The following are key amendments and conditions regarding the reduced VAT rate for new residences in Cyprus, under Law 42(I)/2023, which will be in effect from November 1, 2023.
After a prolonged and eventful negotiation process between the European Commission and the Republic of Cyprus, the green light has been given to enforce revised requirements in the VAT law. These amendments primarily focus on the reduced VAT rate of 5% applicable to the acquisition and construction of primary and permanent residences in Cyprus.
- Reduced VAT Rate of 5%: The revised legislation establishes a reduced VAT rate of 5%, which is applicable to new residences in Cyprus that are intended for use as primary and permanent dwellings. This change signifies a favorable tax treatment for individuals looking to acquire or construct such residences.
- Specific Qualification Criteria: To benefit from this reduced VAT rate, new residences must meet specific criteria as defined by applicable laws. These criteria ensure that the property qualifies for the reduced rate, and they are detailed in Law 42(I)/2023.
- Changes in Size and Cost Restrictions: Prior to the implementation of Law 42(I)/2023, the reduced VAT rate of 5% was applicable to the first 200 square meters of the buildable area of a residence. Importantly, there were no maximum limitations on the size or cost of the residence. However, the new law has introduced restrictions regarding both the size and cost of eligible residences. These restrictions have implications for the range of properties that can benefit from the reduced VAT rate.
- Amendment to Table C in the Fifth Appendix: Law 42(I)/2023 introduces changes by replacing the third paragraph of Table C in the Fifth Appendix. Table C outlines the conditions that must be met for the reduced VAT rate of 5% to apply to the acquisition or construction of new residences. The revised conditions now specify that the reduced rate is applicable to the first 130 square meters of the buildable area of the residence.
These amendments and conditions signify a shift in the VAT treatment of new residences in Cyprus, making it essential for individuals and entities involved in property acquisition or construction to be aware of the updated requirements to determine if they are eligible for the reduced VAT rate. The reduction in the eligible buildable area from 200 square meters to 130 square meters and the introduction of cost restrictions may have implications for potential homeowners and developers in Cyprus.
In addition to the requirement that the reduced VAT rate of 5% applies to the first 130 square meters of the buildable area of the residence, Law 42(I)/2023 introduces further conditions and adjustments:
- Total Cost Limit: The total cost of the residence must not exceed €350,000 to qualify for the reduced VAT rate. This means that even if a residence meets the size criteria, it must also remain within the cost limit.
- Combined Size and Cost Restrictions: The residence must not surpass 190 square meters of buildable area or have a total cost exceeding €475,000. These combined restrictions ensure that both the size and cost of the property remain within defined limits to be eligible for the reduced VAT rate.
For example, if a new residence exceeds 130 square meters but remains within the 190 square meters limit, the reduced VAT rate of 5% applies to the first 130 square meters. However, any buildable area beyond that (up to the 190 square meters limit) would be subject to the standard 19% VAT rate on the corresponding value. The total cost of the residence should still not surpass €475,000.
It’s important to understand that properties exceeding the total cost of €475,000 or the total buildable area of 190 square meters will not benefit from the reduced VAT rate and will instead be subject to the standard 19% VAT rate for the entire cost.
Furthermore, Law 42(I)/2023 includes adjustments for specific individuals:
- Adjustments for Individuals with Disabilities and Families with More than Three Children: The law introduces adjustments to the size and cost limits for individuals with disabilities and families with more than three children. These adjustments aim to accommodate the specific needs of these groups within the reduced VAT rate framework. The details of these adjustments and the eligibility criteria for individuals with disabilities and large families should be specified in the law.
These additional adjustments demonstrate an effort to make the reduced VAT rate framework more inclusive and responsive to the unique circumstances of certain groups, such as people with disabilities and larger families, within the context of property acquisition and construction in Cyprus.
The introduction of Law 42(I)/2023 has brought about significant amendments and provisions in Cyprus’ VAT law, particularly in relation to the reduced VAT rate for primary and permanent residences. Here’s a summary of the key points:
- Amendments for Individuals Already Benefiting from Reduced VAT Rate:
- Individuals who have previously claimed the reduced VAT rate for their primary residence were previously required to refund the entire VAT benefit if they stopped using the residence as their primary dwelling.
- Law 42(I)/2023 introduces a more flexible solution. These individuals can now apply for the reduced VAT rate for a new residence within ten years without refunding the VAT benefit. Instead, they must repay the Tax Authorities the VAT amount resulting from the difference between the reduced rate (5%) and the standard rate (19%) on the value of the residence for the remaining years within the ten-year period.
- Transitional Provisions:
- To facilitate a smooth transition to the new regulations, specific transitional provisions have been established.
- Residences that have obtained planning permission from the competent authority or have submitted an application for planning permission to the competent authority by October 31, 2023, will continue to follow the previous rules.
- Additionally, individuals looking to benefit from the reduced VAT rate must submit their applications to the Tax Authorities within three years from the date of entry into force of Law 42(I)/2023.
In conclusion, the amendments introduced through Law 42(I)/2023 provide clarity and define the conditions for the reduced VAT rate of 5% for primary and permanent residences in Cyprus. These changes include limitations on size and cost to ensure a fair application of the reduced rate. The law also offers a more flexible approach for individuals who have previously claimed the reduced VAT rate for their primary residence and outlines transitional provisions to ease the transition to the new regulations. These updates aim to provide a more equitable and practical framework for VAT treatment in the real estate sector in Cyprus.