Changes to Cyprus's law governing the assessment of the preferential VAT rate on real estate will take effect on November 1, 2023. The four-month transitional period after the adoption of the law by Parliament is coming to an end.  

Let's dive into the context. The standard VAT rate when buying property in Cyprus is 19%. In 2008, the country began to establish a reduced rate of 5% on the first 200 sq. m. when buying the first property in the country.

At the end of December 2022, the European Commission delivered an ultimatum to Cyprus, demanding that it change the VAT legislation within two months. Otherwise, the case could be referred to the court of the European Union.

The problem is that the European directive on VAT allows applying a reduced rate only to residential objects in the framework of social policy. According to the European Commission, Cyprus violated this directive by applying a reduced rate to the purchase of any new property. Among other things, the country has been accused of applying a lower rate for properties purchased under the “golden passports” program.

How will it be now?

All residential properties whose construction starts after November 1 will be subject to VAT under the new rules:

  • A VAT discount will be applied to the first 130 “squares” of the first house or apartment up to a value of €350,000. Note that, according to the Cyprus Revenue Authority, such criteria meet 77% of the real estate declared for a preferential VAT rate.
  • At the same time, the total value of the transaction must not exceed €475,000, and the total built-up area must not exceed 190 square meters.
  • Another clause stipulates that for persons with disabilities, the preferential VAT will apply to the first 190 square meters of built-up area.

It is important that the dwelling be purchased for permanent residence. If the owner wants to rent out the property before the 10-year period expires, he will have to reimburse the difference between the preferential rate of 5% and the standard rate of 19% only for the remaining years. Previously, the rule was to pay the difference for all 10 years.