Are the impositions regarding VAT on Properties in Cyprus fair?


In recent days, we have witnessed discussion taking place with regard to the proposed amendments to the law of VAT on Properties.

Brussels is breathing down Cyprus’ neck that, unless it amends the present legislation, it will impose infringement procedures against Cyprus.

Let’s examine, however, the VAT situation as it stands at present in other European member states, to help us understand the entire situation around the VAT issue on Properties and to reach our own conclusions as to what exactly Brussels is imposing on Cyprus and if these demands are deemed fair and are following the correct procedure.

For instance, Denmark, Sweden, Malta, Germany, Portugal, Greece and Bulgaria are only a few countries in the European Union which do not apply VAT on Properties, and if we continue our research, we will see that Hungary applies 5% VAT for those persons who are purchasing apartments with the surface area of up to 150 square metres and for stand-alone houses of a surface area of up to 300 square metres. The same principle applies in Poland, except that the VAT is 8%, and in Italy, the VAT is 4%.

As you can see from the above, there is no consistency on how and whether VAT is applied to Properties, since each European member state has a different approach on the VAT issue.

One of the main arguments as to why Cyprus applies VAT on Properties has to do with the excuse that has been given that the condition of VAT was imposed even before Cyprus became an EU member state. However, now that Cyprus has joined the EU, a thoughtful citizen of the EU will wonder why there are two types of EU citizens, and why they are not all treated the same in this regard, when in other issues, all EU citizens have the same rights as everyone else, such as the right to freedom of movement, investment and such.

The VAT Directive No. 2017/541 allows member states (VAT applied on Property) to apply a lower VAT rate for first homes as part of the social policy.

However, even though the Directive exists, this still does not put aside the fact that other EU citizens (as mentioned above) do not need to pay VAT.

How, then, can the VAT rules be applied differently in each EU country, and how is this lack of uniformity justified?

Under the Government’s proposal, the reduced VAT rate will apply to the first 170 square metres of a home where the total surface area is up to 220 square metres and the Property value is not more than €350,000.

For apartments, the lower VAT rate will apply to the first 90 square metres where the total surface area is up to 110 square metres and the Property value is not more than €200,000.

In addition, a special clause stipulates that the criterion regarding the total surface area does not apply to persons with a disability.

This proposal has faced a lot of resistance from several organisations, including the Employers and Industrialists Federation, the Chamber of Commerce, the Cyprus Land and Property Owners Association and the Cyprus Property Valuers Association.

Their main argument is that the square metres given and the Property value limit do not reflect the actual situation in Cyprus, taking into consideration the way of life in Cyprus. They have basically suggested that the value of the eligible Properties, both houses and apartments, should be raised to €500,000.

A good point that they have raised is that, with the present inflation rate and the cost of building, no one will find a home for the area and value stipulated in the Bill, thereby making the legislation ineffectual. One needs to also take into consideration that the value of the land has also increased which, together with the construction costs, makes the value of a home with the suggested limits of the value, an unrealistic criterion.

We can also compare Cyprus with other European countries, whereby VAT is not imposed on the basis of square metres and the value of the Property, and we can see the logic of this because we all know that some areas are more in demand than others and the value of the Property is therefore higher. For example, a Property in a busy residential area where, for example, the transport system is good and is located near schools and facilities, will tend to have a higher value than a Property in a rural area, and this will mean that the VAT imposed on these higher-value Properties will not be beneficial to the owners of Properties in these locations.

In my opinion, as Cyprus is a full member of the European Union, we should send a questionnaire to Brussels with our concerns and request that the principles applied by the European Union should be unified, by taking into consideration the distinct characteristics of each country, and in this case, Cyprus and the Cypriot citizens and their way of life. It is not a question which can be solved unilaterally, but the European Union itself should take the circumstances into consideration when imposing their demands on each country. It is not enough to merely follow the European Union regulations without rationale, but the European Union should consider the problems faced by the citizens of the EU member states and specifically, in this instance, Cyprus.

The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Savvas Savvides, Partner, Paphos Office Tel +357 26930800 or email savvas.savvides@kyprianou.com