5% VAT on smaller first homes

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Nicosia hopes to convince Brussels to end a legal process against Cyprus after MPs approved a law on 5% VAT for smaller first homes, which falls short of an EU directive.

The law was passed with the support of 42 MPs, with one abstention for a reduced 5% VAT rate applied for the first 130 sqm of a residence, either a house or a flat, with a value of €350,000.

According to the new law, for houses/apartments with an area of 131-190 sqm valued at €475,000, 19% VAT will be imposed for every square metre above the 130 limit.

If a home has a buildable area of 140 sqm, excluding verandas, and parking, then the 10 additional square metres will be taxed at 19% VAT.

This would mean the overall VAT imposed on the project is 5.1%.

According to Land Registry data, the proposal covers some 76% of transactions made in 2022.

The law includes a provision allowing reduced VAT on the first 190 sqm of a constructed area for individuals with disabilities.

It also provides for a transitional period, during which the proposed regulations will not apply in cases where urban planning permission has been obtained or an application has been submitted within four months from the law’s effective date.

MPs passed the law just days after the Commission sent a reasoned opinion to Nicosia for failing to properly apply EU VAT rules for dwellings purchased or constructed in Cyprus.

The reasoned opinion is the second stage of an infringement procedure that Brussels opened in July 2021.

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.

“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.

Brussels said the measure was not implemented as a social housing policy measure.

Christiana Erotokritou, DIKO MP and head of the House’s Finance Committee told the Financial Mirror last week that the EU Commission expected Cyprus would set the bar for reduced 5% VAT for the first 110 sqm.