EC challenges 5% VAT proposal for primary residences

Finance Ministry Director-General George Pantelis informed the parliamentary Finance Committee that the European Commission disagrees with the consensual proposal agreed upon in Parliament regarding the imposition of a reduced VAT rate on the construction or acquisition of a primary residence.

Christiana Erotokritou, Chairwoman of the Committee, acknowledged the issue and stated that the Committee has two options: either approve the consensus proposal or go "back to the drawing board" to find new wording before June 8, the scheduled date for the proposal to be voted upon in the plenary session.

The Finance Committee's consensus proposal outlines a reduced VAT rate of 5% for houses or apartments that serve as first homes, limited to 150 sqm and €350,000. However, the total square meters should not exceed 200 sqm, and the total value should not exceed €475,000. For houses falling within these criteria, 19% VAT would be paid for sizes ranging from 150 sqm to 200 sqm, while houses exceeding 200 sqm would be subject to 19% VAT on the entire property value. Technocrats from the Ministry of Finance and the Commission's Taxation Directorate discussed the proposal during a teleconference.

Panteli informed the committee that the European Commission's position is that they do not consider the absence of a threshold for the lower part of the house or apartment area to have social targeting. They suggest setting a limit of 110 sqm for the area. This conclusion was based on their evaluation.

Additionally, Panteli mentioned that regarding the infringement procedure related to the existing legislation, the Commission is expected to send a second letter to the Republic of Cyprus in June. This will grant the authorities two months to respond with legal arguments. If necessary, the proceedings before the European Court of Justice will commence by September or October.

He further noted that if new legislation is adopted, it will be re-evaluated by the Commission services. The infringement procedure will be re-initiated if the Commission finds that it does not comply with the acquis communautaire.