The transitional period for Cyprus’s old, more generous 5% VAT scheme for primary residence purchases is set to expire on June 15, 2026. This deadline marks the complete phase-out of the 2016 law, which was widely deemed too lenient and triggered infringement proceedings by the European Commission.
End of the Transitional Window
For three years, the previous rules (Law N.42(I)/2023) and the new stricter framework have operated concurrently. Finance Minister Makis Keravnos confirmed that the transitional provisions apply to any building that either obtained or applied for a planning permit by October 31, 2023.
Buyers or developers in this category have until June 15, 2026 to submit the required declaration to the Tax Department to secure the reduced 5% rate. After this date, all new applications must adhere to the 2023 regulations.
The Stricter New Framework
The previous 2016 law allowed a flat 5% VAT on the first 200 square metres of a main residence, regardless of the property’s total size or market value. Following intense pressure from Brussels, the new framework introduced much tighter caps, ensuring the reduced rate is truly targeted:
| Feature | Old 2016 Law | New 2023 Law (N.42(I)/2023) |
| Area Covered at 5% | First 200 sq. m. | First 130 sq. m. |
| Maximum Total Area | No limit | 190 sq. m. |
| Maximum Value Limit | No limit | €350,000 |
| Total Transaction Value Cap | No limit | €475,000 |
For properties exceeding these new limits, the standard 19% VAT rate is applied to the excess area or value. A special provision allows persons with disabilities to claim the 5% rate on up to 190 square metres, though the value caps still apply.
Compliance Crackdown and Repayments
The Tax Department has significantly intensified its efforts to recover funds from owners who claimed the reduced 5% VAT but failed to use the property as their genuine primary residence, often renting them out via platforms or using them as holiday homes.
- Inspections: Over the last three years, the department has conducted more than 5,000 inspections, successfully recovering approximately €50 million from misuse cases.
- Target Areas: Violations were frequently found in coastal and tourist areas, as well as student-heavy districts like Aglandzia and Engomi.
- Repayment Obligation: Minister Keravnos re-emphasized that anyone who benefited from the 5% rate and later ceased to use the property as their main residence must repay the full amount (a practical 14% charge on the original price). This applies to all, including those who acquired homes through the former residency-by-investment programme.
The Tax Department is currently running a voluntary compliance campaign, offering flexible repayment arrangements of up to 12 monthly installments (or longer in cases of exceptional financial hardship) for owners who come forward to settle their dues.
Fairer Rules for Transfer and Repeat Applications
The 2023 law also modernized several rules to address common issues:
- Repeat Applications: Previously, repeat applicants had to fully refund the VAT benefit if they applied before a 10-year period expired. Now, the repayment is calculated proportionally based on the remaining years of that period, making subsequent applications fairer.
- Family Transfers: If a dwelling is transferred to an adult child who meets the criteria for the 5% rate, no repayment is due, provided the child occupies it as their main home. The same exemption applies if the parent remains living in the dwelling after the transfer, provided the Tax Department is formally informed.
EU Infringement Case Closed
In a final note, Minister Keravnos confirmed that the EU infringement case against Cyprus has been formally closed by the European Commission. Brussels accepted the 2023 law as compliant with EU requirements, meaning Cyprus will not face any penalties or additional fines related to the former scheme.
Source: Stockwatch.com.cy