Cyprus is facing mounting pressure from economists and international bodies, including the IMF, to fundamentally reform its property tax system. Critics argue the current framework, characterized by low tax collection and generous developer incentives, is fueling a housing affordability crisis, worsening inequality, and depriving the state of stable revenue.
The Core Problem: Low Revenue and High Inequality
Fiscal experts highlight that Cyprus collects less than 2% of its total tax revenue from property, a figure starkly below the European Union average of 4.7%. This under-taxation, they argue, not only robs the government of a reliable income source for public services but also contributes to a widening wealth gap.
The current system, combined with incentives like the Golden Visa, has made Cypriot real estate a prime target for foreign investors. This has caused a surge in demand for luxury properties, pushing prices up and locking many local residents, particularly young people, out of the housing market.
Developer Incentives Under Scrutiny
The focus is not just on foreign demand but also on significant tax advantages enjoyed by developers. Policies such as the Notional Interest Deduction (NID)—which can reduce corporate tax rates to as low as 2.5%—and the reduced 5% VAT on new homes are under fire.
Critics warn these incentives encourage the construction of high-end apartments rather than addressing the growing need for affordable housing or social infrastructure.
The Path to Reform
To address the economic inefficiencies and social strains, experts are pushing for a critical review of the entire property tax framework. Key recommendations include:
- Reintroducing progressive property taxes based on modern, realistic market values.
- Tightening controls on foreign property purchases, similar to measures being taken in other EU countries like Spain and Portugal.
- Scaling back excessive developer tax breaks to rebalance the market.
- Redirecting investment toward essential infrastructure and affordable housing.
While updating property values and implementing such changes will take time, proponents argue these steps are essential for creating a fairer, greener, and more sustainable economy in Cyprus.
Source: Cyprus Property News