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Indirect Tax Update - Acquisition of residential dwellings

Acquisition of residential dwellings

The house of representatives has passed the following amendments regarding the imposition of the reduced VAT rate of 5% on the acquisition of a dwelling to be used as the main place of residence.

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KPMG in Cyprus

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1. Second sub-paragraph of Paragraph 3 of Part C of Schedule Five

What was applicable prior to the amendment?

The reduced VAT rate was applicable for “the first 200sqm of dwellings the total area of which does not exceed 275 square meters…” according to the
architectural plans submitted to the Town Planning Authority for securing a
town planning or building permit. 

Amendment

“..first two hundred (200) sq. of buildable area of the residential dwellings, as determined by the building factor… “.

What changes have been introduced with the above amendment?

- The total area of 275 square meters has been abolished

- The first 200sqm of buildable area of residential dwellings based on their building factor remains

There is a significant simplification in the calculation of the total area of residential dwellings, since it will now be based on the number of square meters shown on the town planning or building permit (Refer to Schedule A “Terms of issuing a town planning or building permit”)

2. Sub-paragraph 9 of Paragraph 3 of Part C of Schedule Five

What was applicable prior to the amendment?

A person who exercised the right to purchase a property under the reduced VAT rate could not apply to purchase another property under the reduced rate before the expiration of 10 years.

Amendment

“..may exercise the relevant right for the purposes of purchasing another property before the expiration of the 10 year period, only if the applicant has ceased using the property as his main place of residence, has notified the Tax Commissioner accordingly and has repaid the whole amount of VAT which resulted from the application of the reduced and the standard VAT rates in force at the time when the residential property was purchased or built…”.

What does the above amendment change?

The interested party may re-exercise the right to purchase a residential dwelling under the reduced VAT rate before the expiration of the 10 year period provided that he pays back the whole difference* between the amount resulting from the application of the reduced and the standard VAT rate as these were applicable at the time when the dwelling was purchased or constructed. Please note that no reference is made to the amount corresponding to the remaining period of the 10 years’ time limit. It is therefore irrelevant when someone opts to exercise this right, whether the right is exercised e.g. during the second or eighth year from the time when the property was first used, since the applicant will still be asked to repay the whole amount of VAT he benefited from the application of the reduced VAT rate.

* Clarifications will be sought from the Tax Department and we will revert with our relevant comments.

 

3. Sub-paragraph 10 of Paragraph 3 of Part C of Schedule Five

What was applicable prior to the amendment?

A person who exercised the right to purchase a residence under the reduced VAT rate, will be obligated to repay the difference of VAT if he ceased to use the dwelling as his main place of residence before the expiration of the 10 year period, except for cases where the beneficiary is deceased or the residence was transferred to an adult child.

Amendment

By inserting, at the end of sub-paragraph 10 of paragraph 3, the phrase “..provided that the said child is not himself a person who is also a beneficiary of the reduced VAT rate at the time of the transfer…” right after the phrase “..his adult child…” (13th line). 

What changes have been introduced with the above amendment?

As it was previously the case, a person transferring a residence which benefited from the reduced VAT rate to an adult child before the expiration of the 10 year time limit, was exempted from the obligation to repay the excessive VAT. The new phrase has been inserted so as to restrict this exemption leading to the mandatory repayment of the difference of VAT if the adult child is also eligible* for the reduced VAT rate at the time of the
transfer.

*
Clarifications will be sought from the Tax Department and we will revert with
our relevant comments.

4.Sub-paragraph 11 of Paragraph 3 of Part C of Schedule Five

What was applicable prior to the amendment?

Sub-paragraph 11 was referring to the sum of buildable covered area excluding:

- Up to 5sqm of engine room area

- Up to 36sqm of covered parking space area

- Up to 7sqm of storage space area

- Up to 40sqm of covered verandas and

- Hangar space with clear height up to 2.20m if, due to intense elevation differences.

Amendment

The term “..total area…” and its relevant definition was deleted from sub-paragraph 11 of paragraph 3.

What changes are being introduced with the above amendment?

The above exempted areas are no longer valid since, according to the amendment of the second-subparagraph, the reduced VAT rate will be applicable for the first 200sqm of the dwelling based on its building factor.

For examples, please read the attachment

KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International") a Swiss entity. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International Cooperative ("KPMG International") or KPMG member firms.

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