In recent developments, Cyprus has witnessed a U-turn in its Value Added Tax (VAT) rules for real estate. These changes, influenced by the European Commission, aim to strike a balance between market demands and EU regulations. In this blog post, we will explore the previous VAT rules in Cyprus and outline the key changes that will come into effect.
Previous Cyprus VAT Rules for Real Estate: Under the previous VAT rules, which have been in place since Cyprus joined the EU in 2004, a standard VAT rate of 19% was applied to the purchase of brand new properties. Additionally, as of January 2018, VAT was also imposed on the purchase of land. The responsibility of collecting VAT from the buyer and submitting it to the VAT Department lay with the seller.
To alleviate the additional costs for buyers, the Cypriot government introduced two measures. First, it allowed buyers to apply for a VAT reduction from 19% to 5% for properties intended as their primary residence. This reduction applied to the first 200 square meters of the house. Second, buyers who paid VAT were exempt from Land Registry Transfer Fees when registering the property in their names.
Changes to the VAT Rules: The recent changes proposed by Cypriot MPs involve an increase in the total area eligible for the reduced VAT rate of 5% from 150 square meters to 190 square meters. The EU directive, however, dictates that member states should introduce legislation for a 5% VAT rate on homes up to 140 square meters.
Under the proposed new rules, homes up to 190 square meters with a maximum value of €350,000 will be subject to a reduced VAT rate of 5%. Residences valued between €350,000 and €475,000, with a maximum area of 190 square meters, will face a 19% VAT rate for the €125,000 difference. Houses valued above €475,000 will be subject to the standard 19% VAT rate.
Implications and EU Directive Compliance: The change of heart by the Cypriot Parliament is not expected to be well-received by Brussels. The European Commission has made it clear that EU-approved legislation must be adopted by Cyprus before 8 June. Failure to comply may result in sanctions being imposed, as an infringement procedure was already launched against Cyprus in 2021.
The Finance Ministry had advocated for the adoption of the EU directive before the deadlines expired, while many MPs pushed for an extension of the size criteria to accommodate the Cypriot market’s specifications for larger homes. The proposed changes attempt to strike a balance between these demands and the need for compliance with EU regulations.
Conclusion: The revision of Cyprus’ VAT rules for real estate signifies an attempt to align the country’s legislation with EU directives. The proposed changes, including an increase in the eligible area for the reduced VAT rate, reflect a compromise between market demands and regulatory compliance. However, it remains to be seen how the European Commission will respond, and failure to adopt EU-approved legislation could result in sanctions for Cyprus. As the situation unfolds, it is crucial for buyers and sellers in Cyprus to stay updated on these changes and their implications for real estate transactions.
