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So you fancy investing in a property abroad? Somewhere to relax every once and a while, somewhere that can earn you money in the short/long term, or maybe just somewhere that’s more value for money than an Irish property purchase! Whatever the reason, investment in overseas property is growing steadily, but when it comes to the financials of your investment, what are the facts of overseas tax?
There are a myriad of tax implications involved in buying property abroad so locating a financial advisor with experience of buying in the country of purchase, makes things considerably easier. Your advisor’s role could include assistance in property sourcing, purchase management, knowledge of local legislation and of course expertise in the tax implications and other commercial issues that may affect your investment. With specific regard to tax on overseas investments, some of the issues to consider include the following:
1. Decide on either personal or corporate ownership of the property.
In many jurisdictions, tax advantages could arise if a company, owned by the investor, purchases the property instead of the investor themselves. But take care in considering this option. There are costs incurred in establishing and maintaining these companies and in some jurisdictions the tax authorities are starting to introduce additional or increased taxes for one or two-shareholder companies with the sole purpose of investment in property.
Country specific options for this type of structure in some of our most popular destinations include:
Purchasing in Hungary – Many investors purchase property through a Hungarian company for two reasons. Firstly, a foreign citizen wishing to purchase Hungarian property in a private capacity must secure a permit to do so but using a company cuts out this requirement. Secondly, the future disposal of the property may be by way of sale of the company, and as the sale of shares are exempt from transfer tax (while the sale of residential property will be subject to transfer tax of 6%), a better price may be negotiated with the future purchaser.
Purchasing in France – The use of a French Societe Civile Immobiliere (SCI) should be considered as this type of company can be transparent for the purposes of assessing tax on rental income or chargeable gains, but the shareholding can be structured in such a way that the property may ultimately pass to the investor’s children without the imposition of French gift or inheritance tax.
Purchasing in Spain – Holding Spanish property through a Spanish or off-shore company may avoid the imposition of Spanish gift or inheritance tax, but off-shore companies may be liable for annual taxes that are equivalent to 3% of the property’s rated value. Additionally, this type of Spanish company is now subject to a 40% rate of tax on rental income, as compared to the 25% rate of personal income tax on rental income.
Purchasing in Portugal – Use of off-shore companies to purchase Portuguese property may result in stamp duty (SISA) or gift/inheritance tax benefits. However, all off-shore companies are taxed on deemed rental income and are also subject to an annual tax based on the rateable valuation of the property.
2. Taxes due on property purchase
Transactional taxes arise on original purchase of the property and include both stamp duties (aka transfer tax, SISA, conveyance duty) and Value Added Tax (aka general turnover tax).
With stamp duties differing rates apply in different countries and it’s always important to ask the following relevant questions:
A) Will the rate or applicability of stamp duty differ depending on whether the property is new or second-hand (e.g. In Spain rates of 0.5% or 1% will apply to new property while second-hand property may be subject to a rate of 6% or 7%)?
B) Is any specific exemption available (e.g. In Hungary, certain residential property with a value of up to HUF30m (approx. €120,000) may be exempt from transfer tax)?
With Value Added Tax, the issue of new or second-hand property purchase may also make a difference to applicable VAT rates. Where differing rates do apply, it is often the case that the higher VAT rate applies to new property. If your property is being purchased while under construction, however, it may be possible to reduce VAT liabilities arising by structuring the paperwork in a particular manner.
3. Tax on rental incomes: taxed if you do, taxed if you don’t?
As a general rule, surpluses arising on rental income are subject to tax in the country where the property is located, but as an Irish tax resident you will also be subject to tax in Ireland on the same income. Thankfully, most countries in which Irish citizens are making property investments have a double taxation treaty with Ireland that either provides for an exemption from income tax in one of the countries or grants a credit for tax paid on the same income. So prior to making any purchase, confirm that a double tax treaty exists.
In determining the level of income tax liabilities arising in the country of investment, regard must be had to the applicable rates, tax-free thresholds or credits (if any) and the allowable expenses in calculating the taxable surplus. In Hungary, for example, the income tax rates are graduated from rates of 18% to 38% and the investor may choose whether to deduct specific expenses, supported by the appropriate invoices, or deduct 10% of all costs arising. In Spain, income tax is payable on the gross rents at a flat-rate of 25%, while in Portugal no tax-free threshold or tax credit is available in calculating assessable income.
Another key question will be whether interest paid on a mortgage taken out to purchase the property, will be deductible in calculating the taxable surplus arising in both Ireland and the country of investment.
Finally, might you have to pay for rental incomes you’re not receiving? Where an investor purchases Spanish property, for example, and does not generate rental income from it, the tax authorities will deem the investor to have received a taxable notional rent. This is calculated annually on a value representing 2% of the property’s ‘cadastral value’ (official valuation, intended to represent 50% of the property’s market value) and a rate of 25% applies. Investors should confirm whether the tax legislation of the country of investment includes a provision regarding ‘deemed rental income.’
4. Other annual taxes
Many countries will levy building tax rates (or an equivalent local tourism tax/property tax or occupant tax) on the property on an annual basis. These are usually calculated by reference to the value of the property or on a square footage basis. Variations can occur within the same country or even city and a local lawyer advising on the property purchase should provide these details.
In countries where wealth tax applies, it is typically levied on the owner by reference to the value of assets held by the owner on the final day of the tax year. The tax may be levied in respect of each property owned by the foreign investor, as in Spain, or it may be, as in France, that where the total value of assets located in the country of investment and held by the foreign investor breaches a certain threshold, wealth tax will apply.
In conclusion, sound financial advice, coupled with local research and knowledge will ensure that you make the right decisions to maximise the potential return on your investment. And you never know, in a few years time you might just decide to pack your bags and retire there for good!
About Hamill Spence O’Connell
Hamill Spence O’Connell (HSOC) is a professional services practice with established specialist expertise in private and corporate client services. Areas of particular expertise include: optimising company values and growth prospects, personal tax planning and financial services.
HSOC recognises that its clients know more about their businesses affairs than anyone else, thus its service philosophy is based on keen listening and understanding.
HSOC combines knowledge and experience with an understanding of the clients’ business and financial affairs, providing valuable, value adding and timely advice at all times.
Kerri O’Connell, tax partner with Irish accountancy firm Hamill Spence O’Connell