Lawmakers again discuss reduced VAT on homes

Lawmakers on Monday discussed for the umpteenth time the matter of reduced VAT on homes, with reports suggesting the government will go back to the drawing board and present yet another bill to parliament right after the Easter holiday.

The discussion at the House finance committee was held behind closed doors.

Media reports said the government’s new proposal will involve raising the value of residences eligible for the discounted 5 per cent VAT. The normal rate is 19 per cent.

For houses, the values making them eligible for the lower VAT would be increased to just under €400,000; and for apartments to just under €230,000.

MPs later told media that the government would bring the re-revised text of the bill to parliament after the Easter holiday. If it doesn’t satisfy the parties, they reserve the right to insert their own amendments before tabling the legislation to the plenum for a vote.

This is happening against the backdrop of threatened sanctions from the European Commission. Brussels has initiated infringement proceedings against Cyprus, but it has yet to issue a reasoned opinion.

A reasoned opinion is the second stage – a formal request to a national government to comply with EU law. If a country still doesn’t comply within a specified timeframe – usually two months – the Commission may decide to refer the matter to the European Court of Justice. In practice, most cases are settled before being referred to the court.

In the worst-case scenario, Brussels can impose a fine on a country for non-compliance.

It’s understood the infringement proceedings were first launched in the summer of 2021.

Brussels contends that Cyprus does not properly apply VAT rules for homes purchased or built here.

VAT directive 2017/541 allows member states to apply a lower rate for first homes as part of social policy. But the broad interpretation of the Cyprus provision apparently exceeds the social policy aim stated in the directive, for such an exemption.

The policy was also flagged when it emerged that recipients of the ‘golden passports’ scheme – who invested in property in exchange for citizenship – had likewise benefited from the lower VAT rate.

Earlier, the government had come up with a ‘sweet spot’ – a bill amending the levying of the reduced 5 per cent VAT rate for homes.

Under that government proposal, the reduced VAT rate would apply to the first 170 square metres of a home of a total surface area of 220 square metres and with a property value up to €350,000. For apartments, the lower rate would apply to the first 90 square metres of a total surface area of 110 square metres and with a property value up to €200,000. In addition, a special clause stipulates that the total surface area criterion does not apply to persons with a disability.

However, the idea met with stiff resistance from several organisations – the Employers and Industrialists Federation, the Chamber of Commerce, the Cyprus Land & Property Owners Organisation and the Property Valuers Association.

They instead suggested raising the value of eligible properties – both homes and apartments. And they pointed out that with the current inflation and increasing cost of building materials, no one would find a home or apartment with the square metres and value cited in the bill – making the legislation a damp squib.

As it currently stands, the law provides for the application of a lower VAT rate of 5 per cent for the first 200 square metres of primary residences, without any qualifications. This lower rate is applied irrespective of the income, property or economic conditions of the person or his family residing in the house. Moreover, the total surface area of the home bears no relevance.

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