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European Commission calls on Cyprus to comply with VAT rules for dwellings

The European Commission has decided to send a reasoned opinion to Cyprus regarding the country's failure to properly apply EU VAT rules for dwellings purchased or constructed on the island.

According to a relevant announcement on 1 June, 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.

"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 that objective. 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 dwelling, and the maximum total area of the dwellings concerned," the announcement said.

Consequently, the Commission considers that Cyprus has failed to fulfil its obligations under the VAT Directive.

The 1 June reasoned opinion follows up on the letter of formal notice sent by the Commission to Cyprus in July 2021. Cyprus now has two months to address the shortcomings identified in this reasoned opinion. If Cyprus does not act within the next two months, the Commission may decide to refer the case to the Court of Justice of the European Union, the announcement noted.

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