Susan MeierBuying a home in Cyprus isn't just about living in one of the Mediterranean's most beautiful locations - it also comes with significant tax advantages. Thanks to recent legislative changes, buyers and builders of primary residences can benefit from a reduced Value Added Tax (VAT) rate. This article outlines the new regulations relevant to purchasing property in Cyprus and offers key insights for anyone looking to make their dream of an island home a reality.
Applying the Reduced VAT Rate to Primary Residences
On 8 June 2023, the Cypriot House of Representatives passed an amendment applying a reduced VAT rate of 5% to primary residences. These changes came into effect on 16 June 2023, introducing new conditions for applying the reduced rate to primary and permanent homes, along with transitional rules and updated requirements for re-applying for the reduced rate within a 10-year period.
Conditions for the Reduced VAT Rate
Under the amended VAT Law (95(I)/2000), the reduced 5% rate applies to the first 130 square metres of a primary residence, up to a value of €350,000, provided that:
- The total transaction value does not exceed €475,000.
- The total buildable area does not exceed 190 square metres.
There is an exception for individuals with disabilities. Regardless of the property's total buildable area, they may apply the reduced 5% VAT rate to the first 190 square metres. To qualify, individuals must fall under the specific definition of "persons with disabilities" within the VAT Law. The transaction value per square metre is subject to revision by the Tax Commissioner and the Council of Ministers.
The Transitional Period
A transitional period has been established. During this time, the new amendments (excluding those regarding re-application within 10 years) do not apply if:
- Planning permission was obtained or a full application for planning permission was submitted by 31 October 2023; and
- A properly completed application is submitted to the relevant authority within three years of the new regulation coming into force.
Re-applying for the Reduced VAT Rate
The new legislation changes the rules for applying the 5% VAT rate to a different property within a 10-year window. An individual can apply the 5% rate to a new property provided that:
- The Tax Commissioner is notified within 30 days of the date the individual stops using the original property as their residence.
- The individual pays back the difference between the reduced rate and the standard VAT rate. This repayment covers the remaining portion of the 10-year period during which the property is no longer used as a primary and permanent residence.
Exceptions apply in the event of the beneficiary's death or if the property is transferred to one of their adult children, provided the child is also a beneficiary at the time of transfer.
Eligibility and Application Process
Eligibility for the reduced rate is only confirmed once you receive certified approval from the Tax Department. Applicants must submit a specific declaration stating that the house will be used as their primary and permanent residence, accompanied by various supporting documents. Crucially, applications must be submitted before the eligible person takes actual possession of the property.
Eligible persons include residents of Cyprus, citizens of EU member states, and non-EU citizens, provided the property is used as their primary and permanent residence within the Republic.
Anyone making a false declaration to benefit from the reduced rate is legally required to pay the difference in VAT. Furthermore, making a false declaration is a criminal offence punishable by a fine of up to double the VAT amount due, imprisonment for up to three years, or both.
Conclusion
Buying property in Cyprus remains an attractive proposition under the new VAT framework. The ability to secure a reduced VAT rate makes owning a home on this sun-drenched island accessible for many buyers. However, if you want to take advantage of these rules, you need to be fully aware of the specific conditions and the application process. With the right planning and advice, purchasing a home in Cyprus can be a sound investment in your future.
