The square meters (sq.m.) were reduced and a maximum area of real estate was determined which will benefit from the reduced tax rate of 5% when buying or building a main residence, in the new legal framework that is being attempted to be implemented in Cyprus.
The aim is for the measure to be provided in a targeted manner and to serve its social purpose. The Republic to save the fine from the Commission which initiated an infringement procedure against it, as it found that the reduced 5% VAT was not imposed in a targeted way and foreign millionaire investors who bought luxurious villas to secure a Cypriot capital program, prepared a relevant bill.
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Specifically, the bill submitted yesterday in the Plenary Session of the Parliament, provides that during the purchase or construction of a property, 5% VAT will be imposed for the first 140 sq.m. of the main house which will have a maximum area of 200 sq.m. According to the explanatory memorandum of the bill, in this way the reduced tax rate will be provided purposefully and within the framework of the exercise of social policy provided by the European Union Directive on the common VAT system. The Ministry of Finance considers that the new regulation you propose is in line with the EU recommendations for a targeted measure and does not question its social purpose. At the same time, he considers that it is in line with the data according to which the average house in Cyprus is 140 sq.m. It is recalled that the Commission had initiated the infringement procedure against the Republic last July, while in its warning letter it had argued that the use of the reduced tax rate on real estate, as is done in Cyprus, does not serve social purposes.
In fact, according to data from the Tax Department that had been mentioned in an earlier session of the Parliamentary Committee on Finance, in 2018 the state had lost € 165 million due to the use of the reduced tax rate by 3,726 taxpayers, including foreign taxpayers. Today, the law that has been in force since 2016 provides that the reduced tax rate is applied for social purposes for Cypriot citizens for the first 200 sq.m., regardless of the total area or the total value of the house. Previously, the legislation provided that the reduced VAT rate of 5% is imposed for the first 200 sq.m. buildable area of houses with a total area of 275 sq.m. In the coming weeks, the bill will be put under the microscope of the relevant parliamentary committee. It is reminded that the draft law of AKEL is also pending in the Parliament, which provides that a reduced VAT will not be offered for houses of high value. It also proposes the introduction of ceilings in the value of housing per square meter, so that the construction, expansion and purchase of housing are subject to a reduced VAT rate. The Ministry of Finance disagrees with the bill.