Cyprus Parliament approves new 5% VAT Law for acquisition and construction of first residence

In an effort to comply with European Union (EU) directives, the Cyprus Parliament recently passed a new law that reduces the Value-Added Tax (VAT) rate on the construction or acquisition of first residences. This move comes after the European Commission initiated infringement proceedings against the Republic of Cyprus for not correctly applying EU VAT rules for housing purchases or constructions.

Overview of the New VAT Law

The newly approved legislation allows for a reduced VAT rate of 5% on first homes, a significant decrease from the standard 19% rate. This reduction applies to the initial 130 square meters of a primary residence, whether it is a single dwelling or an apartment. However, there are certain conditions that must be met for the reduced rate to apply:

• The property value must not exceed €350,000
• The total transaction value must not surpass €475,000
• The overall buildable area must stay under 190 square meters

For individuals with disabilities, the reduced VAT rate is extended to cover the first 190 square meters of the buildable area.

Transitional Period and Planning Permits

The new VAT law also includes a transitional period during which the proposed regulations will not apply in cases where urban planning permission has been obtained or an application has been submitted within four months from the law’s effective date.

Voting Results and Political Debates

The Cyprus Parliament’s plenary session saw 42 MPs vote in favor of the law, with one abstention by Greens MP Alexandra Attalides. Despite the general consensus surrounding the law’s passage, there were disagreements among the parties regarding the responsibilities that led to the amendment of the legislation and the infringement proceedings initiated by the European Commission.

The Issue of “Maximum Abuse” and Past Legislation

Greens MP Stavros Papadouris, who ultimately voted in favor, attributed the need for the new VAT law to “maximum abuse” of the issue in the past. He explained that when the Cyprus Parliament decided to eliminate the threshold of 275 square meters for reduced VAT in 2016, almost everyone benefited from what was intended to be a targeted social policy.

Communication with the European Commission

In 2021, when the European Commission requested data regarding the discounted VAT rate in Cyprus, the Tax Department provided information about the previous regime but failed to mention the changes made. This led to the European Commission sending a letter of formal notice to Nicosia, marking the first stage in infringement proceedings.

Limited Bargaining Power with Brussels

Due to the history of mistakes and poor handling, the finance ministry now has “little bargaining power left” when dealing with Brussels, according to Papadouris. The European Commission sent a reasoned opinion to Nicosia on June 1, stating that Cyprus did not correctly apply EU VAT rules for houses bought or built in the country.

EU Court of Justice and Possible Fines

Cyprus had two months to address the matter, or else the Commission could have decided to refer the case to the EU 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. The infringement proceedings were initially launched in the summer of 2021.

VAT Directive 2017/541 and Social Policy

VAT directive 2017/541 allows EU member states to apply a lower rate for first homes as part of social policy. However, the broad interpretation of the Cyprus provision seemingly goes beyond the social policy aim stated in the directive for such an exemption.

The ‘Golden Passports’ Scheme and Lower VAT Rate

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

Conclusion

The new VAT law aims to align with EU directives and satisfy the requirements of the European Commission, while also serving as a socially targeted measure. The Cyprus Parliament’s approval of this legislation is a significant step toward compliance with EU VAT rules for first homes and demonstrates the country’s willingness to address the concerns raised by Brussels.