Impasse over 5% VAT proposal for first homes

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Brussels has shot down a compromise proposal on reduced VAT for smaller first homes, tabled by the MPs, ruling it as state aid.

The proposal was the latest in a series of attempts to reach a compromise but was turned down by the EU as it drastically increased the total area of a home entitled to reduced VAT of 5% from 19%.

Cypriot MPs recently made a U-turn over a compromise on reduced VAT for smaller first homes, backed by the European Commission.

Local media reported that Brussels would greenlight a compromise on reduced VAT for first homes of 150 sqm.

According to the previous compromise, a flat or a house of up to 150 sqm with a maximum value of €350,000 would benefit from 5% VAT.

However, the House Finance Committee met behind closed doors to decide to push the initial deal of 150 square metres up to 190 sqm.

The EU directive dictates that member states introduce legislation of 5% VAT on homes up to 140 sqm.

As expected, the Parliament’s change of heart was rebuffed by Brussels, which has told Cyprus that EU-approved legislation must be adopted by June 8.

If EU-approved legislation is not adopted by then, Nicosia could be slapped with sanctions, as an infringement procedure was launched against the Republic in the summer of 2021.

The Finance Ministry’s permanent secretary George Panteli delivered the news of Brussels’ rejection.

MPs face another dilemma, as their latest proposal does away with a distinction between a house and a flat, applying the same tax for both types of accommodation.

Panteli told MPs the Commission is expected to send a second letter to the Republic of Cyprus in June.

It will grant the authorities two months to respond with legal arguments.

If necessary, the proceedings before the European Court of Justice will commence by September or October.

Christiana Erotokritou, Chair of the House Finance Committee, said there were now two options: either approve the previous consensus proposal, despite EU objections or go “back to the drawing board” to find new wording before June 8.

The Finance Committee’s initial proposal outlines a reduced VAT of 5% for houses or apartments that serve as first homes, limited to 150 sqm and €350,000.

However, homes should not exceed 200 sqm or cost over €475,000.

For houses falling within these criteria, 19% VAT would be paid for sizes from 150 sqm to 200 sqm, while homes exceeding 200 sqm would be subject to 19% VAT on the entire property value.