Filenews 4 August 2023 - by Eleftheria Paizanou
Nothing has been heard yet from Brussels in relation to the law approved by Parliament concerning the imposition of reduced VAT on the purchase or construction of a main residence. The law has been before the European Commission (EU) since last June to examine whether the national legislation complies with the European acquis.
As is well known, the European Commission means that the reduced VAT is imposed only for social purposes, as provided for by the European Directive, something that has not been applied in Cyprus for years, resulting in the Commission initiating proceedings against the Republic.
Due to the abuse of this European Directive, the measure of reduced VAT was almost universal and benefited foreign investors, who were naturalized Cypriots under the Cyprus Investment Program. The problematic legal framework, which opened windows of exploitation, provided for the imposition of 5% VAT on the first 200 sq.m of the house/apartment, regardless of the total area of the property.
Transitional provisions
Under the transitional provisions, the new arrangement will not apply in cases where planning permission has been obtained or an application for planning permission will be submitted within four months of the entry into force of the law, i.e. until the end of October.
According to the law, a duly completed solemn declaration for the imposition of a reduced VAT rate for the purchase or construction of a residence must be submitted to the Commissioner of Taxation within three years from the entry into force of the new legislation.
Also, in cases where the issuance of a planning permit will not be required but only a building permit, a relevant circular will be issued by the Tax Department.
In addition, it is provided that in cases where a person ceases to use his residence as a permanent place of residence before the period of ten years provided for in the basic law, he will pay proportionally the amount of the difference between the tax resulting from the application of the reduced rate (5%) and the standard VAT rate (19%) for the period of time he did not use the residence, on the basis of the labelling of the Commissioner of Taxation.
Beneficiaries
Under the law approved by a majority on June 8, reduced VAT will be levied on 130 sq.m. the main house/apartment with a value of up to €350,000.
At the same time, provision is made for the gradual imposition of reduced VAT, i.e. as the area and value of the house increases, taxpayers will pay more. For houses and apartments with an area of 131 sq.m. up to 190 sq.m. and with a value of up to €475,000 19% VAT will be charged.
It is understood that for the first 130 sq.m. and for a value of €350 thousand. VAT will be 5%, while for the remaining 60 sq.m., up to 190 sq.m., VAT will increase to 19%. Also for houses and apartments with an area of more than 190 sq.m. and with a value over €475,000 19% VAT will be charged from the first square and first cent.
It is recalled that during the discussions that preceded it, Brussels had demanded from the Cypriot authorities that 5% VAT be imposed on the 110 sq.m. of the house / apartment, something with which the parties had strongly disagreed, arguing that this regulation would drastically reduce the number of beneficiaries and affect the real estate market.
It is noted that the President of the Republic has already signed the law, which was published in the Official Gazette of the Republic.
Until November 1
Although there is optimism in the Ministry of Finance that the new legislation will pass the EU assessment, what is worrying is the larger area of real estate on which 5% VAT will be charged, compared to the one recommended by the EU.
However, a competent source told "F" that the inclusion of the two criteria in the legislation, namely the area and value of real estate, will contribute to its approval by the European authorities.
The same source expressed the expectation that the EU will communicate its response to the Cypriot authorities in the autumn, as, according to the transitional provisions included in the new legislation, its validity starts from November 1.
