On June 16, 2023, the Official Gazette of the Republic of Cyprus published an amending law, numbered 42(I)/2023, which immediately modified the provisions regarding the reduced VAT rate of 5% applicable to the acquisition and/or construction of primary and permanent residence in Cyprus by individuals. Prior to the enactment of this law, the reduced VAT rate of 5% was only applicable to the initial 200 square meters of the buildable area of the residence, provided that the total square meters of the residence did not exceed 275.

The new law introduces restrictions on both the size and cost of the residence impacting the extent to which the reduced VAT rate can be applied. Specifically, the reduced VAT rate of 5% now applies to the first 130 square meters of the property, up to a cost of €350,000, provided that the residence does not exceed 190 square meters in buildable area and the total cost does not exceed €475,000. There is an adjustment to the 130 square meters limit, increasing it to 190 square meters for individuals with disabilities. Additionally, in cases where a family has more than three children, the total square meters allowed are increased by 15 square meters for each additional child beyond the initial three.

Another notable change refers to individuals who have previously taken advantage of the reduced VAT rate for their primary and permanent residence. Prior to the revision of the VAT Law, these individuals were required to pay back to Tax Authorities the entire VAT benefit they had received if they ceased to use the property as their primary residence for a period of less than 10 years. Under the new law, these individuals now have the opportunity to re-apply for the reduced VAT rate for a new residence before the 10-year period, provided they reimburse the Tax Authorities with the amount of VAT that results from the application of the reduced rate.(i.e. vat benefit 14% on the cost of the residence for the remaining years out of the 10year period)

In accordance with the transitional provisions outlined in Law 42(I)/2023, the prior regulations will be applicable to residences that meet both the following criteria:

• A planning permission is either obtained from the competent authority or an application for planning permission is submitted to the competent authority by October 31, 2023.
• The application for the reduced VAT rate is correctly submitted to the Tax Authorities within three (3) years from the date when Law 42(I)/2023 came into effect.