EC urges Cyprus to comply with EU VAT rules for homes

The European Commission has called on Cyprus to comply with EU VAT rules for dwellings by sending a reasoned opinion to the country, included in the Commission’s June infringements package. If Cyprus does not comply with EU law in time, the Commission could take the case to the Court of Justice of the European Union.

According to a press release, the European Commission decided to send a reasoned opinion to Cyprus (INFR(2021)2093) for its failure to properly apply EU VAT rules for dwellings purchased or constructed in Cyprus.

Cyprus, it is noted, allows a reduced rate of VAT of 5% on the first 200 m2 of dwellings used as the principal and permanent residence by the beneficiary, without any other limitations.

The VAT Directive (Council Directive 2006/112/EC) does allow Member States to apply a reduced rate of VAT on housing as part of a social policy. However, the wide scope of the Cypriot legislation and the lack of limitations therein indicate that the measure goes beyond that objective, the Commission points out in its press release.

In particular, the reduced rate is applied regardless of the income, assets and economic situation of the beneficiary, the members of the family that will reside in the dwelling, and the maximum total area of the dwellings concerned.

Consequently, the Commission considers that Cyprus has failed to fulfill its obligations under the VAT Directive.

Thursday’s reasoned opinion is the second stage in an infringement procedure that the Commission opened in July 2021 by sending a letter of formal notice.

Cyprus now has two months to address the shortcomings identified in this reasoned opinion. If Cyprus does not act within the next two months, the Commission may decide to refer the case to the Court of Justice of the European Union.