Cyprus Mail 23 June 2022 - by Eleftheria Paizanos
With regard to the reduced tax rate of 5% that will apply for another few months when buying or building a house, based on the current legal framework (up to 200 sq. m. of house), Cyprus last summer received a "katsada" from the Commission, which initiated infringement proceedings against the Republic, due to its untargeted and abusive application.
The inadequate implementation of the reduced VAT resulted in millions of foreign investors (or even wealthy Cypriots) benefiting from the social measure, within the framework of the Cypriot investment programme. For a year now, a fine of millions from Brussels has been hanging over the country, which is why for months the state's technocrats have been writing and erasing to prepare a new - more restrictive - bill, which would also be accepted by Brussels.
Today, 5% VAT is imposed on the first 200 square meters (sq.m) of the property, regardless of the area, while according to the revised bill, which was forwarded to the members of the House Standing Committee on Finance, the existing framework will remain in force until November 29, 2022.
Based on the transitional provisions included in the revised text of the legislation, the new framework agreed between the technocrats of the Ministry of Finance and the ETEK and the provisions of the new legislation will apply to solemn declarations submitted to the competent authority to ensure reduced VAT after 30 November 2022.
Therefore, according to the bill, if it is approved as it stands, the interested parties will have five months to benefit from the reduced VAT under the current regime, as from December onwards the legislation will become stricter, as we explain below.
The provisions of the bill
The Ministry of Finance estimates that, based on the data of the Statistical Service (listed below), it is justified to impose a reduced rate of 5% VAT, within the framework of social policy, for the first 170 sq. m. of residences, with a total area of up to 220 sq. m. and with a total transaction value not exceeding €350,000. Also, a reduced VAT of 5% will be imposed for the first 90 sq. m. of apartments with a total area of up to 110 sq. m. and with a total value not exceeding €200,000.
It is worth noting that in both cases the buildable area is determined on the basis of the building coefficient, according to the architectural drawings of a building submitted to the competent authority to secure planning permission or, where this is not required by a general or special decree, under the Law of Town and Country Planning to secure a building permit, provided that the value of the transaction will not exceed €350,000 for residences and €200,000 for apartments. According to the bill, the total value of the transaction per square meter can be revised by decision of the Tax Commissioner. At the same time, a new provision was added to the revised bill, according to which, in the context of social policy for people with disabilities, the criterion of the total area of residence will not be applied.
Based on statistics
The formula was agreed between the relevant ministry and the ETEK and incorporated into the bill. The new regulation was locked in these square meters, after the analysis of the data between 2019-2021 regarding the purchases of houses and apartments, i.e. the purchase and sale documents of the Cadastre and the separation between residences or apartments from Cypriot and foreign buyers. The revised bill has taken into account the recommendations of the stakeholders involved for the separation of houses and apartments and the inclusion of the sale value for the two categories of real estate per square meter, while transitional periods for the implementation of the provisions of the new legislation are also specified.
As the General Director of the Ministry of Finance, George Pantelis, points out in a letter to the Parliament, for the purpose of determining the buildable area of houses and apartments, as included in the bill, data collected by the Statistical Service were used, based on which it appears that the median value for houses purchased by Cypriots amounts to 173.73 sq.m., with a value of €1,623.80 per sq.m. and for apartments at 91 sq.m., with a value of €1,868.41 per sq.m.
Fluid situation in Brussels and Parliament
The new revised bill, which has not yet been forwarded to the European Commission, will be debated on Monday in the Parliamentary Finance Committee. A competent source, speaking to "F", expressed confidence that Brussels will accept the revised bill, as it is based on documented data from the Statistical Service. In addition, he noted that the new text of the bill also responds to the recommendations of the EU, which argued that the current framework did not serve the social purpose imposed by European legislation, as it applies to everyone who buys property, regardless of area and income. What is of great concern to the government, however, is whether the parties, which had disagreed with the original bill, which provided for the imposition of a reduced VAT up to 140 sq. m. of the main residence, with a total area of up to 200 sq. m. and had asked for a return to the 2011 regime, will accept the bill. That is, to impose reduced VAT on the first 200 square meters of the main residence, with a total area of up to 275 sq. m. Proposal rejected by the EU, as it did not meet the social purpose of the European directive.
It is recalled that in January 2021, the Cypriot authorities misled the Commission, informing it that the legal framework of 2011 was applied in the country, when in fact the current regime was in force, which provides for the imposition of 5% VAT on the first 200 square meters of a residence, regardless of area.
