Politis reports that increased scrutiny is being placed on homes located in Cyprus’ coastal regions as the Tax Department ramps up inspections to verify whether these homes are genuinely being used as primary residences and justifiably benefitting from the reduced 5% VAT rate on their purchase price or construction costs.
According to reliable sources, the Tax Department plans to intensify these inspections during the summer months. Evidence suggests that many Cypriot and foreign property owners, particularly in seaside areas, have claimed the reduced VAT rate under the pretence that the property would serve as their main and permanent home, only to then rent them out via digital platforms such as Airbnb and Booking.com.
Year-Round Inspections
Although the summer brings a spike in checks, inspections are carried out year-round, especially in regions with a high concentration of rental flats, such as Aglantzia and Engomi, which are popular with university students. These areas pose a higher risk of misuse, where properties benefitting from the reduced VAT are being used for income-generating purposes.
Over the past three years, the Tax Department has conducted more than 5,000 on-site visits to homes and flats. These investigations uncovered numerous violations, leading to the recovery of over €50 million in VAT.
What the VAT law says
Legislation passed in June 2023 allows a reduced VAT rate of 5% for the first 130 square metres of a primary residence, applicable to both houses and flats, provided that:
- The total value of the residence does not exceed €475,000.
- The total buildable area is no more than 190 square metres.
The reduced VAT applies only up to €350,000 of the property’s value.
A VAT calculator is available on the homepage of the Tax Department’s website (Greek) for individuals to estimate their applicable tax.
For individuals with disabilities, the reduced VAT rate extends up to 190 square metres, with a maximum eligible value of €475,000. Special provisions are also in place for families with multiple children.
These provisions apply to primary residences for which a town planning permit has been secured, or for those where a planning permit application was submitted after 31 October 2023.
Transitional rule
For primary residences where planning approval was granted or applied for before or on 31 October 2023, a transitional rule applies:
- The 5% VAT rate is allowed on homes up to 200 square metres without any value cap.
- If the property exceeds 200 square metres, the reduced VAT is applied proportionally to the first 200 square metres, with the remaining area taxed at the standard 19% VAT rate, irrespective of total cost.
This transitional provision will remain valid for VAT applications submitted to the Tax Commissioner until 15 June 2026 (Three years after the law was passed).
Voluntary VAT compliance encouraged
The Tax Department will continue its compliance checks on the correct application of the 5% VAT rate on the purchase or construction of primary residences.
It has issued a call for voluntary compliance, particularly targeting individuals who obtained approval for the reduced rate without meeting the required criteria either from the outset or before completing the mandatory ten-year residency period.
If a property for which the reduced VAT rate was granted is not used, or ceases to be used, as the main and permanent residence for at least ten years, the Tax Department is entitled to reclaim the VAT benefit from the owner.
To this end, the department urges affected individuals to submit an enquiry through the Tax For All (TFA) online platform or to visit their local District Tax Office to formally declare the change in use of the property. This will allow the Department to calculate the VAT amount to be repaid.
In cases where the individual is unable to settle the amount in one payment due to financial hardship, repayment plans of up to 12 instalments may be offered. In exceptional circumstances, the Tax Commissioner may approve extended repayment periods.
