Finance Minister warns against rejecting VAT directive

Finance Minister Constantinos Petrides warned MPs that any tampering with a European Union directive to reduce the size of homes entitled to lower 5% VAT could invoke sanctions.

Addressing MPs concerns over the implications on the economy, the Finance Minister said the directive could see the EU withdraw funding provided to Cyprus through the Recovery and Resilience Fund.

A recent EU directive obliges member states to introduce legislation of 5% VAT on homes up to 140 square metres.

In Cyprus, the reduced rate of 5% VAT applies for homes up to 200 sqm of buildable area.

However, stakeholders and MPs have warned that the directive endangers the construction sector’s recovery.

Developers and real estate stakeholders fear the new directive would push up construction costs, which are already on the rise due to an increase in the cost of building materials by 15% to 20%.

The Finance Minister appearing before the House Committee on Finance on Monday made it clear that playing around with the directive was off the table.

He said the government would be on board with introducing a grace period before the legislation is applicable.

“This has to be done soon and could only be accepted by the EU if any decision for delaying the implementation of the directive is justifiable under a social policy,” said Petrides.

Petrides stressed that no change on the specifications on the taxable covered area as described in the directive should be tempered with. The directive has already been passed by the cabinet and needs parliamentary approval, but MPs appear reluctant to pass the bill as is.

Opposition parties have identified weaknesses in the bill, calling it “problematic”, while the ruling party said it is ready to look at ways of improving the law.

Under the new law, a home of more than 140 sqm gets the standard 19% VAT for every square metre over the limit.

But a home covering more than 200 square metres would not be eligible for the lower VAT rate of 5% and instead incur 19% for the whole project.

Currently, this is applicable for homes over 275 square metres.

In earlier comments to the Financial Mirror, the Technical Chamber of Cyprus (ETEK) chair, Constantinos Constanti, said building a home of 201 square metres would cost an additional EUR 42,000.

“As things stand today, the average cost of building such a home would be around EUR 315,000, with the VAT due amounting some EUR 15,000.

“Should the directive be adopted, then couples will be called to pay EUR 42,000 on top of the initial EUR 15,000,” said Constanti. He argued that new VAT legislation on housing would see many couples postpone their dream of owning a home.