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EU extends deadline for amending property taxation

On Monday, lawmakers revisited the issue of decreased VAT on properties, with some attempting to instill a feeling of urgency as the European Commission continues to breathe down Cyprus' neck following the initiation of infringement proceedings against the Republic.

Because that parliament is officially still in recess because of the recent presidential election, the House Finance Committee considered the topic in an extraordinary session. In addition, the following Monday is Green Monday, a holiday, therefore the committee will not convene formally for two weeks. Furthermore , the issue must be discussed with the executive, although the new government has not yet taken office. This will occur the week after the inauguration of President-elect Nikos Christodoulides.

Whenever the new minister of finance assumes office, he or she must be briefed. In addition, according to legislative procedures, two weeks must elapse whenever the House of Representatives agrees on a final text for the measure on lower VAT.

Elias Myrianthous, an Edek member of the House finance committee, told the Cyprus News, "Realistically, we’re looking at a plenum date around late March."

He went on to say that a few days ago, the European Commission informed the finance ministry that, considering the circumstances surrounding the elections, they would wait until the end of March for Cyprus to implement legislation before starting with infringement procedures.

Christiana Erotokritou (Diko), chair of the committee, concurred that the government had not yet received a reasoned view from Brussels. The second step is a reasoned opinion, which is a formal request to a national government to comply with EU legislation. The Commission may send the matter to the European Court of Justice if a country fails to comply within a stipulated period of time, often two months. In actuality, the majority of disputes are settled prior to being sent to court.

In the worst-case situation, Brussels may impose a fee on a noncompliant nation. Such fines may be "significant," according to Erotokritou.

It is believed that the infringement procedure was initiated for the first time in the summer of 2021.

Brussels asserts that Cyprus does not appropriately apply VAT regulations on residences purchased or constructed in the country.

As a social policy measure, the European VAT Directive permits member states to apply a lower rate to first-time homebuyers. Yet, the expansive interpretation of the Cyprus provision appears to surpass the directive's stated social policy objective for such an exemption.

When it was discovered that participants of the 'golden passports' scheme, who invested in property in exchange for citizenship, also profited from the reduced VAT rate, the policy was brought to light.

In the meanwhile, the government devised a "sweet spot" - a bill altering the imposition of the lower 5% (as opposed to the full 19%) VAT rate on residences.

The decreased VAT rate would apply to the first 170 square metres of a home with a total surface area of 220 square metres and a property value of up to €350,000. For apartments, the lower rate would apply to the first ninety square metres of a total surface area of one hundred and ten square metres and a property value of up to €200,000. A special clause stipulates that the entire surface area criterion does not apply to disabled individuals.

Many organizations, including the Employers and Industrialists Federation, the Chamber of Commerce, the Cyprus Land & Property Owners Organisation, and the Property Valuers Association, have opposed the proposal vehemently.

They have instead proposed increasing the value of eligible properties, including both single-family homes and condominiums, to €500,000. And they point out that, given the present inflation and rising cost of building materials, no one would be able to find a home or apartment with the square metres and value specified in the bill, rendering it ineffective.

In February of 2022, the government introduced a law intended to strike a balance. Yet parliamentary resistance compelled the government to return to the drawing board and draft a revised bill, which was initially presented to lawmakers in late June.

Opposition politicians, such as Myrianthous of Edek, say that the features of the government plan will exclude many young people seeking to purchase or build their first home. And other lawmakers want the reduced VAT rate to also apply to home extensions. Other politicians throw a spanner in the works by suggesting that the government try to renegotiate the matter with the European Commission, citing the example of Greece, which was able to obtain enormous leeway from Brussels in the past.

Today, the law allows the application of a reduced VAT rate of 5% for the first 200 square metres of primary residences, regardless of any other criteria. This reduced rate is imposed regardless of the resident's or his family's income, assets, or financial circumstances. In addition, the entire surface area of the home is irrelevant.


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