Finance minister warns of VAT consequences

With the deadlines long expired and the saga of amending the Value Added Tax Law to apply the reduced rate of 5% to specific residential square meters dragging on, Finance Minister Makis Keravnos sounds the alarm, emphasizing the palpable risk of Cyprus being taken to the European Court and fined. In his recent response letter dated June 6, 2023, the Finance Minister explains that in such a scenario, the European Union could potentially claim the entire amount of its own resources, increased with overdue interest resulting from the reduction of own resources, according to Article 12 of Council Regulation (EU, Euratom) No 609/2014.

Meanwhile, the Ministry of Finance considers the proposal submitted by the government to the Parliamentary Committee on Finance and Budget as the appropriate solution under the circumstances (where the maximum limit is set at 110 square meters), especially since it already enjoys the approval of the European Commission, as stated in their letter dated December 12, 2022. According to Minister Keravnos' letter, however, there is a "window" left open for the government to respect, weighing all the data and acknowledging that no one can preempt the approval of the competent authorities of the European Union. The Finance Committee aims to increase the maximum limit from 110 square meters to 130 square meters, a limit that, according to the Members of Parliament, "aligns with market data and satisfies, to the best possible extent, the requirements of the European Directive, while remaining, in conjunction with the highest transaction value, a socially targeted measure as a secondary safety net."

According to the report of the Economic Committee regarding VAT for the first residence and the final text of May 31, 2023, it has been decided to revise the upper limits of the area and introduce upper limits of property value, so that the reduced VAT rate (5%) applies to the first 110 sq.m. of usable residential area, without distinction between apartments and detached houses, up to a value of 350,000 euros, provided that the total value of the transaction does not exceed 475,000 euros and the total usable area does not exceed 190 sq.m. There is, however, a provision summary for cases of disabled individuals where the reduced VAT rate (5%) applies to the first 190 sq.m. of the usable residential area. Additionally, there is a provision summary in the draft law to allow the revision of the transaction value per sq.m. with notification to the Tax Authority following a decision by the Council of Ministers. Furthermore, a provision summary has been included so that in cases where a person ceases to use their residence as a permanent place of residence before the prescribed ten-year period, they are required to pay proportionally the difference between the tax resulting from the application of the reduced rate (5%) and the standard VAT rate (19%) for the period in which the residence was not used, based on the notification from the Tax Authority. Finally, a transitional provision summary has been included in the draft law so that the proposed regulations do not apply in cases where a building permit has been obtained or an application for a building permit has been submitted within four months from the effective date of the proposed law, and a properly completed declaration has been submitted to the Tax Authority for the imposition of the reduced VAT rate for the purchase or construction of a residence within three years from the effective date of the proposed law.

The Committee on Finance wants to increase the maximum limit from 110 sq.m. to 130 sq.m., but this seems difficult.

For the purpose of equal treatment and avoiding market distortion, the draft law includes common criteria for applying the reduced VAT rate (5%) to apartments and detached houses.

The "serial" drama
According to the Parliamentary Committee on Finance and Budget regarding the draft law "Amending the Value Added Tax Law (Amendment) of 2022" and the proposed law "Amending the Value Added Tax Law (Amendment) (No. 5) of 2019," the Parliamentary Committee on Finance and Budget examined the above draft laws in thirteen sessions held between February 7, 2022, and June 1, 2023. The proposed law was also studied by the committee in a previous session on November 5, 2021, and its examination began during the previous parliamentary session, specifically on October 19, 2020. In its sessions held between February 20 and May 15, 2023, the committee also examined a relevant proposed law submitted by Mr. Stavros Papadouris of the Ecologists-Partnership of Citizens Movement, which he withdrew on June 1, 2023, in an effort, as he stated, "to demonstrate goodwill in finding a consensual proposal from the parliamentary parties and promoting a collectively acceptable and preferably unanimous legislative regulation."

During the session held on November 5, 2021, the committee was informed by representatives of the Ministry of Finance that the European Commission had sent a warning letter to the Republic on July 15, 2021. In the letter, it was pointed out that the legal framework governing the application of the reduced VAT rate (5%) for the purchase and construction of residences in Cyprus is not in line with the corresponding provisions of the relevant European Directive, as it does not meet the requirements of social policy envisaged in that Directive.

The Parliamentary Committee on Finance and Budget, having taken into account all the matters raised before it, has reserved its position on the text of the draft law as finally formulated in accordance with the above, pending the discussion of the matter in the plenary session of the House.

[This article was translated from its Greek original]