New VAT Rates for Primary Residences in Cyprus

After a two year negotiation process involving the Republic of Cyprus and the European Commission, approval was finally secured to implement the revised regulations stipulated in the VAT law for the endorsement of the discounted VAT rate of 5% for the purchase and/or development of primary and permanent residences in Cyprus.  The new law, which was published in the Official Gazette of the Republic of Cyprus on June 16, 2023, takes effect immediately.

The reduced VAT rate of 5% now applies to the first 130 square meters of the buildable area of the residence, provided that the total cost of the residence does not exceed €350,000. Additionally, the residence must not exceed 190 square meters of buildable area or a total cost of €475,000. For example, if a new residence is 180 square meters, the first 130 square meters will be subject to the reduced VAT rate of 5%, while the remaining 50 square meters will be subject to the standard VAT rate of 19%.

It should be noted that any residence that exceeds €475,000 in total cost and 190 square meters in total buildable area will attract the standard VAT rate of 19% for the entire buildable area.

Previously, the 5% reduced VAT rate was applicable solely to the initial 200 square meters of the residence’s buildable area, with no maximum limit on the total size or cost of the dwelling. However, Law 42(I)/2023 introduces restrictions on the dwelling’s size and cost, thus modifying the extent of applicability of the reduced VAT rate.

The above limits are adjusted for persons with disabilities and families with more than three children. For example, a person with a disability may be eligible for the reduced VAT rate for a residence that is up to 190 square meters in size and has a total cost of up to €525,000.

Another important amendment to the VAT law is for individuals who have already claimed the reduced VAT rate for their primary residence. Under the previous law, these individuals would have to refund the total of the VAT benefit obtained if they stopped using the residence as their primary residence. However, the new law allows these individuals to apply for the reduced VAT for a new residence before the period of ten years has elapsed, provided they refund to the Tax Authorities the amount of VAT resulting from the application of the reduced rate (i.e., the difference between 19% and 5% = 14%) on the value of the residence for the remaining years of the ten years period.

The transitional provisions introduced by the new law apply to residences for which:

• A planning permission is obtained from the competent authority or an application for a planning permission is submitted to the competent authority by October 31, 2023; and
• The application of the reduced VAT rate is duly submitted to the Tax Authorities, within three (3) years from the date of entry into force of the amending law.

The new VAT rates for primary residences in Cyprus are a welcome development for both buyers and sellers. The reduced VAT rate can save buyers thousands of euros, while the new limits on the size and cost of the residence will help to ensure that the benefit is targeted at those who need it most.