Filenews 6 March 2022 - by Eleftheria Paizanos
Within approximately the next week or two, the Ministry of Finance is expected to forward to the Commission the new proposal for a reduced tax rate of 5% when buying or building a main residence. The government's new proposal will be based on three axes and will combine the area and cost of the property.
The Republic believes that the new proposal will be a response to the infringement procedure initiated last summer by the European authorities. The government will propose the imposition of 5% VAT on the first 200 square meters (sq.m) of the residence, provided that it has a total area of up to 275 sq.m. This regime prevailed from 2011 until 2016, when the Parliament passed a law proposal of DISY to mention the ceiling of 275 sq.m.
In January 2021, the Cypriot authorities essentially misled the Commission, informing it that this legal framework (with the ceiling of 275 sq.m.) was applied in the country, while the reality was different. The legal framework, which is still in place today, provides for the imposition of 5% VAT on the first 200 sq. m. of a residence, regardless of area.
At the same time, the new proposal that the government will send to the Commission will include the criterion of the value of the house, so that it will be an insurance safeguard for not applying the measure for high-value properties. In this way, although a property will meet the criterion of square meters and area, if it exceeds a specific value to be determined it will not be subject to a reduced tax rate. In addition, the new proposal will propose that the measure should not have immediate effect but that a time credit of a certain months should be given, approximately 3-5 months.
The new proposal will be accompanied by a specific argument that will document the necessity of returning to the 2011 regime, i.e. the return of the criterion of 200 sq.m., with a total area of up to 275 sq.m. The new proposal will also provide an argument by the Cypriot authorities for the conditions prevailing in Cyprus, for the area of the main residences and for the need for a transitional provision.
A competent source said that it will be stressed to the EU that, if the new measure is implemented immediately, a number of buyers who have already submitted their applications to the Tax Department will be disadvantaged. The House also maintains a wait-and-see attitude, which expects the Ministry of Finance to forward the revised bill to it, as they do not agree with the legislation that has been tabled and discussed already in the Parliamentary Committee on Finance. It is recalled that the bill provides for the imposition of reduced VAT on the 140 sq.m of the main residence, with a total area of up to 200 sq.m. For this reason, the new proposal is being prepared, in order to satisfy on the one hand the professional bodies and the parties and on the other hand to reduce the impact on future property buyers.
16 years ago social policy began
The state's social policy of acquiring a primary permanent residence began in 2006. Through the passage of time, various factors and data, the law was differentiated to conform to the needs that existed at that time. In particular, under the 2006 legislation, the State provided a grant to persons who proceeded to the construction or purchase of a property that would be used as the main residence and which was charged with the standard tax rate when it was new. At the time, the standard tax rate was 15%. The amount of the sponsorship was calculated based on the square meters of the residence (maximum area of 130 sq.m) and multiplying the area by predetermined amounts (depending on whether it was an apartment or a residence).
In fact, the legislation also provided for families with many children, allowing them to purchase a property with a larger area. The granting of the sponsorship in the case of the residence was given only when its total area did not exceed 275 sq. m. and after the submission of some data that proved that the applicant was using the property as his main and permanent place of residence. The beneficiary would, inter alia, have to provide a copy of the electricity bill, the water supply and certificates of payment of various Community taxes. This practice was described by some as complex and created great administrative costs. There was also a long delay in the processing of applications and in the payment of the grant.
The changes that followed
Due to these pitfalls, five years later it was decided to change the legal framework. However, the government's social policy, in relation to access for all to permanent residence under favourable conditions, continued and the 2006 law was replaced by subjecting these transactions to the reduced rate of 5% VAT, to the VAT legislation.
In 2011, the differentiated legal framework was applied, which provided for the imposition of a reduced tax rate on the 200 sq. m. of the property, with a total maximum area of 275 sq. m. (this regime is claimed by the government). Under this legislation, beneficiaries, in order to benefit from the reduced VAT rate, would have to submit evidence, such as electricity, water, telephone bills, etc., within six months of the time the beneficiaries acquire possession of the residence to prove that it is used as the main and permanent place of residence. In fact, the law explicitly stated that the reduced tax rate can only be granted to citizens of the Republic of Cyprus or any Member State of the European Union and are permanently established in the Republic. According to a briefing of the Cypriot authorities to the EU, in 2012 the legislation was amended again, thus extending the application of the reduced VAT of 5%.
The amendment of the law gives the right to reduced VAT to citizens of countries coming from non-member states when they purchase a building that will be used as their permanent residence in the Republic. The procedure followed for the use of the reduced VAT was as follows: The beneficiary person submitted an application to the District Office of the Department of Taxation, before the first installation at the residence and after presenting all the evidence, the solemn declaration was approved and 5% was imposed for the first 200 sq.m of the property, provided that this was up to 275 sq.m.
The whole regime passed in 2016
It is worth noting that in 2016 the law was changed through a law proposal of DISY, which was approved by a majority of the Plenum of the Parliament, resulting in the imposition of reduced VAT on the first 200 sq.m of the property, regardless of area. This is something about which the Cypriot authorities did not inform Brussels, as the legislation was contrary to the European directive, because it did not serve a social purpose, as required by European legislation. In the correspondence sent to the European authorities, the CCT assured them that the state implements the social policy in the context of the acquisition of a residence in the Republic, enhancing housing opportunities for persons who wish to acquire a primary residence in the Republic. In fact, he assured that social policy had nothing to do with the investment program implemented in the country. However, the Audit Office, in the context of an audit, found that the reduced VAT was also benefited by foreign investors, in the context of the Cypriot investment program.
