VAT and Property Tax in Cyprus: A Comprehensive Guide

Cyprus is a popular destination for real estate investment, offering beautiful landscapes, a favorable climate, and a welcoming environment for foreign investors.

One of the critical aspects to consider when purchasing property in Cyprus is the tax implications, particularly Value Added Tax (VAT) and property taxes.

This article provides an in-depth look into VAT and property tax in Cyprus, helping potential buyers navigate the complexities of these taxes.

Understanding VAT on Property Purchases in Cyprus

General VAT Rate

In Cyprus, the standard VAT rate is 19%. This rate applies to most goods and services, including new property acquisitions.

However, Cypriot law provides provisions for a reduced VAT rate under specific conditions, which can lead to significant savings for property buyers.

Reduced VAT Rate

The reduced VAT rate of 5% can be applied to the purchase of real estate, subject to several requirements.

This provision aims to make property ownership more accessible, particularly for first-time buyers. The conditions for qualifying for the reduced VAT rate are as follows:

1. Applicant Eligibility: The reduced VAT rate is available only to individuals (not companies) who are 18 years or older.

2. Primary Residence: The property must serve as the applicant’s primary residence in Cyprus during their stay.

3. First-Time Benefit: The applicant should not have previously purchased property in Cyprus at the reduced VAT rate.

4. Personal Use: The property must be used solely for the applicant's personal use and not for profit (e.g., renting).

5. Unused Property: At the time of application, the property should not be in use (no occupants, water, or electricity usage).

Financial Thresholds

The reduced VAT rate applies to the first €350,000 of the property's value, provided the total value does not exceed €475,000.

Additionally, the reduced rate applies to the first 130 square meters (sq.m.) of the real estate area, as long as the total area does not exceed 190 sq.m.

Examples of VAT Application:

1. Apartment (100 sq.m., €300,000): 5% VAT applies to the entire property.

2. House (200 sq.m., any price): 19% VAT applies.

3. House (€500,000, any area): 19% VAT applies.

4. Apartment (120 sq.m., €400,000): 5% VAT on €350,000; 19% VAT on the remaining €50,000.

5. House (140 sq.m., €475,000): Reduced rate calculation: 5% of €325,000=0.05×€325,000=€16,250 | €325,000+€16,250=€341,250
The remaining \( 475,000 - 325,000 = €150,000 \) at 19% VAT.

Special Provisions for Planning Permits

Properties with a planning permit obtained or an application submitted by October 31, 2023, can benefit from a different rule.

For these properties, a reduced VAT rate of 5% applies to the first 200 sq.m. regardless of the property's total price and area.

This rule is valid if the application for the 5% VAT rate is submitted within three years from the enactment of the new law (by June 15, 2026).

Obligations upon Change of Use

If the applicant ceases to use the property as their primary residence within ten years of acquisition (e.g., selling or renting it out), they must notify the Department of VAT within 30 days and pay the difference between the reduced and standard VAT rates proportionally.

Example of VAT Adjustment:

An apartment bought for €300,000 with 5% VAT (€15,000) is sold after three years. The standard VAT would have been 19% (€57,000), with a saving of €42,000.

The reimbursement for the seven remaining years out of ten would be:

€42,000×0.7=€42,000×107​=€42,000×0.7=€29,400

If the property is used as the primary residence for at least ten years, the buyer retains the full €42,000 saving.

Additional Considerations

1. Main Place of Residence: The property must be the applicant's main residence in Cyprus but does not require full-time residency. It can be used as a vacation home as long as the applicant stays there during visits.

2. VAT Payment: Buyers do not need to pay 19% VAT initially and apply for a refund. The reduced 5% rate can be applied directly upon purchase.

Example of Reduced VAT Payment Process:

A customer purchases an apartment for €200,000 plus VAT. With a 30% deposit (€60,000 + 19% VAT = €11,400), they apply for the reduced VAT rate.

Upon approval, they pay the remaining 70% (€140,000) with 5% VAT (€10,000). As €11,400 VAT was already paid, the final payment is adjusted to €138,600.

Property Tax in Cyprus

In addition to VAT, property owners in Cyprus are subject to property taxes. The primary property tax is the Immovable Property Tax (IPT), which is based on the property's market value as of January 1, 1980. However, recent reforms have aimed to simplify and reduce the burden of IPT.

Key Points:

1. Immovable Property Tax: Previously, IPT was calculated based on the 1980 market value, with progressive rates. Reforms have since abolished IPT for properties owned by individuals as of January 1, 2017.

2. Municipal Taxes: Property owners must still pay annual municipal taxes, which vary by municipality. These taxes fund local services such as waste collection and street lighting.

3. Sewerage Tax: This is an additional tax levied by local sewerage boards, calculated based on the property's market value.

4. Capital Gains Tax: When selling property, a capital gains tax of 20% on the profit from the sale may apply, with certain exemptions for primary residences and long-term ownership.

Square One Property Partners

Navigating VAT and property tax in Cyprus can be complex, but understanding the rules can lead to significant savings and compliance.

The reduced VAT rate for property purchases offers a considerable incentive for individuals looking to invest in Cypriot real estate.

Additionally, recent reforms in property taxation have made the tax landscape more favorable for property owners.

By staying informed about these tax regulations, potential buyers can make well-informed decisions and optimize their investment in Cyprus.