Cypriot MPs are confident their latest compromise on reduced VAT for smaller first homes will convince Brussels to waive an infringement process launched against Cyprus.
In comments to the Financial Mirror, the chair of the House Finance Committee confirmed that MPs will be pushing for the proposal to be voted through before 8 June, when the EU deadline expires.
The news comes after the Commission sent a reasoned opinion to Nicosia for failing to properly apply EU VAT rules for dwellings purchased or constructed in Cyprus.
Thursday’s reasoned opinion is the second stage in an infringement procedure that Brussels opened in July 2021 by sending a formal notice.
It said Cyprus allows reduced 5% VAT on the first 200 sqm of dwellings used as the principal residence by the beneficiary, without any other limitations.
The bloc’s VAT directive does allow member states to apply a reduced rate of VAT on housing as part of a social policy.
However, “the wide scope of the Cypriot legislation and the lack of limitations therein indicate that the measure goes beyond that objective”, the EU Commission said.
Erotokritou said: “Cyprus imposes only one criterion for a reduced VAT rate, which is the buildable area, leaving out criteria such income, assets and economic situation of the beneficiary, or the number of family members that will reside in the home”.
The issue has lingered in parliament since 2021, with the government and MPs’ proposals raining down.
Erotokritou confirmed that the proposal tabled before the House sees a reduced 5% VAT rate applied for the first 130 sqm of a residence with a value of €350,000.
For houses/apartments with an area of 131-190 sqm valued at up to €475,000, 19% VAT will be imposed for every square metre above the 130 limit.
“That is, if a home, whether a flat or a house, has a buildable area of 140 sqm, excluding verandas, parking etc., then the ten additional square metres will be taxed with 19% VAT,” said Erotokritou.
She explained this would mean that the overall VAT imposed on the project would be 5.1%.
“According to Land Registry data, the proposal covers some 76% of transactions made in 2022.
“We are confident that with the government’s goodwill, we will be able to convince the EU”.
Counter bid
The Finance Ministry, following recommendations of the Commission, tabled a fourth bill foreseeing a reduced 5% VAT be imposed on the first 110 sqm or a primary residence valued up to €350,000.
And 19% VAT will be implemented on every square metre above the 110 sqm limit for homes up to 190 sqm, provided the total value of the transaction does not exceed €475,000.
The first bill tabled by the ministry proposed a reduced VAT rate for the first 140 sqm of a home of up to 200 sqm without any additional criteria.
Following pressure from developers and MPs campaigning to extend the size criteria in the legislation to fit the Cypriot market specs for larger homes, the ministry tabled a second proposal earlier this year.
The proposal foresaw a reduced Vat for the first 170 sqm of a house of up to 200 sqm.
A recent House proposal for 5% VAT on homes up to 190 sqm was shot down by Brussels.
