Anyone who benefited from the previous 5 per cent VAT scheme for the purchase or construction of a main residence in Cyprus will remain covered only until June 2026, when the transitional provisions of the 2023 legislation come to an end.
The scheme provided a significant financial advantage for homebuyers and developers. Under the temporary arrangements, buyers or developers who applied for a planning permit between June 1 and October 31, 2023, can still secure the reduced rate, regardless of when construction is completed.
per: Changes in VAT Regulations
For three years, from June 16, 2023, to June 15, 2026, the old and new VAT frameworks coexist. The previous legislation allowed a 5 per cent VAT on the first 200 square metres of a home, irrespective of its overall size or value. However, following pressure from the European Commission, stricter rules were introduced with the Amending VAT Law Ν.42(I)/2023.
Under the new framework, the 5 per cent VAT now applies only to the first 130 square metres of a property, with a maximum value of €350,000. This is contingent upon the total area not exceeding 190 square metres and the total transaction value remaining below €475,000. For persons with disabilities, the reduced rate extends to 190 square metres, but the same value cap applies.
Compliance and Inspections
Finance Minister Makis Keravnos emphasised the importance of the transitional measures, which apply to buildings that obtained or applied for a planning permit by October 31, 2023. Property owners must submit the required declaration for the reduced rate to the Tax Department by June 15, 2026. Failure to comply could lead to significant penalties.
Keravnos also pointed out that beneficiaries who later use their properties for other purposes must repay the full VAT amount, resulting in an additional 14 per cent charge. The Tax Department has been active in recovering funds, having conducted over 5,000 inspections in recent years and recovering around €50 million from cases where homes were bought under the 5 per cent rate but not used as main residences.
Targeted Areas for Inspections
Many violations have been identified in popular coastal areas and student-heavy districts like Aglandzia and Engomi, where properties are often rented out on digital platforms. The authorities are ramping up checks to ensure that the reduced VAT rate applies solely to primary residences. Inspections tend to increase during summer months, when misuse is more prevalent.
Encouraging Compliance
To facilitate compliance, the Tax Department is running a voluntary campaign encouraging property owners who no longer meet the criteria to come forward and rectify their situations. In cases of financial hardship, repayment of VAT can be arranged in up to 12 instalments, with longer periods available under exceptional circumstances, as stipulated by the Tax Commissioner.
Legal Compliance and Future Implications
In a significant development, Keravnos confirmed that the EU infringement case against Cyprus has been formally closed by the European Commission, following acceptance of the 2023 amendment as compliant with EU law. This means Cyprus will avoid potential fines or additional payments, a relief for the government and stakeholders involved in the housing sector.
