House U-turn on VAT for homes deal

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

MPs increased the total area of the home entitled to reduced VAT of 5% from 19%.

After Monday’s session of the Finance Committee behind closed doors, the initial deal of 150 square metres has gone up to 190 sqm.

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

Parliament’s change of heart is not expected to be taken lightly by Brussels, which has told Cyprus that EU-approved legislation must be adopted by 8 June.

On Monday, 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 EUR 350,000 will benefit from a reduced VAT rate of 5%.

Homes from 150 to 200 sqm were to get the standard 19% VAT for every square metre over the limit of up to 200 sqm for properties worth EUR 475,000.

But a home covering anything over 200 square metres is not eligible for the lower VAT rate of 5% and instead incurs 19% for the whole project.

MPs are now proposing that 5% VAT should be imposed on homes of up to 190 sqm worth up to EUR 350,000.

For residences with a value from EUR 350,000 to EUR 475,000, with a maximum area of 190 sqm, 19% VAT will be imposed for the EUR 125,000 difference.

For houses worth more than EUR 475,000, the VAT will be 19% If EU-approved legislation is not adopted, Cyprus could be slapped with sanctions by Brussels, as an infringement procedure was launched against the Republic in the summer of 2021.

Many MPs had campaigned to extend the size criteria in the legislation to fit the Cypriot market specs for larger homes, while the finance ministry pushed for the EU directive’s adoption before deadlines expired.

According to 2021 data from the Finance Ministry, applications submitted for a reduced VAT rate revealed that 35% involved homes of up to 100 sqm, 17% from 100-140 sqm, while 31% involved properties from 140-200 sqm.

Another 11% of applications involved houses of 200-275 sqm.