Filenews 7 October 2022 - by Eleftheria Paizanou
In 2021 alone, the state lost €203 million from the -horizontal- imposition of a reduced VAT of 5% on the purchase or construction of a main residence. According to the tax expenses analysis report of the Tax Department, in 2021 5,400 taxpayers benefited from the reduced tax rate. In 2020, out of the 5% VAT paid by 3,726 taxpayers, the state lost revenues of €165 million.
It is reminded that 5% is imposed on the first 200 square metres of a property (primary residence), regardless of the area, while any income or other criteria are not taken into account, with the result that the measure, which under the European directive must be applied for social purposes, is benefited by foreign investors in the framework of the Cyprus Investment Program (KEP) as well as wealthy Cypriots.
A few weeks ago, the Audit Office had identified that the state lost €204 million from the utilization of the tax deduction by 1,298 foreign investors, who bought (or appear to have bought) villas and luxury apartments, worth €1.6 billion. Therefore, the data included in the tax expenditure analysis report of the Tax Department concern the use of the measure by all buyers.
On the other hand, the data included in the report of the Audit Office concern the use of the measure only by foreign investors, within the framework of the KEP, as the acquisition of a main residence, worth up to €500,000, was one of the main criteria for the acquisition of Cypriot citizenship.
The tax expenses analysis report reflects the costs that the state has from granting deductions, reducing and exempting from tax, refunding taxes, as well as from the imposition of reduced tax rates. As stated in the report, the tax expenditure was calculated as the difference that arises between the tax attributable when the regulation is used, ie VAT tax rate of 19% on the taxable value and the tax when the reduced rate of 5% is used for residential properties.
It is recalled that on the issue, the Commission in July 2021 has initiated an infringement procedure against the Republic, due to the misuse of the European directive. For a year now, discussions have been taking place in debates in Parliament, without there being any conclusion, in a formula that satisfies all those involved for more targeted tax reliefs (Government, parties and professional sectors). It is the intention of the members of the House Standing Committee on Finance that the matter should be closed before the end of the year. The bill before the Parliament provides that 5% VAT can be imposed on houses for the first 170 sq. m., with a maximum of 220 sq. m. and with a maximum value of €350,000, while for apartments for the first 90 sq. m. for an area of up to 110 sq. m. and for a total value not exceeding €200,000.
