The European Commission on Thursday called on Cyprus to comply with the EU VAT rules for dwellings.

The Commission decided to send a reasoned opinion to Cyprus for its failure to properly apply EU VAT rules for properties purchased or built in Cyprus in its regular package of infringement decisions.

Cyprus allows a reduced rate of VAT of 5 per cent on the first 200m2 of dwellings used as the principal and permanent residence by the beneficiary, without any other limitations, the commission said.

The VAT Directive does allow Member States to apply a reduced rate of VAT on housing as part of a social policy. However, the wide scope of the Cypriot legislation and the lack of limitations therein indicate that the measure goes beyond that objective. In particular, the reduced rate is applied regardless of the income, assets and economic situation of the beneficiary, the members of the family that will reside in the dwelling, and the maximum total area of the dwellings concerned.

Meanwhile, legislation regulating which homes would be eligible for reduced VAT is expected to go to the House plenum for a vote on June 8.

The bill is understood to provide for the discounted 5 per cent VAT applied on all first homes of up to 150 square metres and a value up to €350,000.

For properties between 151 and 200 square metres, and whose value does not exceed €475,000, the lower VAT would apply for the first 150 square metres, with the full 19 per cent rate kicking in for the rest of the surface area.

For properties exceeding these parameters, the normal 19 per cent VAT would apply from the first square metre.

Thursday’s reasoned opinion follows up on the letter of formal notice sent by the Commission to Cyprus in July 2021. The policy had been 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.

Cyprus now has two months to address the shortcomings identified in this reasoned opinion. If Cyprus does not act within the next two months, the Commission may decide to refer the case to the Court of Justice of the European Union.