Parliament has voted to extend provisions allowing a reduced 5% VAT rate on the purchase or construction of a primary residence until the end of 2026, while bringing in the Tax Commissioner to handle approvals in a bid to head off potential European Commission action.
All parties voted in favour except AKEL. The decision came after parliament initially attempted to push through an extension until June 2027 through emergency procedures, only for the Finance Ministry to warn that the Commission must first be notified as the measure affects the relevant EU Directive. A risk remains that the EU could reactivate infringement proceedings against Cyprus, as it did in 2022.
The concern is rooted in Cyprus’s recent history on the issue. For several years before 2023, Cyprus violated the EU Directive on reduced VAT by applying the reduced rate not only for social purposes but to buyers and owners of properties worth millions. After strict warnings from Brussels and coming close to a heavy fine, Cyprus changed the legislation in 2023 — but left a window open for new abuses, according to Phileleftheros.
What the transitional provisions cover
The transitional provisions approved three years ago were set to expire on June 15, 2026. They allow anyone who submitted a town planning application between early June and October 31, 2023 to continue paying 5% VAT on the first 200 square metres of a property, regardless of its total floor area and regardless of when construction is completed — terms more favourable than those under the new framework.
Under yesterday’s decision, the Tax Commissioner will be able to examine applications submitted to town planning authorities up to December 31, 2026 that were not approved due to delays by the competent authorities, as the parliamentary majority argues. Delays in issuing planning permits during the transitional period are attributed partly to the local government reform and the establishment of the District Local Government Organisations, which took over responsibility for granting relevant approvals.
Phileleftheros reports that no specific criteria were voted on and none will be applied for the Tax Commissioner to approve applicants’ declarations for the reduced VAT rate.
What changes from January 2027
From January 1, 2027, all taxpayers will pay VAT under the new framework, which includes tighter restrictions. The 5% rate will apply only to the first 130 square metres of a residence or apartment with a value of up to €350,000. A graduated structure also applies: for properties with a floor area of between 131 and 190 square metres and a value of up to €475,000, a 19% VAT rate is charged.
Parties estimate that by involving the Tax Commissioner and reducing the extension period from the originally proposed June 2027 to December 2026, the risk of a Commission reaction will be avoided.
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