Our View: EC completely right to squeeze Cyprus over VAT on homes

The European Commission is turning the screw on the Cyprus Republic over its failure to amend the law governing reduced VAT for the purchase of first homes. Brussels’ patience is wearing thin and it has given Cyprus until February 15 to amend the law, after which it has said it would initiate infringement proceedings. This was communicated to the legislature, which has refused to amend the bill, by the finance ministry last month, but it is in recess because of the presidential elections and will not reconvene before the deadline.

Even if it did reconvene, for an extraordinary session, it is unlikely the government bill would secure the necessary votes to go through as the majority of the opposition parties are against it. The imminent presidential elections would have strengthened the resolve of opposition parties, which are supported by developers and construction companies. The latter claim that reducing the number of properties that would be eligible for a VAT discount would negatively affect demand in the housing market.

They calculatingly ignore the main reason for lower VAT on the purchase of first homes, which is justified as a form of social policy – making housing more affordable to low income groups. Brussels did not sanction the reduction back in 2017 to boost the housing market. The law has been relentlessly abused, with even foreigners buying expensive homes as part of the citizenship by investment paying the lower VAT rate (5 per cent instead of 19 per cent). It was a complete mockery of the idea of social policy as even the wealthiest individuals, buying ultra-expensive first homes paid the lower rate.

After securing the Commission’s approval, the government submitted a bill which would allow 5 per cent VAT on the first 170 square metres of a house with a total area of 220 square metres not valued above €350,000 and on the first 90 of an apartment with a total area of 110 and not valued above €200,000. Opposition parties, backed by the construction industry want the lower VAT to apply to all properties valued up to €500,000 which is plainly absurd. Someone who can afford a property valued at half a million euro should not benefit from a ‘social measure’ discount. The Commission is absolutely right to demand the amendment is put in place by next month.

The finance ministry, quite rightly, has said it would not enter new consultations with political parties as the amendment has Brussels’ approval and cannot go back with new suggestions, which, in any case are unreasonable. Sadly, if the amendment is not passed, it is the taxpayer that will be burdened with the hefty fine from the European Court. Once again, the hapless Cypriot taxpayer will be funding the populism of irresponsible parties and indirectly subsidising construction firms and developers.