The European Commission has decided to send a letter of formal notice to Cyprus for its failure to properly apply EU VAT rules for dwellings purchased or constructed in Cyprus.
Cyprus allows a reduced rate of VAT of 5% on the first 200m2 of dwellings used as the principal and permanent residence by the beneficiary, without any other limitations. In particular, the reduced rate is applied regardless of the income, assets and economic situation of the beneficiary, the members of the family that will reside in the dwellings, and the maximum total area of the dwellings concerned.
The VAT Directive does allow Member States to apply a reduced rate of VAT on housing as part of a social policy. However, the wide scope of the Cypriot legislation and the lack of limitations therein indicate that the measure goes beyond the objective of a social policy.
Consequently, the Commission considers Cyprus has failed to fulfil its obligations under the VAT Directive. Cyprus now has two months to address the shortcomings identified in this letter of formal notice.
If Cyprus does not take appropriate steps within the next two months, the Commission may decide to send a reasoned opinion.
(In its regular package of infringement decisions, the European Commission pursues legal action against Member States for failing to comply with their obligations under EU law. These decisions, covering various sectors and EU policy areas, aim to ensure the proper application of EU law for the benefit of citizens and businesses.