Higher VAT on smaller homes ‘spells disaster’

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A European Union directive to reduce the size of homes entitled to lower 5% VAT has real estate agents and developers in uproar as they claim it will endanger the recovery of the construction sector and the economy.

According to a recent EU directive, member states must introduce legislation of 5% VAT on homes up to 170 square metres.

In Cyprus, the reduced rate of 5% VAT applies for homes up to 200 sqm of buildable area.

The cabinet has already agreed upon the directive and needs parliamentary approval.

According to Finance Ministry spokesperson George Panteli, a home of more than 170 sqm under the new law gets the standard 19% VAT for every square metre over the limit.

But a home covering more than 220 square metres would not be eligible for the lower VAT rate of 5% and instead incur 19% for the whole project.

Currently, this is applicable for homes over 275 square metres.

Regarding flats, only the first 90 square metres of an apartment covering a maximum of 110 square metres will be taxed 5% VAT.

The proposed legislation provides a short grace period ending in November this year.

Talking to MPs on Monday, Panteli clarified that the amendments were prepared based on statistical data and data coming to light during the infringement procedure launched by the European Commission over Nicosia’s dubious Citizenship for Investment scheme.

Foreign investors eyeing a Cypriot passport were taking advantage of the current legislation when buying luxury apartments in towers, getting away with the low 5% VAT clause.

Land developers have warned the new directive will push up the cost of buying a house even higher at a time when soaring prices of building materials inflate construction costs, while rents will increase significantly.

The increase in property prices would make things difficult for a family of two to acquire a three-bedroom flat, as such property will no longer be eligible for the low-end VAT.

In earlier comments to the Financial Mirror, the chair of the Technical Chamber of Cyprus (ETEK), Constantinos Constanti, said that a couple building a home of 221 square metres would be paying an additional €42,000.

“As things stand today, the average cost of building such a home would be around €315,000, with the VAT due amounting to €15,000.

“Should the directive be adopted, then couples will be called to pay €42,000 on top of the initial €15,000,” said Constanti.

He argued that tweaking VAT legislation on housing would see many couples postpone their dream of owning their own home.

Considering difficulties that will arise for young couples, Cyprus MPs are unwilling to pass the legislation, which has been lingering in the House since the beginning of the year.

The chair of the Finance Committee, and DIKO MP Christiana Erotokritou, said MPs were in a dilemma.

“We either accept paying hefty fines to the European Commission if we do not change the legislation or we proceed with the amendment at some cost. The reason is the misuse of the previous legislation”.