Since 2012, a reduced value added tax (VAT) rate has been operating in Cyprus. It allows first time home buyers to pay 5% instead if the full 19% tax. However, the European Commission is not satisfied with the “generosity” of the Cyprus authorities, and demands to tighten this law. What is going to change and how much will this change?
State of affairs in the period 2012-2023
The reduced VAT law applies exclusively to new buildings. Those who are going to buy secondary real estate do not need to worry – this legislation will not affect them. But, since foreign investors are usually interested in primary real estate, the reduced tax and its changes can greatly affect their decision making.
REFERENCE: The value of a property in Cyprus is always indicated without VAT (cost price+VAT)
So, the buyer of primary real estate in Cyprus pays the “facilitated” tax rate, subject to the following conditions:
- The primary property is purchased directly from the developer;
- Housing is bought for personal use and for permanent residence – it will not be possible to rent it out;
- In the last 10 years, no real estate with a preferential rate of 5% has been purchased;
- The exemption applies only to the first 200m2 – the rest of the living space will be subject to the full 19% tax.
It is clear that savings of 14% is quite noticeable. Therefore, many property buyers choose Cyprus when deciding to buy a new home by the sea. You will also have the opportunity to get the primary object, as well as to get the right to participate in the accelerated program for obtaining permanent residency in Cyprus.
Why will Cyprus change the conditions of benefits when buying property?
It would seem that Cyprus’ position looks great: there is a good inflow of foreign funds, the real estate market is growing and developing, new opportunities have appeared and new horizons are opening up. So, why change anything?
Here, we must remember that the Republic of Cyprus is part of the European Union. And this means that it must obey its laws and special instructions. In this case, the European Commission was dissatisfied with the “generous” policy of Cyprus towards foreign investors.
The reason is simple: such small restrictions do not allow careful monitoring of the transparency of investments. This can harm the reputation of Cyprus in particular and the EU as a whole. If this benefit concerned only the citizens of the island and other EU member states, then there would be no questions asked. However, because of the reduced VAT rate, there is a large influx of buyers from external countries, and this greatly worries the European Commission.
Therefore, on July 15, 2021, Cyprus received official notice to revise the preferential policy for new buildings. For a long time, the Ministers of Cyprus have been developing new rules, taking into consideration the recommendations of the European Commission, as well as trying to preserve attractive conditions for investors. This was the outcome.
What changes did the Cyprus Cabinet of Ministers propose?
Based on the requirements of the European Commission, the following changes to the policy were proposed:
- Limit the area of properties that fall under the reduced VAT: apartments – up to 110m2, houses – up to 220m2.
- Limit the cost of properties that fall under the reduced VAT: apartments – up to 200,000 euros, houses – up to 350,000 euros.
- Establish a preferential VAT of 5% only for part of the living space: for apartments – up to 90 m2, for houses – up to 170 m2. All extra square meters will be subject to the full 19% tax.
It was these proposals that the Cypriot authorities sent to the European Commission for consideration. Of course, this process is not fast, so it has been going on for a second year.
At the same time, the Cyprus Technical Chamber (ETEK) expressed its surprise at the conditions and price limits offered by the Cabinet. The fact is that 200,000 euros for an apartment and 350,000 euros for houses are very small amounts, considering that investors prefer to buy real estate of elite class, which often does not fit into this framework. Such an unfavorable offer could simply scare away potential foreign buyers.
ETEK has proposed raising the bar to 275,000 euros for apartments and 450,000 euros for houses. Of course, this increase is not very significant, but it expands the boundaries and allows us to attract an increased amount of foreign investors.
It is also worth noting that inflation has grown vastly over the past 2 years. Real estate pricing has risen significantly in both Limassol and Nicosia, making it very difficult to find any type of apartment within 200 thousand euros for example. What the Cyprus government will do about this is still unknown.
How soon will these changes take effect?
What Cyprus has proposed to the EU is still under consideration by the local authorities. Some experts believe that the terms of the Cabinet of Ministers will not be approved: they still do not contain a word either about the assessment of the income of buyers, or special conditions for foreign citizens. In the opinion of many, this is what the executive authorities of the EU wanted to see.
Nevertheless, there is a proposal, and it will be discussed. How soon the final decision will be made and what adjustments will be made is not yet clear. Expectations are set for the end of March 2023.
Forecasts for the Cyprus property market after VAT changes
The demand for Cypriot real estate after the “cut” preferential program among foreign buyers will fall. But how much is difficult to predict. The changes will affect those buying housing for themselves – direct investors (who are going to rent out or simply invest for resale) will not lose anything. So, it is too early to talk about losses for the Cypriot economy.
Until this settlement is agreed on, buyers of primary property in Cyprus can still safely plan a deal and get a new home on this hospitable sunny island.
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