Opposition parties in Cyprus insist on the abolition of a reduced VAT of 5% for buyers of luxury villas and apartments, if their total covered area is more than 200 m2.
AKEL member Andreas Kafkalias stated that his party strongly opposes the actions of the Finance Committee and fully supports the European Commission, which warned Cyprus about the misapplication of the EU's reduced VAT rule.
As you may know, Cyprus has a reduced VAT rate of 5% for the first 200 m2 of housing if it's bought by the beneficiary as the main and permanent residence, without considering other important criteria.
The reduced rate applies regardless of the income, assets and financial situation of the beneficiary, family members who will live in the residence, as well as the maximum total area of the house.
The EU VAT Directive allows member states to have a reduced VAT rate on housing in the context of social policy. However, the fact that Cypriot VAT law has no restrictions shows that this measure goes beyond the objectives of social policy.
Earlier, the Audit Office of the country pointed out the same problem to the government of Cyprus.
Investigations into the Gold Passport Case revealed that many of the people who took advantage of the 5% reduced VAT rate, theoretically introduced in the context of social policy, are high-ranking executives with very high salaries. In other words, for many years the tax department has been charging a reduced VAT rate to investors, including very rich foreigners.
VAT legislation across the different countries of the European Union is largely harmonized. However, the use of the reduced rate in an EU Member State is limited to the operations specified in the EU VAT Directive. The Article 98 permits the use of the reduced rate, but only for goods and services falling into the category set out in Annex III to the Directive.
There is a conflict between the EU Directive and the Cyprus law (described below). The problem is the last paragraph in the EU Directive: “… within the framework of social policy”.
Although, when the 5% rate was championed by political parties to help buyers increase the buying power in the real estate market, it is clear that the secret plan was to help the construction industry as a whole by offering cheaper housing to wealthy buyers.
That is why the restrictions on the 5% preferential rate provided for in the legislation of Cyprus refer only to the size of the property and not its value. That being said, the size can be very generous. For example, a house of 200 m2 on the coast of Limassol, which can be sold for more than €2 million + VAT, also falls into the 5% reduced rate zone. Thus, it is highly doubtful whether the condition of the reduced rate of 5% falls within the scope of social policy.
The application of a reduced rate of 5% is granted on the basis that the property will be used as the owner's primary and permanent residence for 10 years. If the owner ceases to use the place of residence as their main and permanent residence, they are obliged to notify the VAT authorities within 30 days from the day when they stop using and refund the difference between the reduced and standard rate.
It is worth noting that the issue of the correct use of the reduced VAT was raised already in the Cyprus Parliament in March last year. However, the matter did not go further than discussion, since the Ministry of Finance was against resolving this issue.
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