Cyprus prepares to change the preferential VAT rate

Cyprus prepares to change the preferential VAT rate for new home buyers under pressure from the European Union

The Cypriot authorities have submitted a new bill to change the preferential VAT rate, which is currently in force on the purchase of primary housing on the island. The reason for the revision was caused by the European Commission's proceedings against Cyprus, which in the regulator's opinion is in breach of European rules in this area. Cyprus lawmakers and local developers have already criticised the new draft because of its inconsistency with the market conditions. For more details, see our story.

How does the VAT exemption apply now?

Under the current law in Cyprus, buyers of new homes can take advantage of a reduced VAT at 5% (the standard rate is 19%) on the purchase for the first 200 square metres of primary residence, irrespective of the total covered area of the property or the investor’s income, assets or economic situation.

What is being proposed?

The new draft law will stipulate different conditions for the purchase of houses and apartments, and their price brackets. The government was recommended by Technical Chamber of Cyprus (ETEK), to apply the reduced VAT to homes of value up to €450,000 and apartments worth up to €275,000.

Who is against it and why

Local MPs and the business community were unhappy with the new draft of the law. The Cyprus Chamber of Commerce and Industry and the Federation of Industrialists and Employers criticized the new wording of the law and proposed increasing the cost of eligible properties - both houses and flats - to €500,000.

They pointed out that with the current inflation and the rising cost of building materials, no one would find a house or flat with the covered area and value specified in the bill, making the new law effectively unworkable

In this regard, Cyprus government will probably have to find a compromise between all stakeholders.