The Cyprus Tax Department has audited real estate purchased with the application of the preferential VAT rate

In July, the Cyprus Revenue Authority carried out an audit of properties purchased or built using the preferential VAT rate.

In total, around one thousand housing units were inspected, mainly in the Free Famagusta area. During the on-the-spot inspections, the department found more than 50 cases of gross violations in the calculation of property tax, resulting in a loss of around four million euros to the island state's coffers.

At the same time, the department noted that since the start of the audit in 2022, the tax department's employees have managed to recover about 40 million euros from offenders. The audits are expected to continue on an ongoing basis.

The department emphasised that many Cypriots and foreigners who have previously purchased a property are not complying with the law. Despite the ban, they are renting out apartments and houses they bought under the short-term rental concessions, making large financial profits. Tax Commissioner Sotiris Markidis urged purchasers who bought homes with a reduced VAT rate of 5 per cent and use their assets for commercial purposes to comply with the law. He said that it was advisable for owners of such properties to voluntarily report to the tax office to pay the remaining 14 per cent VAT.

We urge those who have processed 5% VAT without being entitled to do so to come to the office to settle the arrears. Everyone is obliged to comply with the law in order to avoid the imposition of interest and fees," Markidis said.

As a reminder, the standard rate of VAT in Cyprus is currently 19%.

However, in some cases the legislation provides for the possibility of applying a reduced rate of VAT of 5% on the purchase of a house.

According to the Cyprus VAT Laws N.95(I)/2000, in order to benefit from the reduced VAT rate, the purchased property must be new and used for the first time since its commissioning.

The reduced VAT rate of 5% may be applied by any natural person, irrespective of citizenship or residence status, who:

1. have reached the age of majority (18 years) at the time of applying for the reduced rate;
2. Acquire a property in Cyprus as their permanent and principal residence;
3. do not own any other property in Cyprus acquired with the application of the reduced VAT rate;
4. intend to use the property for their personal use and not for profit (e.g. to rent).

The application for the reduced rate is made on an application basis and is submitted by an authorised person to the Cyprus Revenue Authority prior to the purchaser taking possession of the property. The application must be accompanied by a package of documents, including proof of ownership of the property and its use as a principal residence in Cyprus. Invoices for the sale of property issued prior to the receipt of confirmation from the Revenue Authority must include VAT at the standard rate. In turn, the VAT paid may be adjusted upon receipt of written confirmation of the possibility of applying the reduced rate. The use of the 5% VAT rate is approved by the tax authority provided that the property is used as a main and permanent residence in Cyprus for the next 10 years.

It is worth noting that Cyprus has recently changed the conditions for applying the reduced VAT rate to real estate. According to the new legislation:

1. A preferential VAT rate of 5% applies to the purchase or construction of a primary residence for the first 130 m2 of floor area;
2. The 5% VAT exemption applies to the maximum value of the primary property up to 350,000 euros;
3. the property may not exceed a total surface area of 190 m2 or a value of 475 thousand euros. If these values are exceeded, the standard VAT rate of 19% of the total value of the property applies.