Nowadays having your own permanent residence is a must, however the cost for the acquisition or construction of a house/apartment has significantly increased in the last few years. In accordance with the Statistical Service of the Republic of Cyprus, the construction cost per square meter for a house which has been constructed during the year 2020 was €940 in comparison to the year 2022 where the amount was €1,222 which led to an increase of 30% on the construction cost which affects the construction industry up to today. In addition, as per the Central Bank of Cyprus the residential property price index (RPPI) for the year 2022 was 84,1 and for the year 2023 was 90,6 resulting to an increase of the RPPI of 7.73% which is mainly due to the coronavirus and the wars in Europe and the surrounding area. Along with the increase in the construction cost we have an increase in the interest rate on loans as well as the rental cost which makes it difficult for couples and families receiving an average salary to cover the basic costs.
The Republic of Cyprus for assisting any natural person who wishes to acquire/construct a primary residence, it grants him/her the right to apply for the reduced VAT rate of 5% instead of paying the standard VAT rate of 19% under certain conditions.
In accordance with the Cyprus VAT law which is currently in force, in order for a natural person to be eligible for applying for the reduce VAT rate of 5% he/she should have completed the 18th year of age upon submission of the application, acquire the property in order to use it as a main and permanent residence, does not have any other residence in the Republic where he/she has applied for the reduced VAT rate and in case he/she has received any sponsorship under the Special Sponsorship Law it should be returned back as provided by its provisions.
On the 16th of June 2023 it was published in the Cyprus Government Gazette an amendment concerning the VAT legislation regarding the 5% reduced VAT rate on the acquisition and/or construction of a primary residence in Cyprus. In addition, a circular has been issued by the Tax Department providing clarifications on how the 5% reduced VAT rate should be applied where the criteria that should be taken into consideration are the square meters of the buildable residential area, the value of the property and if the residence will be purchased by a person with disabilities or by a multi-child family.
As per the new VAT legislation, the 5% reduced VAT rate is applicable on the first 130 square meters of the buildable residential area of the building, up to the value of transaction of €350,000, provided that the total buildable residential area does not exceed 190 square meters, and the total value of transaction will not exceed €475,000. It should be noted that in case the total buildable residential area exceeds 190 square meters, and/or the value of the transaction exceeds €475,000, then the whole transaction will be subject to the standard VAT rate of 19% which is currently applicable.
Furthermore, in case that the immovable property will be acquired by a disable person, the 5% reduced VAT rate will apply for the first 190 square meters without taking into consideration the total buildable residential area of the property and for families which have more than 3 children, the total buildable area is increased by 15 square meters per additional child, however the limits with the value of the transaction of €350,000 up to €475,000 still apply.
It is worth noting that the new VAT legislation will not affect any immovable property that a building permit has been issued, or a duly completed application for the building permit has been submitted to the competent authority until the 31st of October 2023, and provided that the application for claiming the 5% reduced VAT rate is submitted within 3 years from the date that this new law came into effect which was on the 16th of June 2023.
A person who is interested in applying for the reduced VAT rate of 5%, he/she should submit the application along with the supporting documentation before he/she takes ownership of the property and should obtain the permission from the Tax Department in writing.
An important factor which should be taken into account by any individual who wishes to apply for the 5% reduced VAT rate is that he/she should use the property as a primary residence for a period of 10 consecutive years otherwise it will have to pay back to the Tax Department an apportionment of the 14% benefit he/she obtained upon the purchase of the residence based on the months that it was not using the property as his/her primary residence.
In addition, as per the new VAT legislation, a person who has already claimed the 5% reduced VAT rate has the right to re-claim the reduced rate for the purchase of a new private residence before the lapse of the 10 years, provided that it will pay back to the Tax Department the apportionment of the VAT claimed for the months that it was not using the property as a primary residence.
As from the 27th of May 2024 the application for claiming the reduced VAT rate of 5% should be submitted by the eligible person through the Tax for All (TFA) platform where the relevant certificate will be available upon the approval from the Tax Department.
The new VAT legislation for the acquisition or construction of immovable property aims to make homeownership more accessible and affordable for the beneficiaries. By reducing the financial burden on buyers, it permits economic development and the maintenance of social balance.
My opinion is that additional measures should be taken by the Government of Cyprus for making the acquisition of immovable property more affordable, to individuals belonging to the middle class for maintaining social balance. These measures must be taken with the aim of achieving both the fair distribution of economic burdens and the preservation of the development of a healthy economy.
K. Treppides & Co Ltd is the largest independent consulting firm in Cyprus with an established international presence and offices in Cyprus, United Kingdom, and Malta. The Company was established in 1985 and employs approximately 200 professionals. A full range of consulting, assurance, tax, accounting, and fund services are provided to groups, companies and investors operating internationally in a wide range of financial and business sectors. The Company has decades of proven track record of delivering high-quality services and solutions to our clients and through this experience, investors and businesses are guided and assisted during the establishment process and subsequent investment activity in Cyprus and internationally.
Contact Details:
Theano Orinou
VAT Manager
Nicosia: Treppides Tower, Kafkasou 9, Aglantzia, CY 2112, Nicosia, Cyprus
Limassol: Andrea Kariolou 38, Ayios Athanasios, CY 4102, Limassol Cyprus
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