Following an extended negotiation period spanning over two years, the European Commission and the Republic of Cyprus reached an agreement paving the way for amendments to the VAT law. The Official Gazette of the Republic of Cyprus promptly published the amending law 42(I)/2023 (“Law 42(I)/2023”) on June 16, 2023.

The focal point of these amendments revolves around the reduced VAT rate of 5%, specifically concerning the acquisition and construction of primary and permanent residences in Cyprus. Previously, as of November 18, 2016, this reduced rate applied to the first 200 square meters of a residence’s buildable area without imposing size or cost limitations.

Under the prior law, an individual could reapply for the 5% VAT rate for a new residence within 10 years under specific conditions, including ceasing to use the initial residence as a primary and permanent residence, notifying the VAT department, and paying the difference between the reduced and standard VAT rates.

The revised law extends the reduced 5% VAT rate to new residences intended for primary and permanent use, subject to specific criteria. Law 42(I)/2023 introduces restrictions on the size and cost of eligible residences, thereby altering the scope of application for the reduced VAT rate.

Key changes outlined in Law 42(I)/2023 include:

  • The reduced percentage rate applies to the first 130 square meters of the buildable area.
  • The total cost of the primary residence must not exceed €350,000.
  • The residence must not exceed 190 square meters of buildable area or have a total cost exceeding €475,000.

For residences exceeding 130 square meters, the reduced VAT rate of 5% is applicable only to the first 130 square meters, with the remaining area subject to the standard 19% VAT rate. It’s crucial to note that the total cost should not exceed €475,000.

Law 42(I)/2023 also introduces adjustments for individuals with disabilities and families with more than three children, aiming to accommodate their specific needs within the reduced VAT rate framework.

Another significant amendment pertains to individuals who previously claimed the reduced VAT rate for their primary residence. Instead of requiring a full refund of the VAT benefit if they cease using the house as their primary residence, Law 42(I)/2023 allows them to apply for the reduced VAT rate for a new residence within ten years without refunding the VAT benefit. Instead, they are required to repay the VAT 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.

To facilitate a smooth transition, Law 42(I)/2023 establishes specific transitional provisions for residences meeting certain conditions, such as obtaining planning permission by October 31, 2023, and submitting the application for the reduced VAT rate to the Tax Authorities within three years from the date of the law’s entry into force.

It’s important to note that this article serves for informational purposes only, and individuals seeking guidance on eligibility for the 5% VAT on a primary and permanent residence or understanding the application of the new conditions can consult our team of VAT specialists.