Reduced VAT rate when buying a primary residence in Cyprus

Purchasing a home in Cyprus has always been an attractive opportunity for both locals and foreign investors. One of the key factors contributing to this interest is the favourable taxation for the purchase of primary residences. In particular, it is the reduced rate of Value Added Tax (VAT) that applies to the purchase of property on the island.

The main provisions of the reduced VAT rate

Currently, the standard VAT rate in Cyprus is 19%. However, in order to stimulate the property market and support citizens in purchasing a home, the government has introduced a mechanism to reduce this rate to 5% for the purchase of primary properties. This condition applies to residents of Cyprus who buy property for their own residence.

Conditions for applying the reduced VAT rate

In order to benefit from the reduced rate of Value Added Tax (VAT) on the purchase of a primary residence in Cyprus, it is necessary to fulfil a number of conditions established by law. These conditions ensure the intended use of the relief and are aimed at supporting citizens in the purchase of a primary residence. Let us look at the main requirements and restrictions in more detail.

Primary residence

The reduced VAT rate of 5% applies exclusively to primary properties. This means that the property must be new and must not have been used or sold before. A dwelling that has already been registered to another owner does not qualify for the relief.

What the term primary residence includes:

• New build: This can be either houses or flats that have been built and completed after the relevant planning permission has been granted.
• Housing from a property developer: The benefit applies to properties sold directly by the developer or its representative.
• Property not previously used: The property must not have been used as a dwelling, office space or for any other purpose prior to purchase by the new owner.

Square footage of the property

Another important condition for obtaining the favourable VAT rate is the area of the property to be purchased. Cypriot law sets certain metre limits to ensure the intended use of the benefit.

The main parameters are:

• Preferential area: A 5% VAT rate applies to the first 130 square metres of the property provided that its value does not exceed €350,000 Euros* (nuances are available). This restriction applies to the total area of the property, including living space, terraces, balconies and other structural elements.
• Pro-rata taxation: If the property exceeds 130 square metres, the standard VAT rate of 19% will apply to the excess area (up to 190 square metres). This means that the tax is calculated proportionally: 5% on the first 130 square metres, and 19% on the remaining area. The property must not exceed 190 sqm and its value must not exceed €475,000 Euros.

Example calculation: If the total area of your home is 185 square metres, the tax will be calculated as follows:

• 5% VAT on the first 130 sqm.
• 19% VAT on the remaining 55 square metres.

Intended use of the property

To qualify for the relief, it is important that the property purchased is used as the buyer’s main residence. This is a key criterion which excludes the possibility of using the reduced VAT rate to buy a property for the purpose of renting or selling it.

What is meant by primary residence:

• Permanent residence: The buyer must use the property for permanent residence. It may be the only flat or house where the buyer lives permanently rather than temporarily or intermittently.
• Commercial Use Exception: The property must not be used for rental, commercial activities or as an investment property. Failure to meet this condition may result in the cancellation of the exemption and a claim for a refund of the difference in VAT.

4.Nationality and residency restrictions

The preferential VAT rate on primary residences applies to certain categories of citizens and residents of Cyprus. These restrictions are designed to ensure that the relief is applied predominantly to those who actually intend to reside on the island.

Who is eligible for the benefit:

• Cypriot nationals: Local residents who are citizens of the Republic of Cyprus are entitled to a reduced rate of VAT on the purchase of a primary residence.
• EU citizens: EU citizens can also benefit from the reduced rate of VAT on the purchase of a property in Cyprus if they intend to reside in the property permanently.
• Third Country Nationals: Non-EU nationals can also claim the benefit but they must prove their residency status in Cyprus. This can be confirmed by a residence permit, work permit or other documents confirming legal residence in the territory of the Republic.

Time limits and restrictions on the resale of property

One of the conditions for obtaining the reduced VAT rate is the obligation of the buyer not to sell the property for a certain period of time (10 years). This condition is introduced to prevent speculative transactions and to maintain the stability of the property market.

The main restrictions are:

• Minimum period of ownership: Normally, the buyer is obliged to own the property for at least 10 years. If the home is sold before the expiry of this period, the government may require a refund of some or all of the benefit granted at the time of purchase.
• Exceptional cases: In some cases, such as moving due to work or family circumstances, the government may make an exception and not require a refund of the benefit for an early sale.

Procedure for obtaining the exemption

In order to benefit from the reduced VAT rate on the purchase of a primary residence in Cyprus, there are several mandatory steps and conditions that must be fulfilled. The procedure is quite formalised and requires attention to detail in order to avoid mistakes that could lead to the denial of the exemption.

Preparation of documents

The first step on the way to receiving the benefit is to collect the necessary documents. It is important to understand that the set of documents should be complete and contain all the necessary confirmations, as an incomplete package can delay the application process.

Basic documents include:

• Contract of sale of real estate: This document confirms the fact of purchase of housing. It must be registered with the Cyprus Land Registry Department.
• Confirmation of the primacy of the property: This may be a certificate from the developer or other document confirming that the property has not been used before and is new.
• Proof of residency: For Cypriot citizens this may be a passport or identity card, for citizens of other countries – a residence permit, work permit or other documents confirming legal residence in Cyprus.
• Proof of use of the property as a principal residence: This may be a declaration or other forms confirming the intention to use the property as a permanent residence.

Submission of the application

Once all the necessary documents have been collected, the next step is to apply for the reduced VAT rate. This application is submitted to the Cyprus Revenue Authority online. It is important to note that the application must be submitted before the sale is finalised, as the relief cannot be applied retrospectively.

The application must contain:

• Personal details of the applicant and his/her spouse (full name, identity card or passport number, residential address).
• Detailed information about the property to be purchased (address, area, value).
• A statement of intention to use the property as a primary residence.
• Confirmation from the developer of the primary residence.

The application can be submitted online via the VAT authorities’ portal.

3.Consideration of the application and receipt of a decision

Once the application has been submitted, the review process begins. The Cyprus Revenue Authority checks the submitted documents for compliance with the requirements. Usually the review process takes from several weeks to several months, depending on the workload of the authorities and the completeness of the submitted documents.

In case of a favourable decision, the applicant is issued with a document confirming the right to use the reduced VAT rate. This document must be handed over to the property developer or seller for the transaction to be processed correctly.

4.Application of the reduced rate on completion of a transaction

At the stage of completion of a sale and purchase transaction, a property developer or seller applies a reduced VAT rate of 5% on the basis of a supporting document received from the buyer. This means that the total amount of the transaction is reduced by the difference between the standard VAT rate (19%) and the reduced rate (5%).

Reporting and subsequent audits

It is important to realise that the Cyprus tax authorities reserve the right to carry out follow-up checks on the use of the property. If it is found that the declared conditions do not match the actual use of the property, for example, if it is not used as a main residence, the tax authorities may request a refund of the difference between the standard and reduced VAT rates.

Thus, compliance with all requirements and correct use of the exemption requires careful attention and possible consultation with a lawyer to avoid unpleasant consequences in the future.

Statistics and economic effects

According to the Cyprus Ministry of Finance, the implementation of the reduced VAT rate on primary residences has significantly revitalised the property market. Between 2017 and 2023, a 12% increase in demand for new housing was recorded, which is directly attributable to the tax relief.

Analysis shows that the majority of buyers who have taken advantage of the reduced VAT rate are EU citizens, emphasising the attractiveness of Cyprus to European investors. Around 60 per cent of all transactions utilising the reduced VAT rate in 2022 were made by EU citizens, while 25 per cent were made by third country nationals, including Russia and China.

Conclusion and outlook

The reduced VAT rate on primary residences in Cyprus is an important tool for maintaining stability in the property market and creating favourable conditions for citizens and investors. With rising housing costs and changing economic conditions, such tax incentives play a key role in making housing affordable and stimulating economic growth.

However, it should be borne in mind that the economic situation in Cyprus and globally may adjust the current tax incentives in the future. Government authorities may revise the conditions for the application of the reduced VAT rate, which will require buyers to plan more carefully and utilise existing incentives in a timely manner.

Buying a primary residence in Cyprus using the reduced VAT rate can significantly reduce your costs and make buying a property more affordable. However, the process of claiming the exemption requires careful adherence to all the conditions and rules set out in the legislation. The specialists of Almanova Law  have in-depth knowledge of Cyprus tax legislation and extensive experience in property transactions. We will help you at every stage – from preparation of the necessary documents to obtaining relief and finalising the transaction. If you contact us, you can be sure that all legal aspects will be taken into account and your interests will be reliably protected.