Taxpayers may be asked to pay the VAT shortfall that ‘Golden Passport’ investors and other home buyers who paid the lower VAT rate of 5% but who should have paid the full VAT of 19% on their property purchase.
Cyprus’ decision to violate EU Directive 2006/112/EC by applying a reduced VAT rate of 5% on the first 200 square metres of all dwellings bought as principal and permanent residences has got it into hot water with the European Union.
The Directive lists the supplies of goods and services to which member states may apply reduced rates, one of which is the “provision, construction, renovation and alteration of housing, as part of a social policy.”
But in Cyprus, 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.
In July 2021, the European Commission sent a letter of formal notice to Cyprus for its failure to properly apply EU VAT rules for dwellings, giving Cyprus two months to take “appropriate steps.”
The risks and implications of Cyprus violating EU Directive 2006/112/EC were known in 2020. In October that year, the Auditor General warned that Cypriot taxpayers would be required to cover the VAT saved by investors who bought passports through the disgraced ‘Golden Passport’ scheme by acquiring expensive homes, revealing that the law passed by parliament in 2015 was implemented in such a way that investors would also pay VAT at the reduced rate. (In October 2021, the European Commission sent a letter of formal notice to Cyprus regarding its ‘Golden Passport” scheme; proceedings are ongoing.)
The inspector of taxes in 2020, Giannis Tsagaris, stated that if the European directive concerning VAT for the acquisition of housing is applied incorrectly, Cyprus will be asked to pay lost income from own resources, to cover the difference between reduced and normal VAT rate saved by investors.
Based on information available in 2020 investors paid €125 million in VAT while at the standard rate of 19%, they would have paid four times the amount, leaving ordinary taxpayers to pay the €375 million deficit.