Introduction:
In a move that seeks to reshape the landscape of property transactions, the House of Representatives recently passed the Amending VAT Law (Ν.42(I)2023), ushering in a series of significant changes to the application of the reduced VAT rate on the supply or construction of residential properties. Published in the Government Gazette on 16 June 2023, this legislative update introduces key alterations that individuals in the real estate market need to be aware of. These 2023 Cyprus VAT Rate Changes are pivotal for anyone involved in property transactions.
Reduced VAT Rate Restructuring
The most substantial modification lies in the adjustment of the reduced VAT rate, now standing at 5%, applicable to the first 130 m2 of buildable residential area for properties with a maximum value of €350,000. This restructuring is a critical aspect of the 2023 Cyprus VAT Rate Changes. The total buildable residential area should not exceed 190 m2, and the overall value of the transaction must not surpass €475,000. This marks a departure from the previous regime, where the reduced VAT rate applied to the first 200 m2 without constraints on total buildable area or property value.
Special Provisions for Persons with Disabilities
Recognizing the unique needs of persons with disabilities, the amended law specifies that a reduced VAT rate of 5% will apply to the first 190 m2 of buildable residential area, irrespective of the total buildable area. As part of the broader 2023 Cyprus VAT Rate Changes, special considerations have been made for persons with disabilities. However, the limitation on the maximum value of €350,000 remains applicable, provided the total transaction value does not exceed €475,000.
Transitional Period and Application Process
Acknowledging the need for a smooth transition, the new provisions include a transitional period. During this time, the amended regulations will not apply to cases where a planning permit was secured or an application submitted by 31 October 2023. To qualify, a duly completed application for the reduced VAT rate must be submitted to the Tax Department within three years from the commencement date of the amendment (until 15th June 2026).
Calculation Method for Exceeding Limits
The Tax Department is anticipated to provide further clarifications on the calculation method when the buildable area and/or property value exceed the new lower limits of 130 m2 and €350,000, respectively.
Revised Provisions for Ten-Year Periods
Under the previous regulations, individuals who submitted a reduced VAT rate application for a new residence before the lapse of a ten-year period since the delivery of the old residence were required to pay the entire VAT benefit. The amended provisions now require payment proportional to the remaining period for which the old property will not be used as the main and permanent place of residence.
Transfer of Dwelling to Adult Child
Correcting a previous inaccuracy, the new provisions state that no payment is required when transferring the dwelling to an adult child, provided the child meets the necessary criteria for the reduced rate at the time of transfer. If the child ceases to use the residence as the main place of residence before the ten-year period lapses, they assume responsibility for the VAT benefit, notifying the Tax Department in writing.
In cases where the dwelling’s ownership is transferred from a parent to a child while the parent continues to reside there, no payment of VAT benefit is due.
These amendments mark a significant shift in the taxation landscape for property transactions. Stakeholders in the real estate sector are advised to stay informed about the nuances of the Amending VAT Law (Ν.42(I)2023) and its implications on their transactions. As the Tax Department releases further clarifications, individuals and businesses are encouraged to seek professional advice to navigate these changes effectively.
