Malta Attempts Further Improvements To New Property Tax Regime

by Robert Lee, Tax-News.com, London

07 February 2006

Malta's Parliamentary Secretary, Tonio Fenech, has unveiled a number of new amendments to the controversial property tax changes announced as part of the government budget in November 2005, and which have led to vociferous criticism from the property industry.

Details on the ten pages of new amendments are at this time scant, but according to the Times of Malta, they are likely to be an attempt at alleviating headaches that have arisen "in particular sectors."

In the last budget, Prime Minister and Minister of Finance Dr Lawrence Gonzi announced that the 35% capital gains tax on profits from the sale of property would be replaced by a 12% withholding tax on the entire proceeds from a property sale. The new tax does not affect those selling their primary residence, who were exempt from capital gains tax.

The government's rationale for switching to a withholding tax was to reduce under-declarations of selling prices and to boost the housing supply by encouraging those who have held on to property for long periods to sell.

However, the move has been condemned by many in the property industry, who fear that sellers will recoup the tax by inflating final sale prices, and encourage owners to hang on to property for longer periods to allow their value to appreciate, thus defeating the government's objective of making the market more liquid and affordable.

The industry also complains that the new tax, and subsequent amendments, are making the system increasingly unworkable and far more complex than under the previous property tax regime.

Estate agents have estimated that the new tax will only benefit those who have held properties for between 10 and 15 years, and will disadvantage those who have recently bought second homes, especially foreign investors.

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