Reinstating VAT on sales: Problems in sight?

The E.U. is placing pressure on the Cyprus government to introduce the 19% VAT charge on the acquisition price of building plots and development plots. The matter is under discussion at the House of Parliament, but it seems that there is no way out and the E.U. is threatening us with penalties which could amount to several millions if we do not introduce this measure very soon.

This will upset the real estate market which has just started to recover and concerns are being expressed from all directions.

If (it will) the measure is adopted, it means that building plots will cost another 19% on the purchase price. This could be “OK” if the buyer is a VAT payer, but most buyers are not, especially those who buy the plot for their own use, etc. The government claims that discounts have already been made to counterbalance this, such as the property taxes (abolished from 2017) and reduction of transfer fees (by 50%) so this new tax has been met with counter discount measures.

It is not as easy as that, however, and it will create serious problems to buyers, reducing thus their demand, whereas financiers will have a serious problem in trying to dispose the swap deal properties and those of which are in their possession trying to sell them and this in addition to the added difficulty to sell under normal conditions.

It’s one of the few occasions that “we must do something about it”, but then this measure was supposed to be introduced several years ago, but the government succeeded to secure postponement (mainly due to the bail-in etc). We do not expect that new apartments/commercial developments will be particularly affected in terms of demand, since developers mostly pay VAT, so it is a charge that they can discount.

The matter gets more confusing as discussions in the House proceed however. It refers to a non-VAT charge for private owners who sell building plots, but on an occasional basis, not as a business, and their sales do not bear VAT.

So, two plots next to each other might have a different cost – one by a developer and one by private individual. Also, the measure does not refer particularly to building land (we don’t know if it covers the development land as such) since it refers to building plots (not clear as yet).

Another point on the subject is the charge of VAT (19%) on commercial rents - not clear what it means and how it will be implemented and what happens to the rents agreed prior to the new measure (if those will be charged as well).

A mess indeed and for those of us who follow the discussion at the House, it is more like a chess game. Every move to by-pass this taxation or reduce the VAT, is met by other demands from the E.U., etc.

Another point to consider is the visa/passports scheme that we have and for which Cyprus has been so successful in attracting foreign buyers and investors in excess of EUR 3 bln in real estate.

The recent report by Bloomberg (in addition to the E.U. warnings) has made a lot of damage accusing Cyprus more or less for laundering of money, that we encourage Russians to invest (low tax etc) and it is evident for us that this is an orchestrated effort to hurt the Russian investors (no mention of European buyers, international western companies, etc. who benefit just as much and refer that these measures benefit by 50% the Russians).

We get scared because Europe feels that Russians are still an enemy and it seems that the second world war hostilities are not over yet and Cyprus must be punished for its friendly relations with Russians – an example being the bail-in for Cyprus targeting primarily the Russian depositors and no such measure was undertaken for other countries such as Italy, Greece, Portugal, etc. all of which still have a similar problem as we did in the past.

Also, this measure met no reaction from the E.U. when the millions of Russian deposits which were in Cyprus fled for other European destinations such as the U.K. and Germany where they were most welcomed. Was it not “laundering” in those cases?

In addition, there are in place similar passport schemes, as well as that for residency/visas in most European countries with no reaction from our European “partners” – only in the case of Cyprus.

One wonders at the end if it is worth remaining in the E.U. and we could consider this if we did not have the political problem. We have no support from the E.U., we contribute to the E.U. more than we get, whereas the needs of the small countries are not taken fully into account by the larger E.U.

members.