The European Commission intends to demand from Cyprus to pay hundreds of millions of euros to the European Fund as compensation for incorrectly charged VAT on the sale of real estate, during the Citizenship by Investment program.
As it turned out, third-country nationals purchased hundreds of housing properties in the country at a reduced 5% tax rate, instead of the 19% rate required, as provided by the relevant EU Directive.
During the inspections, the Cyprus Audit Service found, and later confirmed by the Commission, that many rich foreigners who received Cypriot citizenship under the investment program bought houses in the country, including on the secondary market, for more than 500 thousand euros. For the first 200 m2, they paid a reduced 5% VAT, despite the fact that this benefit is provided only for new buildings and only in the context of state social policy.
As you may know, according to Cypriot law:
- the reduced VAT rate in Cyprus applies to purchases that were made after October 1, 2011;
- it should be a new building and the buyer should buy their first real estate in Cyprus;
- the selected property must serve as the buyer's primary and permanent residence in Cyprus for the next 10 years;
- the reduced rate is applied on the first 200 m2, the tax on the remaining area is charged at the standard VAT rate, i.e. 19%.
In addition to the above, the 5% reduced VAT rate is applied in the context of state social policy.
It is worth noting that the loss of income and violation of the relevant European directive was confirmed by the MEP from the DIKO party Kostas Mavridis.
The money from the reduced tax rate was lost not only by Cyprus, but also by the European Union, to which a significant part of the proceeds of VAT is sent.
According to the Court of Auditor, the Cyprus Tax Department did not apply the European Directive on the Reduced VAT Rate (which allows the application of the reduced rate only for social purposes and not for investments), but only applied the relevant Cypriot legislation.
Tax inspector Giannis Tsagaris said the law is clear and the Department is applying Cypriot law, which imposes 5% VAT on the first 200 m2 of living space suitable for construction. However, the European Directive states that the low VAT rate of 5% is only granted for social and not investment reasons.
It is possible that Cypriot taxpayers will be asked to cover the VAT saved by naturalized investors who bought luxury homes. The tax inspector stressed that checks are now underway to determine whether the houses are actually used as primary and permanent housing.