After dramatic negotiations for almost two years between the Republic of Cyprus and the European Commission, the green light was given to pass the amended requirements specified in the VAT law for the application of the reduced VAT rate of 5% for the acquisition and/or construction of primary and permanent residence in Cyprus.
On the 16 June 2023, the amending law 42(I)/2023 (the “Law 42(I)/2023”) was published in the Official Gazette of the Republic of Cyprus with immediate effect.
The reduced VAT rate of 5% applies to the acquisition or the construction of a new residence in Cyprus that will be used as the primary and permanent residence, provided that the residence meets certain criteria as these are laid down by the applicable laws.
Before the Law 42(I)/2023, the reduced VAT rate of 5% applied only to the first 200 square meters of the buildable area of the residence, without a maximum cap on the total size or cost of the residence. The Law 42(I)/2023 implements limitations on the size and cost of the residence, thus affecting the range to which the reduced VAT rate is applicable.
Specifically, the Law 42(I)/2023, replaces the third paragraph of Table C of the Fifth Appendix in relation to the applicability of the reduced VAT rate of 5% for the acquisition or construction of a new residence as follows:
provided that the residence does not exceed:
For example, in the event the new residence is larger than 130 square meters, i.e. 180 square meters, then the calculation will be made for the first 130 square meters with the reduced VAT rate of 5% and for the remaining 50 square meters (i.e. 180 – 130), the 19% VAT rate will be applied in the corresponded value, provided that the total cost does not exceed the amount of €475,000.
It is noted that any residence exceeding the total cost of €475,000 and the total buildable area of 190 square meters, then the total cost will be subject to VAT at 19% for the whole buildable area.
The above limits are adjusted for persons with disabilities, as defined in the amending Law 42(I)/2023, and families with more than three children.
Another important amendment of the VAT Law is for individuals who have already claimed the reduced VAT rate for their primary residence. Before the amendment of the VAT Law, those individuals had to refund the total of the VAT benefit obtained in the event that they had stopped using the residence as their primary residence. According to Law 42(I)/2023, the said individuals could apply for the reduced VAT for a new residence before the period of ten years has elapsed, provided they refund to the Tax Authorities the amount of VAT resulting from the application of the reduced rate (i.e., the difference between 19% and 5% = 14%) on the value of the residence for the remaining years of the ten years period.
As per the transitional provisions introduced by Law 42(I)/2023, the previous rules apply for residences for which:
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 Stephanos Ayiomamitis, Senior Associate, at our Limassol office, Tel +357 25363685 or email stephanos.ayiomamitis@kyprianou.com
