Cyprus faces EU action for VAT rule violations on dwellings

The European Commission has issued a reasoned opinion to Cyprus for its failure to adhere to EU VAT rules regarding dwellings. Cyprus allowed a reduced VAT rate on residential properties without necessary limitations, prompting concerns about potential violations of the VAT Directive. This article explores the reasons behind the Commission's decision, emphasizing the importance of compliance and fairness in EU VAT regulations.

The European Commission has taken a decisive step by sending a reasoned opinion to Cyprus due to its failure to adhere to EU value-added tax (VAT) rules in relation to the purchase or construction of dwellings within the country. Cyprus has been allowing a reduced rate of VAT of 5% on the first 200m2 of dwellings used as the principal and permanent residence, without imposing any limitations.

According to the VAT Directive (Council Directive 2006/112/EC), member states can indeed apply a reduced rate of VAT on housing as part of a social policy. However, the Cypriot legislation's broad scope and lack of limitations raise concerns that the measure exceeds the intended objective.

The primary issue lies in the fact that the reduced rate is applied regardless of the beneficiary's income, assets, and economic situation, as well as the circumstances of the family members who will reside in the dwelling and the maximum total area of the dwellings involved.

Consequently, the European Commission asserts that Cyprus has failed to fulfill its obligations under the VAT Directive. This reasoned opinion serves as a follow-up to the letter of formal notice sent by the Commission to Cyprus in July 2021.

Cyprus now faces a two-month period to address the shortcomings outlined in the reasoned opinion. Failure to take appropriate action within this timeframe may result in the Commission deciding to refer the case to the Court of Justice of the European Union.

The European Commission's decision reflects its commitment to ensuring that member states adhere to the agreed-upon rules and regulations. VAT rules play a crucial role in maintaining fair competition, promoting economic stability, and harmonizing fiscal policies within the European Union.

While the reduced VAT rate on housing is permissible under the VAT Directive, it is essential that member states strike a balance between social policy objectives and ensuring that such measures are not misused or overly generous. The concerns raised by the Commission suggest that the Cypriot legislation may be deviating from the intended purpose, potentially leading to distortions in the housing market.

By issuing a reasoned opinion, the European Commission provides Cyprus with an opportunity to rectify the identified shortcomings and bring its VAT rules in line with EU regulations. This approach allows for constructive engagement between the Commission and member states, emphasizing the importance of compliance and uniformity in the application of EU law.

Cyprus now faces the task of carefully reviewing the concerns raised by the European Commission and taking appropriate measures to address them. This may involve introducing limitations or refining the eligibility criteria for the reduced VAT rate on dwellings, ensuring that the measure aligns more closely with the social policy objective while avoiding undue advantages for certain individuals or groups.

The ball is now in Cyprus hands to demonstrate its commitment to upholding EU VAT rules and fostering a fair and equitable housing market within its borders.

As the two-month deadline approaches, the European Commission will monitor Cyprus' response closely. The potential referral of the case to the Court of Justice of the European Union should serve as a reminder to member states that non-compliance with EU regulations will be met with further legal action.

Ultimately, the European Commission's reasoned opinion to Cyprus serves as a testament to the importance of consistent and fair application of VAT rules within the European Union. Through this process, the Commission aims to maintain a level playing field for member states, ensuring that social policy objectives are achieved without undermining the principles of the single market.