Compromise VAT bill on new homes

The government has retabled a bill for reduced VAT on first homes, aiming to find the sweet spot between MPs’ concerns and the European Commission, which has initiated infringement proceedings against Cyprus over the discount.

A European Union directive to reduce the size of homes entitled to a lower 5% VAT had the House and real estate stakeholders in an uproar, as they claimed it would endanger the recovery of the construction sector and the economy.

Cyprus has also come under the microscope after a report by the island’s Audit Office claimed the current legislation was abused by foreign investors eyeing a golden passport, costing the state millions of euros in unpaid taxes.

Based on the findings, the Republic had revenue losses of EUR 200 mln from foreign investors who were naturalised as Cypriots.

As the state Auditors reported, foreign investors eyeing a Cypriot passport were taking advantage of the current legislation when buying luxury apartments in towers, getting away with the low 5% VAT clause.

In a warning letter, the European Commission emphasises that third-country nationals also benefit from what is considered a social contingency measure.

The House is now ready to reopen the file, examining the proposal, which has yet to be made public, but reports have the government splitting the difference.

According to a recent EU directive, member states must 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.

The cabinet has already agreed upon the directive and needs parliamentary approval.

According to reports, a home of more than 170 sqm under the proposed bill will get the standard 19% VAT for every square metre over the limit.

But a home covering over 220 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.

For flats, only the first 90 square metres of an apartment covering a maximum of 110 square metres will be taxed at 5% VAT.

The Audit Office has sent a note to the Parliament with its position on the revised bill, expressing its concerns over whether it is consistent with the European obligations of the Republic.

Auditors expressed doubts over whether introducing a ceiling on the buildable area and on the total value of the property, without tying it in with the buyers’ income and other social criteria, would satisfy the EU. It is also concerned over the government’s differentiation between houses and flats. Furthermore, the Audit Office emphasised that under no circumstances should the measure of lower VAT be applied to property for investment purposes.

The Technical Chamber of Cyprus (ETEK), advising the government, has proposed the reduced VAT be applicable for homes of value up to EUR 450,000 and apartments worth up to EUR 275,000.