European directive on reduced VAT

European directive on reduced VAT

On 11 November 2020, Cypriot Member of the European Parliament (MEP) Costas Mavrides of the Group of the Progressive Alliance of Socialists and Democrats in the European Parliament posed a written parliamentary question to the European Commission:

“According to a report by the Auditor General of the Republic of Cyprus dated 24/9/2020 and published by the Audit Office of the Republic of Cyprus, an audit of the Cyprus Investment Programme (CIP) found that sales of properties to foreign investors were subject to a reduced rate of VAT of 5% (for the first 200 m²), while the standard rate is 19%. This was possible under a law aimed at social assistance. However, according to Article 98 and Annex III (10) of Council Directive 2006/112/EC, the reduced rates do not apply to the purchase and sale of housing for investment purposes. Furthermore, under the common European VAT system, a reduced rate of VAT may be applied by Member States only in specific cases, including the ‘provision, construction, renovation and alteration of housing, as part of a social policy’.

In view of the above, can the Commission say:

1. To what extent do real estate investments, generally by wealthy investors, fall within the scope of the reduced tax rate in the above-mentioned European directive?

2. In the context of the CIP, did the Cypriot authority responsible ask the Commission for its position before setting the appropriate rate of tax?

3. If there has been a breach of the relevant directive, what actions/penalties are envisaged by the Commission?”

On 3 February 2021, Economy Commissioner Paolo Gentiloni responded on behalf of the European Commission stating: “The Commission services have been recently informed about the alleged situation.

According to the current Cypriot legislation on value added tax (VAT), the reduced VAT rate of 5% is still applicable to the purchasing or construction of a dwelling in Cyprus, as long as the dwelling is used as the principal and permanent residence in Cyprus by the beneficiary. I t is also provided that this rate additionally applies to constructions of a building (or portion thereof) for social purposes.

As regards real estate investments, the Commission recalls that Article 98 of the VAT Directive provides for a lower VAT rate only if it concerns the delivery, construction, renovation and reconstruction of houses in the context of social policy, and not as part of an investment policy, as it was also the case for the Citizenship by Investment Programme.

The Commission will contact the Cypriot authorities in order to obtain information on the matter described. If appropriate, it may initiate the procedure provided in Article 258 of the Treaty on the Functioning of the European Union, to ensure that the necessary measures to comply with EC law are taken.”


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