Government approved bill for reduced VAT on first homes

By a near-unanimous vote, parliament closely monitored by Brussels passed a law on Thursday, that permits a reduced VAT rate of 5% on first homes. The discounted VAT rate, in contrast to the standard rate of 19%, will be applicable to the initial 130 square meters of both single dwellings and apartments. The reduced 5% rate is applicable to properties valued up to €350,000, ensuring the total transaction value does not exceed €475,000 and the total buildable area remains below 190 square meters.

Furthermore, the law includes a provision for individuals with disabilities, allowing them to benefit from the reduced VAT rate on the first 190 square meters of the buildable area. Additionally, the legislation accounts for a transitional period to exempt cases where a town planning permit has already been issued or an application for such a permit has been filed within four months of the law's implementation.

During the parliamentary session 42 Members of Parliament voted in favor of the law, with Greens MP Alexandra Attalides choosing to abstain. Despite the consensus in the voting, there were exchanges of criticism among politicians regarding the need to modify the legislation and the potential penalties faced by Cyprus from the European Commission.

It was acknowledged that the bill was passed "under duress" due to pressure from Brussels due to the previous mistakes and mishandling of the issue. On June 1 of this year, the European Commission sent a reasoned opinion to Nicosia, stating that Cyprus had not correctly applied EU VAT rules for the purchase or construction of houses.

Cyprus was given a two-month period to address the matter, and failure to do so could lead to the Commission referring the case to the EU Court of Justice. However, it is common for cases to be settled before reaching the court. In the worst-case scenario, Brussels may impose fines on countries for non-compliance.

The infringement proceedings were initially initiated in the summer of 2021. The VAT directive 2017/541 allows member states to apply a lower rate for first homes as part of their social policy. However, Cyprus's broad interpretation of the provision seems to exceed the social policy aim stated in the directive, particularly in terms of exemptions.

The Cypriot policy came under scrutiny when it was discovered that participants in the 'golden passports' scheme, who invested in property to obtain citizenship, also benefited from the lower VAT rate.