| However, if
you are unable to be there due to previous commitments (or simply geography!)
an international broker should be able to help you obtain a power of attorney,
allowing someone else to sign on your behalf.
Renting your
property out when you are constantly on the move can be a bit of a headache,
but hiring a letting agent qualified in dealing with international clients
could take the pressure off. They can help you find suitable tenants,
prepare a letting agreement, take the security deposit, deal with utilities
bills, collect the rent (the important bit!), visit the property on a regular
basis, check empty properties, and undertake property maintenance during
a tenancy.
Costs
Ignoring taxation
(which we will deal with in more detail later), and quite apart from the
cost of the mortgage itself, there are other expenses to bear in mind when
arranging a mortgage for your investment property, and these vary considerably
from country to country. For example, in France, the fee level can be affected
by the age of the property (as newer properties attract lower charges),
the number of people involved, and how many outside agencies (e.g. estate
agents, lawyers, brokers, letting agencies) are involved.
If buying
a property in France, (over and above the broker or IFA's fee) you should
be prepared to pay:
-
A land registry
fee of 0.6% for property under 5 years old, or a 1% fee for anything older
-
The notaire's
sales commission of up to 5% (where an estate agent is not used. If an
estate agent is used, their fees are usually paid by the seller of the
property).
-
Stamp duty of
0.6% for property under 5 years old, or a 6% (!) charge for anything older.
-
The notaire's
conveyancing fees, which vary according to the value of the property, but
can be anything from 1-1.5%.
As previously
stated, costs will vary depending on the location of your property, as
you can see the issue of additional expenses needs to be taken into account
when deciding whether international property investment is for you- although
the returns can sometimes be spectacular, it ain't cheap!
The tax
implications of international property investment
Capital acquisitions
tax, capital gains tax, inheritance tax, gift tax, property transfer tax,
VAT, stamp duty, tax on rental income, share transfer tax, land tax…no,
wait a minute. Come back…sit down and take deep breaths - I didn't mean
to frighten you.
Although the
majority of countries impose some kind of taxation on international property
investment by foreign nationals, it would be a rare (and unpopular!) country
which levied all of the above. The tax implications of your foreign real
estate investment will vary in complexity and impact according to where
it is located, and to a certain extent, what you intend to do with the
property when you have purchased it. As a general rule, in the majority
of countries if the tax authorities believe that the purchase was made
as a 'commercial' investment (i.e. if you habitually buy, renovate, and
sell on, or if you have bought undeveloped land with a view to building
a housing complex or leisure facility), they will view you as a property
dealer, and tax your investment accordingly at a higher rate.
Where taxes
are levied on international property investment, they will usually fall
into the following categories:
1) Taxes on
the purchase, acquisition or transfer of the property or land, such as
capital acquisitions tax, inheritance tax, stamp duty and property transfer
tax.
2) Taxes on
the ownership of and/or residence in the property, such as local and national
property taxes, and land tax.
3) Taxes on
rental income. (If you choose not to live in the property, be aware that
there may be additional taxes imposed on non-resident or foreign landlords.
Not necessarily devastating, but still a factor to be considered if buying
to let overseas.)
4) Taxes on
disposal of the property, such as capital gains tax, gift taxes, and death
duties
As previously
stated, property taxation regimes vary widely from country to country,
and you may feel that low, or no-tax jurisdictions are the ideal choice
for you. However, in some (although not all), due to limited resources
and space, property investment opportunities are limited only to the very
wealthy, who must be willing to contribute substantially to the local economy,
and purchase luxury real estate. Other jurisdictions limit the number of
foreign nationals permitted residence or work permits in order to maintain
the standards of living, and protect the employment chances of existing
residents.
Governments
in non-tax haven countries tend to impose fewer restrictions on property
purchase for investment or residential purposes by foreign nationals. However,
in such countries, the likelihood is that you will face more taxes on your
investment. Some property investors choose to purchase international property
via an offshore company or trust in order to bypass some of the taxes levied
in high tax countries, and although this can be a valid option, it is not
suitable in all circumstances. We will discuss this in more detail later.
Where you
decide to purchase property is, in the final analysis, a personal choice,
and will need to be based on your circumstances, resources, and eventual
goals. If you have your heart set on retiring to a beachfront house in
the Bahamas, you are unlikely to be satisfied with a one-bedroom apartment
in Cyprus. If, however, you are looking to subsidise your income by providing
affordable housing to expatriates and other professionals, the latter would
be ideal. It all depends…
Although tax
shouldn't necessarily be the most important consideration when choosing
a property, there is no denying that it's certainly up there at the top
of the list for most people. Probably the best way to illustrate the variety
of taxes, and the way in which they are imposed, is to look at three countries
with very different tax regimes:
Greece
Currently in
Greece, purchase, inheritance, possession, use, and donation of property
are taxable. Greece has a unified inheritance and gift tax on property
acquired as the result of a gratuitous lifetime transfer or death, with
the liability resting on the transferee, or beneficiary of the property.
Property situated in Greece, and moveable property situated abroad owned
by both resident and non-resident foreign citizens is liable for inheritance
tax. Non-residents may wish to reduce their tax burden by purchasing Greek
real estate through a non-resident company, as then the asset held by them
is a shareholding in a foreign company, which is not subject to inheritance/gift
tax under Greek law. However, this solution will provide no protection
for Greek residents, as the shares themselves would be subject to the unified
tax.
Property
transfers are subject to a 9% tax for property up to GRD 4 million (approximately
$10,262) and 11% for any amount beyond that. There is also a municipal
transfer tax imposed on top of that equal to 3%.
Ownership of
Greek real estate by individuals is taxed at a rate of between 0.3% and
0.8% on the value of the property, but with a deduction of GRD 69,000,000
(approximately $180,000) plus a further 0.25-0.35% real estate duty known
as the TAP, on the whole value of the property.
Rental income
is subject to Greek income tax (calculated on a progressive scale from
5% to 42.5%) and also stamp duty calculated at 3.6% of the actual rent,
and payable on a monthly basis. However, no VAT is charged on payments,
and there are no plans to introduce it while stamp duty is payable.
There are no
capital gains tax implications following the sale of a property, but the
proceeds from a disposal of real estate which takes place 5 years or less
before death are deemed to be part of the taxable assets of the deceased,
although this presumption can be challenged by the beneficiaries of the
estate.
Tenerife
Tenerife is
the largest of the Canary Islands, which although they are autonomously
governed, for taxation purposes generally fall under Spanish jurisdiction
(although a great deal of autonomy is afforded to the regional governments).
When the purchase,
acquisition, or transfer of Spanish property takes place, one of two taxes
will be payable. VAT is levied on the purchase of newly constructed property
and land immediately available for construction. (In the Canaries there
is an Indirect General Tax for the Canary Islands, but it is similar in
many ways to the Spanish VAT). In situations where VAT is not levied, property
transfer tax at a rate of 6% of the purchase price (Escritura value) is
levied instead. When buying newly built property, stamp duty (IGIC) at
a rate of 5% is also payable. However, there is an exemption for property
investors who create employment, whereby transfer tax and IGIC are not
payable. (Corporate income tax can also be very low in these cases).
Liability
for inheritance tax is dependent on residence status, and for non-residents
is payable only on Spanish sourced income or gains. The level of the tax
varies according to the degree of kinship between the deceased and the
beneficiary, and the previous level of wealth of the beneficiary.
There is an
annual real estate tax of 4% of the Cadastral value of the property payable
for both residents and non-residents, and as in France, a 3% tax levied
on the purchase of Spanish property by non-resident companies (although
there are certain situations in which this doesn't apply, and property
purchased by a Spanish company, even if all of the shareholders are non-resident,
is exempt from this). Non-resident property purchasers must also appoint
a resident fiscal representative, and submit a wealth tax declaration.
Resident property owners are exempt from wealth tax on Spanish assets below
a certain threshold, but non-residents must pay a 0.2% wealth tax on the
total value of their Spanish assets.
Rental income
from property obtained by a Spanish non-resident is subject to taxation
at a rate of 25%, although maintenance costs and expenses incurred as a
result of obtaining the income (for example interest paid on mortgages
and loans) are deductible. Capital gains tax on the sale of a property
is levied on a progressive scale of between 2% and 40% of the difference
between purchase price and selling price, although the rate is usually
20% for residents and 35% for non-residents.
The Cayman
Islands
At the other
end of the spectrum lie the Cayman Islands. Other than import duties (imposed
at various rates), and a stamp duty rate of 7.5% on real estate transfer
and 1% on legal documents pertaining to valuable assets and transactions,
there are no direct taxes imposed on Caymanian residents or non-residents.
There are no
restrictions on foreign ownership of real property in the Cayman Islands
as such, and due to the lack of direct taxes, it is equally possible to
buy a condo and rent it out for the majority of the year, or to buy an
undeveloped piece of land, and leave it undeveloped until you have the
time and resources to build your dream home. If you choose the former
option, your rental income will be free from income tax (in Cayman
at least), and the absence of property taxation, or of any rules stipulating
the time frame within which land must be developed, means that the latter
is in essence a 'maintenance free' investment until such times as you choose
to develop the land.
However, achieving
residence and/or a work permit can be problematic, as access to employment
is fairly restricted for foreigners. An expat wishing to apply for permanent
residence in the Cayman Islands on retirement should be prepared to invest
at least $180,000 in local enterprise or real estate. Caymanian status
is usually granted on a quota basis to citizens from the UK and British
dependent territories, and certain other countries including the United
States, Eire, Australia and New Zealand.
Offshore
Companies and Trusts
As you can
see from the two examples above, the country in which you choose to locate
your property (as well as your country of residence if different) will
almost certainly have an impact on the amount of tax payable by your estate
in the event of disposal of the property, or of your death.
In order to
alleviate some of the tax consequences involved in the ownership of foreign
real estate in high tax countries, some investors may choose to purchase
property through a non-resident company or trust, often established in
a low tax jurisdiction. Trusts in particular can sometimes be effective
in protecting the investors and their beneficiaries from punitive estate
and death duties. In countries such as Greece, where there are no provisions
in the country's tax legislation to facilitate the taxation of the underlying
assets of a foreign company, an offshore company can often be a tax efficient
and effective vehicle in which to hold property investments.
However, although
in some countries (for example Spain, Portugal, and Australia) non-residents
are encouraged to make their real estate investments through an offshore
company, this form of tax planning may not be effective (or even possible
to implement legally) everywhere, so again it depends on your chosen location.
In France,
for example, legislation was enacted in 1983 to prevent property investors
from avoiding registration and wealth taxes. The tax authorities complained
that when French real estate was purchased by legal entities in offshore
jurisdictions, it was impossible to levy the aforementioned taxes on the
sale and transfer of shares within these entities because they were unable
to discover the identity of the shareholders, due to the stringent secrecy
laws in place. They therefore demanded that a 3% tax be levied on the
fair market value of real estate in France owned by these companies.
The tax was
later ruled by the supreme court to have violated the non-discrimination
clauses contained in some of France's bilateral tax treaties, however,
and so was modified. As it stands now, foreign entities which own real
estate in France (either directly or indirectly) are only subject to the
3% tax if the value of such real estate represents 50% or more of their
French assets. French residents and foreign companies registered or resident
in countries with which France has a double tax treaty are also exempted,
provided they furnish the French tax authorities with the identities and
addresses of the shareholders on an annual basis.
Although double
tax treaties are of more interest to corporate and commercial international
property investors, they can sometimes have an effect on the amount of
taxation that an individual's real estate investment income is subject
to, especially if they are resident in a country which taxes world-wide
income, or are planning to purchase property in a country which does this.
Certain double tax treaties may enable you to claim tax paid on rental
income from overseas against your domestic income taxes, or to receive
dividends at a lower rate of withholding tax. However, the number of different
tax treaty models, and the sheer volume of treaties in force on a global
level make it impossible to give a comprehensive picture of the likely
consequences of a double tax treaty in any given circumstances. We would
therefore strongly recommend that you take advice as to the potential implications
from a qualified professional before making a decision as to the location
of your investment property.
So- Is it
worth it?
The answer
to this question will depend on your personal circumstances, what you hope
to achieve by investing, and how much you can afford to spend. There is
a vast spectrum of opportunities available within the property investment
field, ranging from the ridiculously expensive to the nicely affordable,
and with the help of an international broker or IFA, you should be able
to find something suited to your tastes and pocket.
Investing in
a 'real' asset, as opposed to an intangible one can sometimes provide more
stability, and property tends to hold its value better than other commodities.
You do need to be aware that the overall liquidity and health of the property
markets, and possible fluctuations in interest rates and inflation can
affect the value of your investment, but generally it is possible to achieve
a very healthy return on your investment. |
