Subsidy in relation to the purchase of buildable land


On 12 January 2022, at a meeting of the Council of Ministers, a significant change to the Purchase of Permanent Residence Scheme (PPRS) for the purchase of land for the purpose of erecting a permanent residence was approved. With this change, the possibility of a cash payment, in the form of a subsidy of 14% is provided, based on the PPRS, covering the case where the parent or guardian transfers to an adult child the land for which VAT had been paid and the adult child will proceed to the construction of a residence for which the reduced rate of 5% is to be approved. The remaining terms of the PPRS are still valid and are described in Table C of the Schedule Five (See below the main remaining terms).

It is noted that before the above change, the VAT subsidy on the purchase of land was only given to the buyer of the land, provided that he was going to build his permanent residence (See Schedule A for the conditions required for the granting of the subsidy)

Therefore, with the recent change, if e.g. a parent buys a plot of land and pays €10,000 VAT, the parent will be entitled to a subsidy of €7,368 (14 X 10,000 / 19). This subsidy will be given provided the parent’s adult child will proceed to erect his permanent residence on the specific plot and will receive approval from the Tax Department (VAT Service) for the reduced rate of 5%.

It is reminded that the main terms of the PPRS are the following:

  1. The application for a reduced rate of 5% must be made before moving into the dwelling (house or apartment) which is to be used as a permanent residence,

  2. The reduced rate is applied for the first 200sqm of buildable coefficient of dwellings as determined based on the building coefficient according to the architectural plans submitted to the planning authority to obtain a planning permit,

  3. The beneficiary submits a solemn declaration stating that he does not use another residence as his permanent residence,

  4. Along with the solemn declaration the beneficiary should give:

  • Contract for the purchase or construction of the dwelling,

  • Architectural plans, and

  • Copy of bill for telephone, water supply, electricity, municipal and community taxes, within six months of moving in the dwelling or gaining possession of the dwelling

  1. The construction of the dwelling should be done by a licensed contractor who should declare that he holds an annual permit of the class and category of the respective construction project.

Although the announcement of the Council of Ministers does not refer to the time of payment of the subsidy, we assume that this will be done after the construction or taking possession by the adult child in the relevant residence. Therefore, the time of payment of the sponsorship to the parent / guardian is located within six months from the date of moving into or taking possession of the residence by the adult child.


If the size of the house exceeds 200sqm of buildable coefficient, the subsidy is reduced according to the reduction of the right of 5% on the total costs.


Example

Buildable Coefficient 250sqm

Construction cost € 300,000

Plot cost € 100,000

Total cost € 400,000


Allowable percentage: 200/250 = 80%

1. Construction cost subject to reduced rate 5% = 300,000 X 80% = 240,000

VAT

(a) 240,000 X 5% = 12,000

(b) 60,000 X 19% = 11,400

Total VAT €23,400

2. Subsidy right = 100,000 X 80% 80,000

Subsidy = 80,000 Χ (19% - 5%) = 11,200*

* KDP 302/2019 does not clarify whether input tax paid for the plot of land should be reduced in relation to the buildable area of the house. If the buildable area concerns only the house and not the plot, the subsidy may cover the entire VAT paid for the plot, i.e. €14,000 (€100,000 Χ 14%).


Schedule A: Conditions applicable for claiming the subsidy

1. The undeveloped buildable land must have been purchased since 2nd January 2018 and be subject to VAT as per the relevant provisions of paragraph (1) (b)(iii) of Schedule 8).

2. The land* purchased is destined for the construction of the applicant’s main and permanent place of residence in the Republic.

*Although not clearly mentioned either in KDP 302/2019 or in its accompanying explanatory notification released by the Tax Authorities, it appears that there are no restrictions with respect to the size of the land for which the subsidy is applied for.

3. The subsidy for the land is only granted if the residential building to be constructed is also eligible for the reduced VAT rate of 5% (as per the relevant provisions of Part C of Schedule 5 of the Cyprus VAT Act).

4. The submission to the Tax Authorities of the necessary application together with any supporting documentation must be made within a set timeframe. Nevertheless, neither KDP 302/2019 nor its accompanying explanatory notification released by the Tax Authorities impose any time restrictions with respect to the time between the purchase and construction of the land.

It is noted that the subsidy only applies for the purchase of land whilst construction services continue to be taxed under the reduced VAT rate of 5% provided the statutory conditions are met.


Persons entitled to the subsidy

Every person who purchases undeveloped buildable land which is subject to 19% VAT and constructs a building which is to be used as his main and permanent place of residence while staying in the Republic.


Amount and calculation of the subsidy

Taxpayers entitled to the subsidy shall receive a cash refund equal to 14% of the VAT amount corresponding to up to 200 square meters of building area charged on the purchase price of the undeveloped buildable land.


Example:

An applicant purchases an undeveloped buildable land for a total amount of €300.000 plus 19% VAT (€57.000). The applicant constructed a building of 250 square meters of buildable area.

Since the buildable area of the residence exceeds the fixed statutory threshold of 200sqm, the applicant is entitled to claim only part of the subsidy in relation to the VAT amount paid upon the purchase of the land. i.e.

- Allowable percentage: 80% (allowable buildable area/total buildable area (200/250)

- Subsidy to be granted: €33.600 (€300.000 Χ 80% X 14%)

- VAT amount non-refundable: €11.400 (€300.000 X 20% X 19%)

In order for the subsidy to be granted, applicants must submit to the Tax Authorities the following documents:


Procedure for requesting the subsidy

1. A certified declaration. The declaration must be submitted to the Tax Department’s District Offices either on the same date of applying for the imposition of the reduced VAT rate of 5% on the purchase or construction of a residence in the Republic or at a later point of time..

2. Original purchase invoice issued to the applicant by the seller of the land*.

3. Sale purchase agreement in relation to the undeveloped buildable land duly stamped and sealed by the Stamp Duty Commissioner*.

4. Any other supporting documentation proving that the residence with which the subsidy relates is being used by the applicant as his main and permanent place of residence in the Republic. (I.e. copies of utility bills referring to telecommunication services received, electricity, water supply, etc)*.


* The documents mentioned under points 2 - 4 here above must be submitted to the Tax Authorities within a period of 6 months from the date the applicant first commenced using the property.