The European Commission has sent a request to Cyprus regarding Cyprus' violation of the European Directive on VAT reduction when buying or building basic housing.
What does it mean? This request requires Cyprus to amend the VAT legislation within two months. If the parliament does not amend the legal framework by February 15, 2023, the case may be referred to the EU court, which increases the likelihood of a fine being imposed on it.
That happened 19 months after the European Commission sent a letter to Cyprus with an official notification that it needed to adequately apply EU VAT rules for housing purchased or built in Cyprus.
Context. Although the European VAT Directive allows EU Member States to apply a reduced VAT rate on housing as part of social policy, the broad scope of Cypriot legislation and the absence of restrictions indicate that this measure goes far beyond the purpose of social policy.
In Cyprus, the first 200 sq.m are subject to VAT at a reduced rate of 5%. That applies to residential premises purchased or built as primary residences. In addition, the reduced rate is applied regardless of the income, property, and economic status of the beneficiary, family members who will live in the dwelling, and the maximum total area of the corresponding residence.
But even the current law is being abused. From October to December 2022, the Department conducted 2,171 on-site inspections of taxpayers who took advantage of the reduced VAT rate. They found one thousand thirty-nine taxpayers in the houses; three hundred ninety-one admitted that they had violated the law because the housing in question was not their primary place of residence. Some of them applied to the tax department, where they paid an additional tax of 14%.
What now? A new VAT bill is already under consideration in the Parliament of Cyprus. It provides for the collection of 5% VAT on the first 170 sq.m. of houses with a total area of no more than 220 sq.m. and a total cost of no more than € 350,000. In addition, a reduced VAT of 5% will be applied on the first 90 sq.m. for apartments with a total area of no more than 110 sq.m. and a total cost of no more than € 200,000.
Source: Cyprus Property News
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