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EU gives Cyprus until end of March for VAT change on homes

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Lawmakers on Monday revisited the issue of reduced VAT on homes, with some trying to instill a sense of urgency on the matter as the European Commission continues breathing down Cyprus’ neck having launched infringement proceedings against the Republic.

The House finance committee discussed the issue in an extraordinary session, given that technically parliament is still in recess due to the intervening presidential elections. Complicating matters further, next Monday is Green Monday, a holiday, so the committee will not be meeting formally for a fortnight. In addition, MPs will have to discuss the matter with the executive – but the new government has yet to take office. This will happen next week once President-elect Nikos Christodoulides is sworn in.

Once the new finance minister takes office, he or she will need to be briefed. Also, whenever MPs do agree a final text for the bill on reduced VAT, under parliamentary regulations two weeks must pass before the bill goes to the House plenum.

“Realistically, we’re looking at a plenum date around late March,” Elias Myrianthous, an Edek MP on the House finance committee, told the Cyprus Mail.

He added that a few days ago the European Commission communicated with the finance ministry, letting the latter know that – given the circumstances with the elections – they would wait until the end of March for Cyprus to enact legislation before they advance infringement proceedings any further.

Committee chair Christiana Erotokritou (Diko) likewise said that, to date, the government has not received a reasoned opinion from Brussels. A reasoned opinion is the second stage – a formal request to a national government to comply with EU law. If a country still doesn’t comply within a specified timeframe – usually two months – the Commission may decide to refer the matter to the European Court of Justice. In practice, most cases are settled before being referred to the court.

In the worst-case scenario, Brussels can impose a fine on a country for non-compliance. Such fines may be “significant”, Erotokritou said.

It’s understood that the infringement procedure was first launched in the summer of 2021.

Brussels contends that Cyprus does 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.

Meantime the government had come up with a ‘sweet spot’ – a bill amending the levying of the reduced 5 per cent (as opposed to the full 19 per cent) VAT rate for homes.

Under the government proposal, the reduced VAT rate would apply to the first 170 square metres of a home of a total surface area of 220 square metres and with a property value up to €350,000. For apartments, the lower rate would apply to the first 90 square metres of a total surface area of 110 square metres and with a property value up to €200,000. In addition, a special clause stipulates that the total surface area criterion does not apply to persons with a disability.

However, the idea has met with stiff resistance from several organisations – the Employers and Industrialists Federation, the Chamber of Commerce, the Cyprus Land & Property Owners Organisation and the Property Valuers Association.

They have instead suggested raising the value of eligible properties – both homes and apartments – to €500,000. And they point 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.

In February last year the government came up with a bill intending to find a 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.

Opposition legislators like Edek’s Myrianthous argue the government bill’s provisions will exclude many young people looking to buy or build their first home. And some MPs want the lower VAT rate to also apply to extensions to homes. Throwing a spanner in the works, other lawmakers even suggest that the government try to renegotiate the issue with the European Commission, pointing to the example of Greece who earlier managed to get significant leeway from Brussels.

Currently, the law provides for the application of a lower VAT rate of 5 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.

 

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