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International Real Estate Taxation

By Editorial
September 20, 2011

In this feature, we look back at significant developments in the area of real estate taxation around the world over the past three months, during which time a number of governments have proposed new or increased taxes on property as part of deficit-closing measures.

Europe in particular has witnessed a number of proposed changes to property taxation, especially in those European Union member states which are mired in the eurozone crisis. On September 11, the Greek government announced the immediate introduction of a new property tax to be charged at rates of up to EUR10 per square meter, depending on the property's location. The measure is expected to raise EUR2bn annually and will remain in place for two years.

Cyprus, which like Greece is a popular location for second-home owners and expats, particularly from the United Kingdom, has also been forced into taking a harsh dose of fiscal medicine in order to prevent the country from becoming the next victim of the eurozone crisis. Last month, the government proposed changes to the immovable property tax thresholds in a bid to raise an additional EUR24m in revenue. The proposal was subsequently included in a package of austerity measures which was approved by the House of Representatives in late August.

Meanwhile, Ireland, which is undergoing a prolonged period of fiscal austerity, is consulting on proposed changes to property-based tax reliefsas part of the government's plans for an overhaul of the system. The Fine Gael-Labour coalition let it be known in its Programme for Government earlier this year that it was keen to restrict or abolish property tax reliefs to generate additional revenue, and the proposed measures target non-owner occupiers, namely landlord investors, and passive investors in industrial buildings.

However, this is not the end to the bad news for property owners and investors in Ireland, with the government set to introduce a new property tax, which is expected to be in place by next year, and subject to an increase as early as 2013 as part of deficit reduction commitments made to the 'troika' of lenders which are currently bailing out the Irish government. In the interim, a temporary Household Charge will be payable in Ireland from early 2012 at an initial rate of EUR100 before the property tax itself is fully implemented.

In Spain, Alfredo Perez Rubalcaba, leading candidate for Spain's Socialist Party in the run up to the forthcoming elections in November, recently unveiled details of his election programme, containing plans to reintroduce wealth tax on property. The proposal was subsequently approved by the Spanish cabinet on September 16, and it is thought that the measure will raise over EUR1bn annually from around 160,000 taxpayers.

Elsewhere in Europe, Austria's Finance Minister Maria Fekter, has proposed that the right to levy property tax in Austria be transferred from the central government to the federal states. The idea behind the proposal is that state governments would be given more fiscal autonomy and would therefore be able to manipulate tax policy in order to attract additional local investment. However, the idea is fiercely opposed by the Austrian Association of Municipalities and it remains to be seen whether Fekter's proposal will become a reality.

A possible new tax on property is also forming part of the debate over the 50% top rate of tax in the UK. Introduced by the previous Labour government in 2010, the 50% rate kicks in on annual income of GBP150,000, but anecdotal evidence suggests that it costs the country more than it raises, both in terms of administration and competitiveness, and the Conservative Party is keen to see it repealed or reduced. Standing in their way, however, are the Liberal Democrats, the Conservatives' junior coalition partners in government, who argue that cutting tax for the rich while not doing so for everyone else is patently unfair. If the 50% must go, the Lib Dems say that a 'mansion tax' on high value property must take its place. The party is also studying proposals for an overhaul of property tax at the local level and the introduction of a land tax, which, they argue, would be a more progressive, and therefore fairer, way to raise money for local government than the present system of council tax, based on a property's value some 20 years ago. Neither idea is likely to see the light of day, however, while the Conservatives remain the dominant force in government, especially after the mansion tax proposal was rubbished by Communities Secretary Eric Pickles.

British property owners with holiday homes in France, of which there are many, were also no doubt greatly relieved to hear that plans for a tax on second residences there were shelved this summer after an outcry from the property industry and opposition in the French Senate. The levy was intended to contribute to the financing of the government's wealth tax reform and was expected to generate revenues of around EUR176m on the basis of around 363,000 secondary residences in France.

There was also good news for property investors in Monaco (well, at least for the small band of Formula One drivers, Russian oligarchs and other super-rich individuals who can afford to buy in the principality!) in July this year after a new law was passed amending the taxation on the transfer and purchase of real estate. The law provides for a substantial cut in the registration tax levied on individuals buying property in Monaco, although the new rate will not apply to purchases conducted through 'offshore' entities.

In Europe then, the prime motivation for new or higher existing property taxes is to raise revenue. Elsewhere however, governments are facing the problem of 'hot money' inflows into their country which has the effect of driving up asset prices (with the danger that such price bubbles may burst when hot money flows out again) and taxes have been used as a means to curb speculative buying. One place where this has happened is Hong Kong, which slapped a special stamp duty on property purchases last year. However, it is unclear whether the tax is having the desired effect. While agents have reported a noticeable drop off in business from local buyers in the last few months, Chinese buyers are stepping in to snap up prime property in the city. Also, the Knight Frank Prime Global Cities Index suggested last month that prime property in Hong Kong recorded strong annual growth, with prices in June 2011 16.1% higher than twelve months earlier. In July, Hong Kong's Inland Revenue Department issued interpretation and practice notes concerning the special stamp duty.

In the US however, property taxes are predominately being used as a revenue raiser for cash-strapped local and state governments. Recently, controversy has centred on a proposed change to Proposition 13, California's law limiting property taxes in the state. In a speech to the Sacramento Press Club, the Mayor of Los Angeles Antonio Villaraigosa suggested that Proposition 13's protection should only be given to homeowners, and not to commercial property. Even when phased in over time, he indicated that such a change could still generate up to USD8bn in additional tax revenue. Proposition 13 was enacted in California after a referendum in 1978. It restricts the maximum amount of any ad valorem property tax to 1% of a property's assessed value, and restricts annual increases of assessed values to an inflation factor, not to exceed 2% per year. It also prohibits reassessment of a property's value except for a change in ownership or after completion of new construction.

So, as we can see, the overwhelming trend at the moment is towards higher taxes on real estate, especially in Europe but also in other parts of the world. While governments continue to struggle to make ends meet, this scenario is unlikely to change much in the next three months.



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