Cyprus Revises Reduced VAT Rate on Housing to Target Social Policy Goals
Cyprus has amended its VAT legislation to impose stricter limits on the reduced 5% VAT rate for new primary residences, aligning it more closely with social policy objectives. Previously, this reduced rate was broadly applied, regardless of the buyer's wealth or property value, including luxury homes valued at several million euros. The European Commission challenged this broad application, leading to infringement proceedings against Cyprus in 2021.
In response, Law 42(I)/2023 introduced meaningful caps: the reduced VAT rate now applies only to the first 130 sq.m. and €350,000 of a residence, with an overall size and value limit of 190 sq.m. and €475,000 respectively. These thresholds aim to ensure the tax relief genuinely benefits those in need of housing support, rather than subsidizing luxury properties. Market data suggests these limits still accommodate average family homes while narrowing benefits for high-end purchases.
Experts note that social policy must evolve with Cyprus’s dynamic property market to maintain relevance. While the revised measures appear more equitable, ongoing review will be necessary to adapt threshold values as property prices fluctuate. This adjustment represents a significant shift towards balancing public support with preventing tax avoidance through expansive VAT reductions.
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