Cyprus to Change Reduced VAT Rate: Impact on Real Estate Market and Predictions

Since 2012, Cyprus has had a reduced value-added tax (VAT) rate in effect. It allows property buyers to pay only 5% VAT instead of the full 19%. However, the European Commission is not satisfied with such "generosity" from the Cypriot authorities and demands that this law be tightened. Read about what may change in our article.

The situation from 2012 to 2023

The law on the reduced VAT rate applies exclusively to new buildings. This is the most important note: those who intend to buy existing properties may not worry - changes to Cyprus legislation will not affect them. However, since foreign buyers are interested in new real estate, the reduced tax and its changes can significantly affect their decision.

NOTE: the cost of real estate in Cyprus is always written without VAT - with the addition of +VAT.

Currently, the buyer of new Cypriot property pays the "reduced" tax rate under the following conditions:

1. the property is purchased from the developer;
2. the property is purchased for personal use, specifically for permanent residence - it cannot be rented out;
3. no property with a reduced 5% rate has been purchased in the last 10 years;
4. the reduced rate only applies to the first 200 square meters, and the remaining living space will be subject to the full 19% tax.

It is quite obvious that a 14% savings is quite significant. Therefore, many property buyers choose Cyprus to get a home by the sea. Especially since foreigners often have the opportunity to take exactly a new property and get the right to participate in the accelerated program for obtaining permanent residency in Cyprus.

Why will the conditions for tax breaks on real estate purchases change in Cyprus?

It would seem that the situation for Cyprus looks great: there is a good inflow of foreign funds, the real estate market is growing and developing, new opportunities have appeared and new horizons have opened up. Why change anything?

Here, it is necessary to remember that the Republic of Cyprus is part of the EU. And this means that it must comply with its legislation and special directives. In this case, the European Commission was unhappy with Cyprus's too generous policy towards foreign investors.

The reason is simple: such small restrictions do not allow for careful monitoring of investment transparency. This could harm the reputation of Cyprus in particular and the European Union as a whole. If this benefit applied only to citizens of the island and EU member states, then there would be no questions. But now, thanks to the reduced VAT rate, there is a large influx of buyers from third countries, and this greatly concerns the European Commission.

Therefore, on July 15, 2021, Cyprus received an official notification to revise its preferential policy towards new buildings. For a long time, the Cyprus Cabinet of Ministers developed new rules, taking into account the recommendations of the European Commission, and considering attractive conditions for investors. And here's what came out of it.

What changes did the Cyprus Cabinet of Ministers propose?

Based on the requirements of the European Commission, the following changes were proposed in the preferential policy:

1. Limit the area of units that fall under the reduced VAT: apartments - up to 110 m2, houses - up to 220 m2.
2. Limit the cost of units that fall under the reduced VAT: apartments - up to 200,000 euros, houses - up to 350,000 euros.
3. Set a preferential VAT rate of 5% only for part of the residential area: for apartments - 90 m2, for houses - 170 m2. All other square meters will be subject to the full 19% tax.

It was these proposals that the Cypriot authorities sent for consideration to the European Commission. Of course, this process is not fast, so it has been going on for the second year.

At the same time, the Technical Chamber of Cyprus (ETEK) expressed its surprise at the prices proposed in the Cabinet of Ministers. The fact is that 200,000 euros for an apartment and 350,000 euros for houses are very small amounts. Investors usually prefer to buy business or elite class real estate, which often does not fit within these limits. Such an unprofitable offer will simply scare away potential foreign buyers who saw the benefit precisely in high-priced housing.

ETEK proposed raising the bar to 275,000 euros for apartments and 450,000 euros for houses, which would be more attractive for investors. However, it is still unclear what decision the European Commission will make regarding the new rules for tax breaks in Cyprus.

When will the changes come into effect?

So, what Cyprus has proposed to the European Commission is under consideration by the local authorities. Some experts believe that the Cabinet's conditions will not be approved: they still do not include any mention of an assessment of buyers' incomes or special conditions for foreign citizens. This is precisely what many believed the executive authorities of the EU wanted to see.

Nevertheless, the proposal is there, and it will be discussed. It is not yet clear when a final decision will be made and what adjustments will be made. Expectations are pinned on the end of March 2023, when all members of the island's government will return from vacation.

And if we remember the Cypriot national slowness and ubiquitous "sigá-sigá," then we can expect the process to drag on for a long time. So those who plan to buy real estate in Cyprus in the near future and use the preferential VAT have every chance of making a profitable deal. There is time and opportunity for this.

Forecasts for the Cyprus real estate market after VAT changes

It is not difficult to guess that demand for Cypriot real estate among foreign buyers will drop after the reduction of the preferential program. But to what extent is difficult to predict. The changes will only affect those who buy property for themselves, while direct investors (who plan to rent or simply invest with subsequent resale) will not lose anything. So it is still too early to talk about serious losses for the Cypriot economy. Analysts do not dare to make specific forecasts, especially before the Cabinet makes a final decision on the restrictions and sends them for consideration by the European Commission. So for now, buyers of primary real estate in Cyprus can confidently plan their deal and get a new home on the hospitable sunny island.

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