Cyprus Mail

Searching for compromise over VAT on properties

great construction pic

Lawmakers and industry stakeholders remained unsatisfied on Monday with a revised government bill aiming to tweak the granting of reduced VAT on the purchase of primary residences, even as the European Commission continued breathing down Cyprus’ neck over the matter.

The issue relates to new legislation drafted by the government that seeks the sweet spot between local concerns and the European Commission, which has initiated infringement proceedings against Cyprus over the VAT discount.

In February the government came up with a bill intending to find that balance. But opposition inside parliament forced it to go back to the drawing board and come up with an amended bill, first shown to MPs in late June.

Currently the law provides for the application of a lower VAT rate of 5 per cent (the norm is 19 per cent) for the first 200 square metres of primary residences, 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 broad interpretation of the Cyprus provision apparently exceeds the social policy aim stated in the directive, for such an exemption.

The policy was also flagged when it emerged that recipients of the ‘golden passports’ scheme – who invested in property in exchange for citizenship – likewise benefited from the lower VAT rate.

Now, the latest amended bill distinguishes between houses and apartments. Homes eligible for the VAT discount are those with a value of up to €350,000 and with an area up to 220 square metres. And the lower VAT rate will apply to the first 170 square metres – a compromise between what currently applies and the European Commission’s position.

Apartments eligible will be those with a value up to €200,000 and an area up to 110 square metres, with the VAT discount applying to the first 90 square metres.

In addition, the bill as it stands has a transition clause – to benefit from the VAT discount, an individual must apply to the VAT Service by November 30 of this year, having first obtained a building permit.

The finance ministry argues that the distinction between homes and apartments gives Cyprus more leeway vis a vis the European Commission and increases the area eligible for the VAT discount.

But at the House finance ministry on Monday, representatives of developers and building contractors associations, as well as the Scientific and Technical Chamber, called the legislation overly complicated and warned it would create distortions in the market.

The Cyprus Chamber of Commerce and Industry, and the Industrialists and Employers Federation, also suggested raising the value of eligible properties – both homes and apartments – to €500,000.

They pointed out that with the current inflation and increasing cost of building materials, no one would find a home or apartment with the square metres and value cited in the bill – making the legislation a damp squib.

Committee chair Christiana Erotokritou censured the government for bungling the legislation and for not properly liaising with the European Commission, leading to more confusion.

The goal, she said, should be to encourage and support young couples desiring to build their first home, “with a transparent and fair law…rather than letting it help super-rich businessmen and ‘phantom buyers’ of luxury properties.”


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