CANCELLATION OF THE 5% VAT REDUCTION ON PROPERTY

Buying a home in Cyprus comes with Value Added Tax (VAT) in some cases. To make home ownership more affordable, first-time buyers can benefit from a reduced 5% VAT rate, provided they meet certain criteria.

Value Added Tax (VAT) was introduced in Cyprus on acquisitions of new properties in May 2004, and on acquisitions of land in January 2018.

In Cyprus, property acquisitions are generally subject to VAT at the standard rate of 19%, when VAT is applicable. However, in order to support home ownership and make it more accessible, the law offers a reduced 5% VAT rate for first-time homeowners under certain conditions.

Requirements For the Reduced 5% Vat Rate

The key requirements to qualify for the 5% reduced VAT rate are:

• The property must be brand-new, not a resale.
• The buyer must be a natural person, not a company.
• The property must be used as the buyer’s primary residence for at least 10 years and not used for investment purposes.

The legislation concerning the VAT reductions was amended by the Government in June 2023 introducing new provisions.

Old Rules (Pre-June 2023)

According to the old rules, the reduction was applicable to the first 200 sq. m. of a newly constructed property. If the property exceeded 200 sq. m., then part of the purchase price was paid with 5% and part of the purchase price was paid with 19%.

New Rules (Post-June 2023)

According to the new rules, the reduced rate of 5% VAT applies to:

• The first 130 sq. m. of a newly constructed property, provided that the total buildable area does not exceed 190 sq. m., and
• A property value of €350,000, provided that the total transaction value does not exceed the amount of €450,000.

It is worth noting that the old rules still apply in cases where the application to obtain a Planning Permission for the constructions of the property was submitted before the 31st of October 2023.

Renting Or Selling Before the Expiration of the 10 Year-Period

The authorities grant the reduced 5% VAT rate subject to the condition that the property is used by the applicant as a primary residence for at least 10 years. However, if the owner decides to rent or sell the property before the expiration of the 10-year period, the authorities must be notified.

How to Notify the Authorities

The notification to the authorities must be made through the Tax For All (TFA) portal by submitting an application accompanied by the necessary supporting documents and information, such as:

• Reason for cancellation,
• Copy of the Tile Deed of the property or the Contract of Sale,
• Copy of the passport,
• Statement issued by the Electricity Authority of Cyprus (EAC).

Following the submission of the application, the VAT Department examines the supporting documents and information provided, calculates the VAT, and issues a statement indicating the amount payable. When calculating the amount due, the authorities consider the difference between the 5% and 19% VAT originally paid and then apply it proportionally to the time remaining before the expiration of the 10-year period. In other words, the owner does not lose the benefit for the time the property was used as a primary residence but is liable to pay the part relating to the remaining years.

The authorities specify in their statement the deadline for the settlement of the amount due.

Failure to Notify the Authorities

If the authorities are not notified that the VAT must be cancelled in a timely manner, this may result in:

• Penalties and Interest Charges.
• Delays in the completion of the sale transaction.
• Legal Exposure.

Reclaiming the 5% VAT on a New Purchase

Following the repayment of the VAT due to the authorities, the owner may re-apply and benefit from the reduced rate on a new purchase, provided that they meet the criteria.

Conclusion

The 5% VAT reduction scheme makes property acquisition more affordable and accessible to first-time homeowners. However, property owners who have been granted the 5% reduced VAT on the acquisition of their primary residence and later decide to rent or sell the property before the expiration of the 10-year period, should take all necessary actions to remain compliant with the law. In these cases, it is advisable to seek professional legal assistance before submitting any documents to the authorities.

The lawyer will examine the circumstances of each case and prepare the necessary documents before submitting, to avoid mistakes and exposure to penalties, and to prevent unnecessary delays in completing the sale of the property.