October 2025 | Legal Insight | Real Estate & Tax Law
The Parliament of Cyprus has recently enacted new legislation introducing substantial amendments to the VAT framework applicable to primary residences. These legislative changes, adopted with broad political consensus, aim to bring national law into alignment with European Union requirements, following sustained pressure from the European Commission.
Overview of the New VAT Regime
Under the new law, a reduced VAT rate of 5% is now applicable to the first 130 square meters of a main residence—whether a house or apartment—purchased as a primary home. This applies to both Cypriot nationals and foreign buyers. Any area exceeding 130 square meters will be taxed at the standard VAT rate of 19%.
To benefit from the reduced VAT rate, the following criteria must be met:
- Maximum total property size: 190 square meters
- Maximum purchase price: €475,000
- Maximum value eligible for 5% VAT: €350,000
For buyers with disabilities, the reduced VAT rate of 5% applies to the full 190 square meters, providing enhanced support to this group.
Transitional Provisions and Exemptions
The new legislation is not retroactive. Properties for which a building permit has already been issued remain subject to the previous VAT rules. Additionally, a four-month transition period has been established, during which developers may apply for building permits under the old regime and still benefit from the earlier, more favourable VAT structure.
Legislative Background and EU Compliance
The reform follows extensive discussions that began in early 2022, when the European Commission raised concerns over Cyprus’s then-current policy. At that time, the reduced VAT rate of 5% applied to the first 200 square meters of a primary residence—a provision that was often leveraged by real estate investors, including participants in the now-defunct citizenship-by-investment scheme.
The Commission argued that the preferential VAT rate should be reserved for those with legitimate housing needs, not for high-value property purchases by investors. In December 2022, the EU issued a formal warning and threatened to impose a €300 million fine if the legislation was not amended promptly.
Despite the urgency, political negotiations in Cyprus delayed the adoption of the new law until mid-2023. Key disagreements centred around the specific square meter threshold that would qualify for the reduced VAT rate, with proposals ranging from 90 to 130 square meters before the final figure was agreed.
Implications for Buyers and Developers
The updated VAT rules represent a significant change in the legal and tax landscape for residential property in Cyprus. Prospective buyers—especially those entering the market for the first time—must now carefully consider how these changes affect their purchasing power and eligibility for reduced VAT.
For developers, the transition period offers a limited window of opportunity to secure building permits under the previous rules. Prompt action is advised to take advantage of this provision.
How We Can Help
Our firm is actively monitoring the implementation of the new VAT law and advising clients on its legal and financial implications. Whether you are a private individual planning to purchase a home or a developer navigating compliance issues, our Real Estate & Taxation team is here to provide tailored legal support and strategic guidance.