The law on first homes has approved a reduction in VAT.

The parliament on Thursday passed a law allowing for a reduced VAT rate of5% on the first residential homes. The discount will apply to the first130 square meters of the first residential unit, both for individual houses and apartments, and up to a sum of350,000 euros provided that the total transaction value does not exceed475,000 euros and the total built area does not exceed190 square meters.

Another article provides that individuals with disabilities will receive a discount on VAT for the first190 square meters of construction. The law also provides for a transitional period so that the new rules do not apply in cases where a building permit has been issued or when an application for a building permit has been submitted within four months of the law coming into force..

At the plenary session of the State Assembly,42 deputies voted in favor, with the abstention of the deputy from the "Green" party, Alexandra Attalides. Despite agreement in the vote, politicians exchanged barbs about who is responsible for the need to change legislation, as well as the threat of fines from the European Commission to Cyprus.

In his remarks, Stavros Papadouris, a deputy of the "Greens" party, who ultimately voted in favor, noted that the bill was adopted "under pressure" - that is, under pressure from Brussels. He attributed this to "maximum abuse" of this issue in the past. Papadouris said that when Parliament decided in2016 to abolish the threshold of275 square meters for the reduced VAT rate, virtually everyone benefited from what was supposed to be a targeted social policy. He also noted that when in2021 the European Commission asked Cyprus to provide data on the reduced VAT rate here, the tax administration informed Brussels of the regime that was previously applied, but did not report any changes. Subsequently, Brussels sent Nicosia an official notification letter - the first stage of infringement proceedings.

On June1 of this year, the European Commission sent a reasoned opinion to Nicosia, stating that the latter incorrectly applies EU rules on VAT to purchased or constructed homes in Cyprus. Cyprus had two months to resolve this issue. If it does not take action within the next two months, the Commission could decide to refer the matter to the European Union Court. In practice, most cases are settled before being taken to court. In the worst-case scenario, Brussels could impose a fine on the country for non-compliance.

**It is clear that the offending procedures were initiated in the summer of2021. Directive2017/541 allows Member States to apply a lower rate for first residential houses within the scope of social policy. However, the broad interpretation of the Cypriot positive norm seems to go beyond the stated goal of social policy in this directive. Cypriot policy also raised concerns when it became known that recipients of the "golden passport" program, who invested in real estate in exchange for citizenship, also benefited from the reduced VAT rate.