After a prolonged and eventful negotiation process between the European Commission and the Republic of Cyprus, the green light has been given to enforce revised requirements in the VAT law. These amendments primarily focus on the reduced VAT rate of 5% applicable to the acquisition and construction of primary and permanent residences in Cyprus. On June 16, 2023, the Official Gazette of the Republic of Cyprus promptly published the immediate effect of the amending law 42(I)/2023, ( the “Law 42(I)/2023.”).
Reduced VAT Rate for New Residences
Under the revised legislation, the reduced VAT rate of 5% is now applicable to new residences in Cyprus intended for use as primary and permanent dwellings. However, specific criteria laid down by applicable laws must be met for a residence to qualify for this favourable rate.
Previously, the reduced VAT rate of 5% only applied to the first 200 square meters of the buildable area of a residence, without imposing any maximum limitations on size or cost. However, with the implementation of Law 42(I)/2023, restrictions have been introduced regarding the size and cost of eligible residences, consequently influencing the range of application for the reduced VAT rate.
Key Amendments and Conditions
Law 42(I)/2023 replaces the third paragraph of Table C in the Fifth Appendix, which outlines the conditions for applying the reduced VAT rate of 5% to the acquisition or construction of new residences. The revised conditions are as follows:
- The reduced rate is applicable to the first 130 square meters of the buildable area of the residence.
- The total cost of the residence must not exceed €350,000.
- The residence must not surpass 190 square meters of buildable area or have a total cost exceeding €475,000.
For instance, if a new residence exceeds 130 square meters, let’s say 180 square meters, the reduced VAT rate of 5% is applicable to the first 130 square meters. However, the remaining 50 square meters (180sq – 130sq) would be subject to the standard 19% VAT rate on the corresponding value. It’s crucial to note that the total cost should not surpass €475,000.
Residences exceeding the total cost of €475,000 or the total buildable area of 190 square meters will be subject to the standard 19% VAT rate for the entire cost.
Adjustments for Specific Individuals
Law 42(I)/2023 also introduces adjustments to the limits for individuals with disabilities, as defined in the law, and families with more than three children. These adjustments aim to accommodate the specific needs of these groups within the reduced VAT rate framework.
Provisions for Individuals Claiming Reduced VAT Rate
Another notable amendment pertains to individuals who have already claimed the reduced VAT rate for their primary residence. Previously, these individuals were obliged to refund the entire VAT benefit if they ceased using the residence as their primary dwelling. However, Law 42(I)/2023 introduces an alternative solution. Now, these individuals can apply for the reduced VAT rate for a new residence within ten years without refunding the VAT benefit. Instead, they are required to repay the Tax Authorities the VAT amount resulting from the difference between the reduced rate (5%) and the standard rate (19%) on the value of the residence for the remaining years within the ten-year period.
To ensure a smooth transition, Law 42(I)/2023 establishes specific transitional provisions. These provisions indicate that the previous rules will continue to apply to residences meeting the following conditions:
- A planning permission is obtained from the competent authority, or an application for planning permission is submitted to the competent authority by October 31, 2023.
- The application for the reduced VAT rate is duly submitted to the Tax Authorities within three (3) years from the date of entry into force of Law 42(I)/2023.
With the publication of Law 42(I)/2023, Cyprus has implemented amendments to the VAT law, thereby providing clarity and defining the conditions for the reduced VAT rate of 5% for the acquisition and construction of primary and permanent residences. These changes introduce limitations on size and cost, ensuring fair application of the reduced rate. Individuals who have already claimed the reduced VAT rate for their primary residence are now eligible to apply for the same benefits when purchasing a new residence, subject to repayment obligations. The transitional provisions ensure a smooth transition for residences in progress.