifications. This lower rate is applied irrespective of the income, property or economic conditions of the person or his family residing in the house. Moreover, the total surface area of the home bears no relevance.

But in July last year the European Commission said it was taking measures against Cyprus because of its failure to comply with the EU rules for VAT, in relation to homes.

The Commission sent a letter of warning to Cyprus, asking for the government’s position. If the reply is not to the Commission’s satisfaction, it may proceed with a reasoned opinion and even take action before the Luxembourg court.

The allegation is that Cyprus did not properly apply VAT rules for homes purchased or built here.

VAT directive 2017/541 allows member states to apply a lower rate for first homes as part of social policy. But the wide interpretation of the Cyprus provision apparently exceeds the social policy aim stated in the directive, for such an exemption. It’s also understood that citizenship recipients of the ‘golden passports’ scheme benefited from the lower VAT rate.

But the tweaks to the legislation since proposed by the government – in a bid to mollify the EU – has created other complications.

For example, the auditor-general’s office said Monday that means testing should apply when determining eligibility for the lower VAT rate on homes.

“A wealthy citizen buys a 200 square metre apartment for €2 million, and for the first 140 square metres instead of paying €260,000 in VAT, they will pay only €70,000. Is this social policy? For us certainly not,” said an official from the Audit Office.

Some MPs suggested that the new bill, once enacted, should not apply immediately but rather be subject to a transition clause.

But an official with the Tax Department said the European Commission would most likely reject the idea of a transitional phase.

Lawmakers asked the finance ministry to share its correspondence with the European Commission so as to get a clearer picture of what leeway the government has.