Government changes its mind on tax on first homes

Cypriot MPs have rejected a compromise on a reduced VAT rate for small first homes, supported by the European Commission. MPs increased the total area of a house eligible for the reduced VAT rate of 5% from 19%. After a closed Finance Committee meeting on Monday, the initial agreement of 150 square meters was increased to 190 square meters.

An EU directive requires member states to introduce legislation for a 5% VAT on houses up to 140 square meters. The change in parliament's position is not expected to be accepted easily by Brussels, which has told Cyprus that EU-approved legislation must be passed by June 8. On Monday, local media reported that Brussels would approve a compromise on a reduced VAT for first homes of 150 square meters.

Under the previous compromise, an apartment or house up to 150 square meters with a value of no more than €350,000 would be eligible for a reduced VAT rate of 5%. Houses between 150 and 200 square meters were to pay the standard VAT rate of 19% for each square meter above the limit up to 200 square meters for properties with a value of €475,000.

If the EU-approved legislation is not adopted, Cyprus will face sanctions from Brussels, as the infringement procedure was launched against the Republic in the summer of 2021. Many MPs have been in favor of extending the size criteria in the legislation to meet Cypriot market specifications for larger homes, while the Finance Ministry has been pushing for the EU directive to be adopted before the deadline.

According to the Ministry of Finance's data for 2021, applications for the reduced VAT rate showed that 35% relate to houses up to 100 square meters, 17% relate to houses between 100 and 140 square meters, and 31% relate to properties between 140 and 200 square meters. Another 11% of the applications relate to houses with an area of 200 to 275 square meters.