The state could invest at least € 44.6 million in its coffers if the reduced tax rate was not applied during the purchase or construction of villas with an area of more than 275 square meters (sq.m.).
Specifically, between 2018 and November 2021, according to data provided by “F”, 581 first houses were sold throughout Cyprus, with a buildable area of over 275 sq.m. This confirms the allegations made by the Commission against the Republic last summer, through the infringement procedure, according to which the reduced tax rate did not serve the social purpose of the European Directive.
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In fact, the specific data reinforce the findings of the Audit Office, which identified that foreign investors, in the context of the implementation of the Cyprus Investment Program, bought millions of properties to meet the criterion of buying a permanent residence on the island (main residence), benefiting reduced VAT.
Based on the legal framework that continues to apply until today, for the first 200 sq.m. of the property, in the case of a main residence which has no limit on the total area, the buyer, regardless of income, pays only 5% VAT. That is, if a house has an area of 275 sq.m., the buyer for the first 200 sq.m. pays 5% VAT and for the remaining 75 sq.m. 14% tax.
Before the specific legislation, ie in 2016, 5% VAT was imposed on the first 200 sq.m. of the property, meaning that the total area did not exceed 275 sq.m. According to the data of the Ministry of Finance, from the disposal of 581 houses with an area over 275 sq.m., if the normal tax rate was imposed and the relevant discount was not granted, the state would receive another € 44.6 million (the specific amount costs 14% of value). During this period, the majority of the villas that were the main residence were located in Limassol.
Impressive is the fact that, although in Nicosia more houses were available with a buildable area of more than 275 sq.m. than in Paphos, most of the revenue was lost by the state from the sale of this type of property to the latter, apparently due to their increased value-size.
In Limassol most villa sales
Analytically, based on data from the register of first residence, out of the 581 houses that were sold in the specific 47 months, 201 properties (over 275 sq.m.) are located in Limassol. If the normal tax rate was imposed on these properties, the state would collect € 15.4 million. The specific data concerning Limassol show that the “social measure” of low VAT was used for high-value luxury properties located in privileged areas.
Nicosia follows, where 132 such houses were sold, however, due to their lower value, if they were taxed at a normal tax rate then the Tax Department would collect from the relevant tax of € 5.4 million.
In Paphos, 119 main houses have been sold (over 275 sq.m.) and the normal VAT would reach € 18.2 million, ie this money would have the state as revenue if there was no relevant tax deduction (reduced VAT).
In Larnaca, 97 villas / main residences were allocated, which if taxed normally the income would increase by € 3.4 million. Finally, in the Province of Famagusta, main residences have been allocated (over 275 sq.m.), which if imposed 19% VAT the state would receive an additional € 2 million.
The party was big
These data prove the “big party” that took place for years in Cyprus at the expense of state revenues, as the practice was contrary to the purpose of the relevant Directive. Under the EU Directive, the surrender and construction of housing under a social policy is subject to a reduced tax rate. This provision prohibits the adoption of national measures which are equivalent to the possibility of applying the reduced VAT rate to the delivery, construction, renovation and remodeling of all dwellings, without taking into account the restriction related to the social context in which the specific acts.
As stated in the European Commission's correspondence with the Cypriot authorities, Member States may decide to apply reduced VAT rates to transactions which the Union legislature has authorized to be used in the context of social policy. At the same time, he notes that, according to the Cypriot legislation and the lack of restriction on the area of the houses, the reduced VAT rate of 5% is applied for the first 200 sq.m. without imposing conditions on national VAT legislation that would justify the social nature of the measure. In short, very large houses of very high value also benefit from the reduced VAT.
According to the warning letter sent by the EU last summer, in the CC the reduced rate applied in Cyprus does not meet the condition of the social policy of the VAT Directive. He points out that extending the scope of the reduced VAT to all dwellings used as main and permanent residence can not be considered essentially a social policy. It also indicates that if the violation of the VAT Directive continues, which leads to a reduction of the Union's own resources, then the EU will be entitled to receive the full amount of the specific own resources lost, as well as default interest!
They are trying to find a solution
Last September, the authorities of the Republic responded to Brussels, informing about the bill that he has prepared and which is being discussed in the Parliamentary Committee on Finance. The bill, which provokes many reactions, provides for the imposition of 5% VAT for 140 sq.m. of the property, with a total area of up to 200 sq.m.
Tomorrow, at the new meeting of the Commission, a formula will be sought, which will satisfy the social purpose of the Directive and the parties. The thoughts that are made are to include an additional condition regarding the value of the property per sq.m. Specifically, if the value per sq.m. exceeds the value to be determined per sq.m., then the reduced tax rate will not be utilized, regardless of area. It is estimated that in this way it is ensured that the buyers who will proceed to the purchase of luxury apartments and houses will not benefit from this social measure.
They hid information from the Commission
It is worth noting that the EU had warned the country many months before moving against Cyprus. In fact, according to the relevant correspondence, in January 2021, the Cypriot authorities responded by hiding the real picture. Specifically, they reported that 5% VAT is imposed on the first 200 sq.m., meaning that the area of the house is 275 sq.m. (s.s. the previous legislation). This is the measure that was in force before and not the one that was in force at the date of the letter, as, from November 2016 until today, 5% VAT is imposed on 200 sq.m. of the property, regardless of area! Apparently, the Cypriot authorities hid the truth from the EU, which was later identified by the Audit Office and informed the Commission.