Filenews 26 February 2023 - by Eleftheria Paizanou
It remains unknown whether Brussels will consent to the renegotiation of the bill on reduced VAT on the purchase or construction of a primary residence. This is despite the fact that the members of the Parliamentary Committee on Finance intend to ask the new Minister of Finance to renegotiate with the European Commission some provisions of the bill.
At a time when the Parliament is seeking to gain time, a fine of millions from the European Union (EU) is hanging over the Republic, due to the abuse of the European VAT Directive, especially with regard to tax relief to foreigners who have used the Cyprus Investment Program to obtain a Cypriot passport. A source from the Ministry of Finance, speaking to "F", said that all possibilities are open, while expressing concern about the long delay observed for the country's compliance with the European directive.
As we were told, since July 2021, when the European Commission opened the infringement procedure against Cyprus, almost twenty months have passed and the Parliament is still debating the bill. He also said that European technocrats often - densely ask for information and pointed out that the Cypriot authorities had made great efforts to convince them to accept the bill that is in Parliament.
The bill provides for the imposition of 5% VAT on the first 170 sq. m. of houses, with a total area of up to 220 sq. m. and a transaction value of up to €350,000. Also, reduced VAT will be imposed on the first 90 sqm of apartments, with a total area of up to 110 sqm and with a total value of up to €200,000. Brussels considers that this bill is in line with the European Directive, according to which member states are allowed to apply a reduced VAT rate to housing, but in the context of social policy and not horizontally.
The changes that call for commas
The majority of the parties are calling for changes to be made to the bill, so that the restrictions that will eventually be set for the beneficiaries of reduced VAT, in relation to the area of a house and its value in the market, are based on 2022 data and not on 2021 data, on which a government proposal before Parliament was based. As MPs argue, the bill does not correspond to the new economic and building data, as Russia's invasion of Ukraine led to an increase in energy costs, inflation and basic building materials. They also note that in the last year, especially the cost of building has risen by 30%, emphasizing that this implies an increase in the values of real estate, therefore the value of houses or apartments that will benefit from VAT of 5% instead of 19% must also increase.
Essentially, the formula that will be attempted to be achieved will focus mainly on increasing values. That is, the value of the houses that will be charged with only 5% VAT exceeding €350,000 and the apartments of €200,000. Especially for apartments, MPs and professional bodies consider that with the increase in cost, this value corresponds to small apartments.
In addition, MPs are demanding a change in the transitional provisions in the bill, so that someone can benefit from the 5% VAT if a town planning application has been submitted for the specific building. This was rejected by the technocrats of the ministry, who consider that in such an eventuality everyone will rush to file the relevant application to benefit... in the future at a reduced VAT rate. They also expressed the assessment that the European authorities will not agree that the transitional provisions will be of long duration, as they know that in this way the existing problematic regime will continue to be applied for a long time.
Bad precedent, lawyers say
Legal circles told "F" that the bad precedent set against Cyprus could be a deterrent for the EU to consent to a new round of consultations. As is well known, for years the Cypriot authorities have fooled the EU by hiding the real data on VAT on residential properties. In December 2020, the European Commission contacted the Cypriot authorities, requesting information on the reduced 5% VAT rate applied in Cyprus. In January 2021, the Cypriot authorities informed that the measure applies to the first 200 sq.m., provided that the residence does not exceed 275 sq.m and is the main residence of the owner. However, this practice was applied until November 2016, as since then the legislation was amended and until today provides for the imposition of 5% VAT on the first 200 sq. m. of a house, without there being a restriction on the total area of the property. In a note, the Europeans criticized the fact that the Cypriot authorities failed to inform them of the change in the law. According to the lawyers, it will be difficult to persuade Brussels to consent to new relaxations on the bill, as the Republic has often appeared inconsistent with its commitments.
Brussels' reaction and delay in parliament
The first bell rang in Cyprus in July 2021, sending a letter of formal notice for failing (and still not applying) EU VAT rules correctly for houses bought or built in Cyprus.
According to the legal framework in force, 5% VAT is imposed on the first 200 sq.m of the property, regardless of area. The EU has indicated that in Cyprus the reduced rate is wrongly applied regardless of the income, assets and financial situation of the beneficiary, the family members who will reside in the dwelling and the maximum total area of the dwelling. In fact, he underlined the fact that Cypriot legislation has a wide scope and does not provide for restrictions, which, as he said, shows that the measure exceeds the objective of a social policy.
In July 2021, the EU gave the Republic two months to address the omissions mentioned in the letter of formal notice, otherwise it would proceed with a reasoned opinion. In January 2022, Cyprus responded to the EU with the first bill, which provided for the imposition of 5% VAT (instead of 19%) on the first 140 sq. m. of a main residence, provided that it will have a maximum area of 200 sq. m.
The Ministry of Finance argued that with this bill the reduced tax rate was provided in a targeted manner and within the framework related to the exercise of social policy provided for by the EU Directive on the common system of VAT. He also considered that the bill met the EU's recommendations for a targeted measure with a social purpose. However, there were strong reactions from market participants and parties, which is why last summer the Ministry of Finance revised the bill, which was accepted by the EU. However, this has not fully satisfied the affected professionals in Cyprus either, with the result that the issue is in the air.
Since last December things have become even more difficult and the risk of the country finding itself in adventures is much greater. On 15 December '22, the Commission sent a new warning to the Cypriot authorities. Based on the letter, the authorities of the Republic had until February 15 to amend the legal framework, i.e. the Parliament was asked to approve the bill immediately. This was not done, on the grounds that the work of the Parliament was suspended due to the elections in February. However, with the resumption of the work of the Parliament, the MPs, instead of pushing the bill for approval, decided to ask the finance minister to be appointed to renegotiate with the Commission for a more relaxed bill.
The revelation of widespread abuse
Role in the intervention of Eur. The reports of the Audit Office, according to which the reduced VAT was not offered in a targeted manner, also played out. On the contrary, he was also benefited by foreign millionaire investors, who bought luxury villas to secure a Cypriot passport.
The abuse of the measure was also revealed by the audits carried out by the Tax Department in recent months. From the beginning of October until December '22, officers of the Tax Department carried out a total of 2,171 on-the-spot checks on residences owned by persons who benefited from reduced VAT. During the inspections, a total of 1,039 persons were found in the residences, of which 391 had violated the law. These taxpayers were required to pay an additional 14% VAT, corresponding to €23.5 million.
