Discounted VAT on first homes discussed again in parliament

Parliamentarians on Monday again discussed a government bill on discounted VAT on first homes, with some expressing the hope the legislation would – finally – go to the House plenum for a vote soon.

The majority of MPs on the House finance committee – discussing the matter behind closed doors – reportedly disagree with the re-revised government bill and have reserved the right to table amendments of their own.

This comes after several months of haggling over the bill, which the government is anxious to have passed – what with Brussels breathing down its neck.

As the bill stands now – following a series of tweaks – the reduced VAT rate of 5 per cent on first homes would apply for the first 170 square metres of the buildable area, and for homes up to 220 square metres total and a transaction value up to €385,000.

For apartments, the lower VAT would apply to the first 90 square metres – apartments up to 110 square metres total and a value of up to €220,000.

Opposition Disy have drafted their own legislative proposal, geared at the value of the property rather than the square metres. Under their proposal, the first €350,000 of a property’s value would be taxed with 5 per cent VAT, with the full 19 per cent rate kicking in for the €350,000 to €500,000 band.

For properties above €500,000 the 19 per cent tax rate would apply from the first euro.

Disy says its proposal is more straightforward, applicable and ‘socially just’.

For the committee’s next session, MPs have summoned the Tax Commissioner, the head of the Scientific and Technical Chamber, and the head of the Department of Town Planning and Housing.

Acting committee chair Chrysis Pantelides (Diko) said they were in the “final stages” of the discussion.

He hoped the bill would go to the plenum “as soon as possible.”

This is happening against the backdrop of threatened sanctions from the European Commission. Brussels has initiated infringement proceedings against Cyprus, but it has yet to issue a reasoned opinion.

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 – had likewise benefited from the lower VAT rate.

The current 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.