Navigating VAT Refunds for New Property Investors in Cyprus

As a foreign investor looking to purchase a new property in Cyprus, understanding the Value Added Tax (VAT) implications is crucial. While the standard VAT rate on new properties is 19%, there are provisions under Cypriot law that may allow for a reduced rate of 5% for eligible buyers. This guide, from the perspective of a Cyprus tax expert, outlines how foreign new property investors can potentially receive a VAT refund or apply the reduced rate directly.

Key Insights into Cyprus Property VAT for Foreign Investors

Standard vs. Reduced VAT: The standard VAT rate on new properties in Cyprus is 19%. However, a reduced rate of 5% is available under specific conditions for properties intended as a primary and permanent residence.
Eligibility for Reduced Rate: To qualify for the 5% reduced rate, the property must be the buyer's first property purchase in Cyprus and serve as their primary and permanent residence. There are also limitations on the property's size and value to fully benefit from the reduced rate.
Application Process: Buyers can apply for the reduced VAT rate directly upon purchase, or in some cases, claim a refund of the difference if the standard rate was initially paid. The application is submitted to the Cyprus Tax Department and requires specific documentation.

Understanding VAT on Property in Cyprus

In Cyprus, the acquisition of new properties is subject to Value Added Tax. This applies to properties where the planning permit was issued after May 1, 2004. Resale properties are generally exempt from VAT but are subject to property transfer fees instead.

Standard VAT Rate

The standard VAT rate applied to new property purchases in Cyprus is 19%. This rate is typically added to the purchase price of the property.

VAT guide for Cyprus

Reduced VAT Rate: The 5% Opportunity

Cypriot law provides for a significantly reduced VAT rate of 5% for the purchase or construction of a new residence, provided it is to be used as the primary and permanent residence of the applicant. This is a crucial provision for foreign investors who intend to make Cyprus their home.

Conditions for the Reduced Rate

To be eligible for the reduced 5% VAT rate, several conditions must be met:

The applicant must be a natural person (an individual), not a company.
The property must be the applicant's first property purchase in Cyprus.
The property must be used as the applicant's primary and permanent residence.
There are limitations on the size and value of the property to which the 5% rate fully applies. As of recent changes, the 5% rate generally applies to the first 130 square meters of properties up to a total area of 190 square meters and a value not exceeding €350,000, within a total property value of €475,000. The standard 19% VAT rate will apply to the area exceeding these limits.
The property should not be used for generating income, such as through rentals, within a specified period (usually 10 years). If the property's use changes within this period, a proportional amount of the VAT difference may need to be repaid.
The applicant must not have previously benefited from the reduced VAT rate on another property in Cyprus.

Changes to Reduced VAT Rules

It's important to note that the rules regarding the reduced VAT rate have undergone changes. Recent legislative amendments have adjusted the criteria for the size of the property that qualifies for the 5% rate and have introduced provisions for applying for the reduced rate within a certain timeframe after acquiring possession of the residence, provided there is a valid reason for delayed submission.

Receiving the VAT Benefit: Refund or Direct Application

Foreign investors who qualify for the reduced 5% VAT rate can benefit in two primary ways:

Applying the Reduced Rate Directly

The most straightforward method is to apply for the reduced 5% VAT rate directly at the time of purchasing the property. This involves submitting the necessary application and supporting documents to the Cyprus Tax Department before or during the purchase process. If approved, the reduced rate will be applied to the eligible portion of the property's value, meaning the buyer only pays 5% VAT upfront instead of 19%.

Image of documents related to VAT refund application

Documents for VAT refund application

Claiming a VAT Refund

In some cases, a buyer might initially pay the standard 19% VAT rate, particularly if the application for the reduced rate is submitted after the purchase or if the property was acquired under circumstances where the reduced rate was not immediately applied. If the buyer subsequently qualifies for the 5% rate, they can apply for a refund of the difference, which amounts to 14% of the VAT paid on the eligible portion of the property.

The process for claiming a refund involves submitting an application to the Cyprus Revenue Authority along with supporting documentation, including the purchase contract and proof of VAT payment. The refund is processed after the application is reviewed and approved.

The Refund Process

If you have paid the standard 19% VAT and believe you are eligible for the 5% reduced rate, you can follow these steps to apply for a refund:

Ensure you meet all the eligibility criteria for the reduced 5% VAT rate, including property usage, size, and your status as a first-time buyer in Cyprus for primary residence.
Gather all necessary supporting documents. This typically includes your passport, the property purchase agreement, proof of payment of the 19% VAT, building permits, floor plans, and any other documents requested by the Tax Department.
Submit the application for the reduced VAT rate and the refund request to the District VAT Office.
The Tax Department will review your application and documents. This process can take some time.
If your application is approved, the 14% VAT difference will be refunded to you.

Image related to VAT refund on new property purchase in Cyprus

VAT Refund on the Purchase of New Property in Cyprus

Factors Affecting the Refund/Reduced Rate

Several factors can influence whether a foreign investor receives the VAT benefit:

Applicant Status: The reduced rate is for individuals purchasing for their primary residence, not for investment or commercial purposes.
Property Type: The reduced rate applies to new residential properties used as a primary and permanent dwelling.
Property Size and Value: The eligible amount for the 5% rate is capped based on the property's size and value.
Timely Application: While there are provisions for late applications under specific circumstances, applying for the reduced rate at the appropriate time is generally recommended.
Accuracy of Documentation: Providing complete and accurate documentation is essential for a successful application.

Comparison of VAT Rates and Application Scenarios

To provide a clearer picture, the table below summarizes the different VAT scenarios for property purchases in Cyprus:

Property Type	Buyer Type	Intended Use	Applicable VAT Rate	Notes
New Residential Property	Individual (First Time Buyer in Cyprus)	Primary and Permanent Residence	5% (on eligible portion)	Subject to property size and value limits. Application to Tax Department required.
New Residential Property	Individual or Company	Investment, Rental, or Secondary Residence	19%	Standard rate applies.
New Residential Property	Individual (Eligible for 5%)	Primary and Permanent Residence	Initially 19%, then potential 14% refund	If 19% was paid upfront, a refund can be claimed if eligibility for 5% is proven.
Resale Property	Any	Any	Exempt from VAT	Subject to Property Transfer Fees.
New Commercial Property	Individual or Company	Any	19%	Standard rate applies.

Understanding these scenarios is vital for foreign investors to correctly anticipate the tax burden and explore potential savings.

Important Considerations for Foreign Investors

For foreign nationals, navigating the tax system in a new country can be complex. Here are some additional points to consider:

Seeking Professional Advice

Given the nuances of VAT legislation and the specific requirements for the reduced rate and refunds, it is highly recommended that foreign investors seek advice from a qualified tax advisor or legal professional in Cyprus. They can assess your individual circumstances, confirm your eligibility, assist with the application process, and ensure compliance with all legal requirements.

Potential Legislative Changes

Tax laws can change. While the information provided is based on current legislation, it is advisable to stay informed about any potential updates or amendments to the VAT law in Cyprus that could affect property purchases.

Usage of the Property

As mentioned, the reduced VAT rate is conditional on the property being used as your primary and permanent residence for a specified period. If you cease to use the property as such within this timeframe (e.g., by selling or renting it out), you may be liable to repay a portion of the VAT difference you initially saved or had refunded.

FAQ: VAT on Cyprus Property for Foreign Investors

Can a foreign company claim the reduced 5% VAT rate?

No, the reduced 5% VAT rate is specifically for natural persons (individuals) who are purchasing a property for use as their primary and permanent residence.

Is there a time limit to apply for the VAT refund if I initially paid 19%?

Yes, there are deadlines for submitting the application for the reduced rate, which can lead to a refund if the standard rate was paid. Recent amendments have introduced some flexibility for late submissions under justified circumstances, but it is best to apply as soon as possible after the conditions for eligibility are met, ideally within 12 months of taking possession of the property.

Does the 5% VAT rate apply to the entire property value?

The 5% rate applies to the eligible portion of the property's value and area. For properties exceeding certain size and value thresholds, the 19% rate will apply to the value attributable to the excess area.

What happens if I rent out the property after benefiting from the reduced VAT rate?

If you use the property for purposes other than your primary and permanent residence within 10 years of benefiting from the reduced rate, you may be required to repay a proportional amount of the VAT difference.