The transitional provisions included in the Law on the Reduction of the VAT Rate on the Purchase or Construction of Primary Residences by the executive and legislative authorities have resulted in significant losses for the state budget. Over the past 19 months, Cyprus has lost hundreds of millions of euros due to outdated tax rules.
In particular, an updated, stricter legal framework was approved in June 2023, aligning with the European directive.
Under the new rules, the 5% VAT rate can only be applied as part of social support policies. However, transitional provisions approved in the same year allow the previous legislation to remain in force until June 2026, meaning that citizens will be able to build or purchase expensive residences, including multimillion-dollar villas, at a reduced tax rate for another three years, despite this practice violating European law. Thus, Cyprus has once again postponed fulfilling its obligations to the European Commission. Previous legislation applied VAT at 5% to the first 200 m² of real estate, regardless of the property's total area or value. The new legislative framework establishes different criteria. The preferential rate now applies only to the first 130 square meters of residential property, provided the property's value does not exceed €350,000.
A phased taxation scale is also being introduced.
- For properties ranging from 131 to 190 square meters and costing up to €475,000, VAT is applied at a rate of 5% to the first 130 square meters, and a rate of 19% to the remaining area.
- Properties exceeding 190 m² or valued at over €475,000 are subject to a 19% VAT on the entire area and value without exemptions.
Transitional provisions permit those who applied for planning permission between June 1 and October 31, 2023, to use the previous taxation scheme, regardless of construction completion date. As a result of this loophole, thousands of applicants submitted their documents in late October. The Cyprus Land Department experienced a "panic" due to the record number of applications.
According to a letter from Finance Minister Makis Keravnos in response to a request from MP Alexandra Attalidou of the Volt party, 9,000 applications had been approved by June 2023 for the application of 5% VAT on properties up to 200 m².
According to the Ministry of Finance's estimates, the potential budget revenue if all these transactions were taxed at a rate of 19% would be around €360 million. Of this amount, 650 applications concerned properties worth more than €500,000, which were still eligible for preferential VAT. Potential tax revenues in these cases could have amounted to an additional €85 million. An additional 300 cases were identified in which real estate worth €500,000 or more was subject to a reduced VAT rate, regardless of size. Applying the standard rate would have added €47 million to the budget. The Volt party issued a statement condemning the retention of the transitional provisions, calling them "unfair and unjustified."
Party representatives promised to continue promoting a bill to repeal the provisions. However, the Ministry of Finance noted that such an initiative could be deemed unconstitutional because repealing transitional provisions that have already been approved and gone into effect could violate the principle of legal certainty. While the government continues to adhere to European legislation, critics point out that Cyprus has once again found itself in a situation where domestic political compromises conflict with international commitments, leading to significant budget losses.