Cyprus loses €100+ million due to a loophole in the reduced VAT law for real estate

From time to time the market throws up stories that seem almost unbelievable, and this one has been quietly brewing for years. The transitional provisions of Cyprus’s reduced VAT regime are still working in a way nobody intended, allowing buyers to avoid the standard 19% VAT on property. As a result, the state budget is missing out on over €100 million, and for a small island this is a serious hole.

The original idea behind the 5% reduced VAT for primary residences was simple: help people who are buying a home to live in. But over the years the system opened a back door. Buyers found ways to structure transactions so that they remain within the reduced-rate framework, even when the purchase doesn’t fully match the spirit of the law. Everyone on the market kind of knew this was happening, but the scale is turning out to be much larger than expected.

The core issue lies in the transitional rules that still allow older criteria to be applied. In practice, part of the Cyprus real estate market continues to operate under the previous VAT regime, meaning some buyers legitimately enjoy the 5% VAT while others pay the full rate. This imbalance distorts pricing and creates two parallel realities: the law as written and the law as actually used.

The government has finally acknowledged the problem publicly. Officials are preparing VAT reform for real estate, and the tone suggests the changes will be strict. The upcoming adjustments may redefine eligibility for the reduced rate, strengthen checks on whether the buyer truly uses the property as their primary residence, and introduce broader verification tools. In short, the intention is to close the loophole and stop the budget from leaking tens of millions every year.

For buyers and investors, this marks an important turning point. Any revision of the VAT rules for property purchases in Cyprus could affect final pricing, investment calculations and expected ROI. This is especially relevant for those looking at new developments in Limassol and other high-demand coastal areas.

The market isn’t likely to slow down because the fundamental demand for property by the sea in Cyprus stays strong, but the familiar rules are about to shift. Buyers will need to pay closer attention to VAT conditions, and developers may have to rethink pricing models if access to the 5% reduced VAT becomes more restrictive.