Published August 09, 2022 15:00 PM
Value Added Tax (VAT) is a tax that must be paid when purchasing a new home. VAT is not applied to purchases of new or used items from a developer with a construction permit issued prior to May 1, 2004, on the secondary housing market.
VAT rate in Cyprus
When you purchase a new house, you must pay the usual VAT rate of 19 percent. However, the law gives the buyer the option to save money and pay only 5% VAT on the first new home. The law of the Republic of Cyprus No. 73 (1)/2012, which altered tax laws and permitted preferential 5 percent VAT instead of the current rate of 19 percent, came into effect on June 8, 2012.
The law of the Republic of Cyprus provides the following VAT rates when buying real estate:
- For purchases of new or secondary properties from developers with construction permits issued prior to May 1, 2004, there is a 0% interest rate.
- 5 percent reduced rate for the purchase of a first home in Cyprus
- The standard rate is 19%.
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The reduced VAT rate is granted when the following requirements are fulfilled:
- The purchaser must be an individual (and not a business) who is at least 18 years old.
- For the following ten years, the applicant must make the purchased home their primary residence in the Republic of Cyprus.
- The purchaser should not have previously purchased any other properties at a reduced VAT rate.
- For the next ten years, the property must only be utilized for personal purposes and not for financial gain (such as from renting it out).
- Only the first 200 m2 of residential property that conforms to architectural plans certified by the Republic of Cyprus’s official authorities are subject to the reduced rate of 5 percent. The buyer will be required to pay the regular rate, which is 19%, for the remaining space.
For example, a buyer purchased for the personal use of a house with an area 350 m2 and a total value of 1, 5 million EUR. The VAT calculation is as follows:
€1.500.000 х 5% x 200m²/350m² = €42.857
€1.500.000 х 19% х 150m²/350m² = €122.143
The total amount of VAT is:
€42.857 + €122.143 = €165.000
On November 18th, 2016 previous condition was abolished, In order for a property to qualify for the reduced rate, it had to be below 275 m2.
What does “main place of residence” mean?
The buyer might not reside in Cyprus long-term. However, for the time being, while he is in Cyprus, this property should serve as his primary residence. It demonstrates that he bought the property for his own use and not for a business.
Is it possible to sell or rent this property?
If the buyer who received a reduced VAT rate of 5% decides to no longer use the property as his first and primary residence in Cyprus earlier than 10 years after receiving possession (whether through a sale or rental), he must notify the Department of VAT within 30 days and pay the difference between the reduced and standard VAT rates that were in effect at the time of signing the Agreement.
Let’s have a look at an example:
The buyer paid €500.000 for a brand-new apartment, and the 5 percent VAT was approved. He paid €25.000 in VAT. He made the decision to buy a house and sell the apartment after 7 years. However, he is prohibited from renting or selling this property for ten years under the legislation. Let’s calculate the payout amounts:
€500 000 × 19% = €95 000 — Standard VAT, 19%
€500 000 × 5% = €25 000 — the buyer paid before
€95 000 — €25 000 = €70 000 — the amount of saving
€70 000 х 3/10 = €21 000 — the sum that the buyer will have to pay back to the tax office. (Where 3 – is the number of years until the statutory 10-year period expires.)
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