Cyprus has lost more than €1 billion in potential tax revenue through a reduced VAT scheme for homebuyers, according to figures obtained by Phileleftheros. The cost is still mounting as transitional rules keep the old system alive for some projects.
A measure meant to make housing more affordable became a tax break that could benefit buyers of multimillion-euro villas. The state gave up revenue; wealthy investors got a discount. More than 26,000 taxpayers used the reduced rate, according to official figures.
A VAT tax break with no meaningful price ceiling
Under the 2016 law, buyers building or buying a primary residence paid 5% VAT on the first 200 square metres, regardless of the property’s total size or value. The standard rate is 19%.
That meant a buyer could purchase or build a luxury villa and still pay the lower rate on a substantial part of the property. The law’s broad terms opened the door to benefits for affluent buyers, including third-country investors who benefitted from the 5% VAT, some of whom also benefitted by obtaining Cypriot citizenship.
The scheme was supposed to serve a social purpose. Instead, its design allowed the reduced rate to reach far beyond households most in need of help. The cost to the public purse now exceeds €1 billion in foregone revenue, according to the figures obtained by Phileleftheros.
Reform came late – and the old rules linger
After complaints and discussions with the European Commission, Cyprus changed the law. The revised VAT rules restrict the 5% rate to the first 130 square metres of a home valued at up to €350,000. For homes measuring between 131 and 190 square metres and valued at up to €475,000, the additional area is taxed at 19%.
Yet the old rules have not disappeared. Transitional provisions allow some buyers to keep using them if they submitted a planning-permit application between early June and 31 October 2023—even if construction finishes years later.
The transition was meant to cushion the property market. It has already been extended by another six and a half months, reportedly because of local-government reform and changes to planning and building-permit responsibilities. Whatever the administrative explanation, the effect is clear: the flawed system continues to benefit some buyers while the state waits to collect the tax under the revised rules.
No more extensions
The parallel use of the old and new systems is due to end on 31 December 2026. The deadline should stand. A further extension would prolong a costly arrangement after the state has already lost more than €1 billion in potential revenue.
Property-sector interests are expected to press political parties for more time, and some parties have reportedly already received approaches. They should resist. Cyprus cannot keep presenting this as a housing measure while leaving a route open for buyers of luxury homes to benefit from a reduced VAT rate.
The European Commission may have accepted transitional provisions. That is no reason to stretch them indefinitely. On 1 January 2027, the old rules should finally be over.
By Eleftheria Paizanou
Translated and adapted from an article published by Phileleftheros
