The Cyprus state budget lost nearly €1 billion in revenue under the previous rules governing reduced VAT on residential property. The figure represents the difference between the tax the state would have collected at the standard VAT rate of 19% and the amount actually paid under the 5% reduced rate.
According to data from the Ministry of Finance, in 2024 alone the state lost €306 million in revenue. Around 7,100 taxpayers benefited from the reduced rate. A year earlier, the old system allowed 4,800 buyers to use the lower VAT rate, while the state budget lost another €195 million.
Overall, from 2018 through 2024, the state’s revenue loss reached €999 million, while more than 26,000 people benefited from the reduced VAT regime. The final amount could increase further. The reason is Parliament’s decision to extend the transitional provisions through the end of 2026.
Who benefited from the old rules?
Legislation introduced in 2016 allowed the 5% VAT rate to be applied to the first 200 m2 of residential property regardless of the property’s total size. In practice, there was no overall cap on the value of the home. As a result, the system could be used not only by ordinary families buying a primary residence, but also by purchasers of expensive properties.
The reduced rate was used particularly actively by wealthy foreign investors. They could build expensive villas while significantly reducing their tax burden. The lower VAT rate was even applied to properties purchased under the former investment program, which was later abolished following a major scandal.
The broad use of reduced VAT was one of the reasons the European Commission raised objections. Brussels argued that the lower rate should primarily function as a social measure rather than be available to all homebuyers. In effect, a mechanism originally designed to support people purchasing their own homes also became available to buyers of high-value real estate.
Why the old rules are still in effect in 2026
In June 2023, Cyprus amended the legislation and introduced much stricter conditions for the reduced VAT rate. At the same time, transitional provisions were introduced for people who had already started the process of obtaining a building permit. The transition period was originally scheduled to end in late June 2026. However, in April 2026 Parliament extended it by 6.5 months, through December 31, 2026. This means that some applicants may still qualify for the reduced VAT rate under the old system.
In particular, the transitional provisions apply in cases where an application for planning permission was submitted by October 31, 2023. The Tax Department separately confirmed that it would continue processing the relevant declarations through December 31, 2026, where delays were caused by planning authorities.
This became especially important after Cyprus’s local government reform. Since 2024, a significant share of permitting responsibilities has been transferred to the District Local Government Organizations, or EOAs. Delays in processing applications were one of the reasons the transitional period was extended.
At the same time, separate deadlines applied to certain applications. For example, where a planning application had been submitted by October 31, 2023, and a building permit had been issued by December 31, 2024, the relevant declaration for use of the old regime had to be filed with the Tax Department by June 15, 2026. Applications for the reduced VAT rate must be submitted through the Tax For All (TFA) system.
What will change from January 1, 2027?
From January 1, 2027, once the transitional period ends, all buyers will be subject to the new legislation adopted in 2023. The main difference is the introduction of much stricter limits. Under the current rules:
- the 5% VAT rate applies to the first 130 m2 of a primary and permanent residence being built or purchased;
- the reduced rate applies to properties valued at up to €350,000;
- the total area of the property must not exceed 190 m2;
- the total transaction value must not exceed €475,000;
- any portion of the area or value above the reduced-rate threshold is taxed at the standard 19% VAT rate, provided the property remains within the overall limits.
The new system therefore no longer allows the 5% VAT rate to be applied automatically to the first 200 m2, as was possible under the previous legislation. For example, if a primary residence is between 130 m2 and 190 m2 and remains within the overall value cap of €475,000, the reduced rate applies only to the eligible portion, while the remaining area is taxed at 19%. If the total area exceeds 190 m2 or the property value exceeds €475,000, the right to the reduced regime is generally lost and the standard 19% rate applies to the entire transaction.
Separate conditions apply to people with disabilities and certain large families. Another important restriction is that a home purchased using the 5% VAT rate must be used as the buyer’s primary and permanent residence. The Tax Department reminds property owners that if the home stops being used for this purpose before the end of the 10-year period, the state may require repayment of the corresponding tax benefit.