In a significant development in Cyprus’ fiscal landscape, Circular 11/2023 issued by the Cyprus Tax Department on 28 November 2023 has brought forth crucial clarifications. This official communication sheds light on the modifications introduced to the foundational Cyprus law ‘N.95(I)/2000’ through N.42(I)/2023, with these amendments becoming effective from 16 June 2023. The focal point of these revisions lies in the adjustment of the Value Added Tax (VAT) rate, transitioning from the previous 19% to a reduced 5%, specifically applicable to the acquisition or construction of houses designated as permanent residences. This article delves into the intricacies of these changes, exploring their implications and providing a comprehensive understanding of the updated tax framework governing residential properties in Cyprus.
Under the standard conditions, a 5% VAT is applied to the initial 130m² of the total buildable area, with a cap at €350,000 for the house cost. The 5% VAT is not applicable if the total buildable area exceeds 190m² or the house cost surpasses €475,000, and if so, the VAT would be at 19% on the whole amount. In cases where the total buildable area falls between 130m² and 190m², the first 130m² incurs a pro-rata 5% VAT, while the remaining portion is subject to the standard 19% VAT rate. Calculation examples for demonstration purposes are provided below.
Exceptions to the standard conditions include eligibility for a 5% VAT rate for individuals with disabilities for up to 190m² buildable area, and with no limitation regarding the total buildable area. Additionally, families with more than three children qualify for an extra 15m² for each additional child. For instance, a family with five children is entitled to a 5% VAT on 160m² (130m²+15m²+15m²).
To be eligible for the reduced VAT rate, the applicants, who were previously granted a planning permission from the relevant government authority up to 31 October 2023, must submit their applications no later than three years from the date of the amendment law, with the deadline set until 15 June 2026.
Additionally, those who have previously applied for the reduced rate can reapply within a 10-year period from their initial application. It is crucial to keep in mind that fulfilling the condition of paying the relevant tax benefit is necessary for the period in which the first house is not used as a permanent residence.
Illustration, instances, and computationscan be exemplified as follows:
Scenario One. Given a total buildable area is of 130m², a house cost amounting to €350,000, no person with disabilities, and a family with three children, the VAT for the situation is calculated by applying a 5% rate to the house cost, resulting in a VAT amount of €17,500.
Scenario Two. If the total buildable area were 160m² with a house cost of €350,000, no person with disabilities, and a family with three children, the VAT calculation would involve a pro rata calculation for the initial 130m² at a 5% rate, resulting in €14,218.75 (130/160)x350.000=284.375×5%). The remaining amount, calculated as (160 – 130), would be subject to a 19% rate, resulting in €12,468.75 (350.000-284.375=65.625×19%). The total VAT for this scenario would be €26,687.50, combining both pro rata and remaining calculations.
Scenario Three. In the event that the total buildable area amounts to 210m², the house cost is €450,000, the applicant is a person with disabilities, and the family consists of three children, the VAT calculation would be as follows: a pro rata calculation for the initial 190m² at a 5% rate results in €20,357.15 (190/210)x450.000=407.143×5%). Subsequently, the remaining amount, calculated as (210 – 190), would be subject to a 19% rate, resulting in €8,142.83 (450.000-407.143=42.857×19%). Consequently, the total VAT for this particular scenario would amount to €28,499.98, combining both pro rata and remaining calculations.
In summary, the transformative amendments introduced by Circular 11/2023 make an impact on Cyprus’ fiscal landscape, taking effect from June 16, 2023. This signals a notable change in the application of Value Added Tax (VAT) for residential properties. The thorough examination of these modifications, along with an emphasis on procedural elements, contributes to a clearer understanding of eligibility criteria and timelines for the reduced VAT rate application. Through the illustration of practical scenarios, the content adeptly showcases the tangible effects of the updated tax framework on property transactions in Cyprus, delivering valuable insights for individuals making informed decisions.
Tax experts at Eurofast in Cyprus offer comprehensive tax compliance services, encompassing the computation of VAT related to the purchase or construction of a house. We also provide guidance in properly completing the requisite VAT forms. For further clarification or advice, please contact our accounting team in Cyprus at nicosia@eurofast.eu.
Nicholas Marcou
Corporate Accountant
Eurofast Nicosia
nicosia@eurofast.eu