Reshaping VAT on First Homes

In a significant move with the close observation of Brussels, the Cyprus parliament recently passed a law altering the existing, reduced value-added tax (VAT) rate of 5 percent on first homes. This legislative change aims to continue making homeownership more accessible and affordable for individuals and families while alleviating pressure imposed by the European Commission. However, this decision did not come without a fair share of political debates and the looming threat of penalties from the European Commission. 

Reduced VAT Rate on First Homes:

Under the newly passed law, first-time homebuyers in Cyprus will benefit from a reduced VAT rate of 5 percent, a significant decrease from the standard rate of 19 percent. This reduced rate applies to the first 130 square meters of a first home, whether it is a single dwelling or an apartment, whereas previously the reduction applied to the first 200 square meters. The law change also states that the reduction applies to a property with a maximum value of €350,000 whereas previously the laws stated that there was no  maximum value. Additionally, the amended discounted VAT rate extends from the first 130 square meters to the first 190 square meters of the buildable area for individuals with disabilities. These provisions aim to alleviate the financial burden on homebuyers and incentivize homeownership in Cyprus.

EU Scrutiny and Potential Penalties:

The European Commission has been closely monitoring Cyprus' implementation of EU VAT rules for housing. In June, the Commission issued a reasoned opinion to Cyprus, indicating non-compliance with EU VAT regulations for houses purchased or built in the country. Cyprus had two months to address the issue to avoid potential referral to the EU Court of Justice or fines for non-compliance. It is important to note that most cases are resolved before reaching the court. The EU's concern primarily revolves around the broad interpretation of the reduced VAT provision, which potentially extends beyond the social policy aim stated in the VAT directive.

Promoting Affordability and Accessibility:

The high VAT rate has traditionally been a significant financial burden for homebuyers, especially first-time purchasers who often face multiple costs associated with property transactions. Although now revised, this measure is still a positive step towards alleviating these challenges, potentially making homeownership more within reach for a broader segment of the population.

In conclusion, the passage of the revised VAT rate on first homes in Cyprus represents a significant change based on what was originally in place and will reshape the country's housing policy from hereon. While still addressing affordability concerns, it also navigates the pressure and scrutiny from the European Commission. By promoting homeownership and revitalizing the real estate market, Cyprus still aims to boost economic growth, create employment opportunities, and foster social development. Moving forward, it is essential for Cyprus to ensure compliance with EU regulations while continuing to support its citizens' aspirations for homeownership.