VAT 5% on housing in Cyprus: innovations
Parliament almost unanimously approved the bill on VAT on primary housing.
According to the bill, for the main (first) housing – a house or apartment, which a citizen of the country or a foreigner purchases on the island, a VAT of 5% per 130 square meters will apply. m of area and 19% for the rest of the area.
The total area of the main residence should not exceed 190 square meters, the total cost is 475,000 euros, and the cost on which VAT is calculated at 5% is 350,000 euros.
The bill also states that if the main home is purchased by a person with disabilities, then VAT of 5% applies to the entire 190 square meters.
The law does not have retroactive effect – that is, it does not apply to projects for which a construction permit has already been obtained. There is also a transition period of four months during which the developer can apply for a building permit and will not be subject to the new regulations.
The VAT bill on primary residences has a long history. The issue was first raised at the beginning of 2022 and concerned the investment policy of Cyprus. According to the current legislation, VAT of 5% applied to 200 sq. m. area of first housing in Cyprus. That is, if an investor purchased a villa of 350 sq. m, then from 200 sq. m he paid 5% VAT, and on the remaining 150 sq. m. – 19%. Last but not least, this provision of the law was used by investors who received a passport or residence permit for their contribution to the Cypriot economy.
However, the provisions of this law caused a reaction from the European Commission, which demanded a reduction in the area from which the reduced tax is taken. According to the logic of the EU, the reduced VAT should be used by people who really need cheaper housing due to their financial situation. At the end of December 2022, Brussels threatened to impose a fine of 300 million euros on Cyprus if changes were not made to the legislation within two months.
However, the discussion and adoption of the law dragged on until mid-2023. Largely for the reason that the deputies could not agree on what area of the first home the reduced VAT would be charged – 90, 110 or 130 square meters.
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