Holiday homes and income tax
It is estimated that from the 60,000 holiday and second homes sold to foreigners, a large percentage of about 20% or 12,000 of them, are rented out to their fellow countrymen and other holidaymakers. These so-called “holiday villas” are advertised both locally and on the Internet, and there are specialised agencies that handle such rentals. If we conservatively estimate that 12,000 units are rented at 100 euros a day for 90 days a year, then the total income is around EUR 108 mln. This equals an evaded income tax, including the defense levy, of around EUR 22 mln a year. Of course, the actual amounts of rents charged is much higher, often reaching EUR 1,500-2,000 a week, thus almost 2-3 times higher, with a proportional increase in tax evasion.
Apart from tax evasion, there is also the issue of unfair competition to hoteliers, who face all sorts of restrictions compared to the free-to-rent holiday villas that are not subject to any restriction. Even though we cannot expect that all the holidaymakers staying at the 12,000 units will visit the hotels, even if only 6,000 of them do so, the hotels would have increased revenues and capacities.
The most frustrating is that these rentals are prohibited by law, which the CTO says applies for all rentals of less than 30 days. In Greece, where there is a similar provision, the penalty is a hefty 30 day jail sentence for the owner.
Of course, the taxation of these foreign investors could have an adverse impact on attracting them to buy properties with the aim to rent them to others (Buy-to-Let). But this would only affect the British home owners, because the other nationalities are not interested in renting them out; but surely this does not justify illegal rentals, plus there does not seem to be much demand for this from potential buyers. A 3bedroom villa with pool in Paphos would earn an annual rent (summer period) of around EUR 20,000, in the Famagusta area about 25,000 a year, while beach-front villas are rented for around EUR 30,000-35,000 a year. Is it, therefore, reasonable or fair that apart from the illegality that prevails with the blessing of the State, that the owner does not pay a penny in dues?
But the decision for taxation and the collection are two different issues. I believe that foreign owners do not wish to have any problems with the local authorities and would probably comply to any measures, while the cooperation of local authorities is also necessary. In the current recessionary period, all countries want to improve their taxation capabilities. The government in Britain, for example, is at present conducting wide scale research to see what homes and investments its citizens have abroad and income is earned from them.
So, in an effort to improve collection and help raise funds that will be re-invested in local infrastructure projects, I suggest the following:
• On the date that the sales agreement is deposited at the local Land Registry, a foreign buyer must sign a declaration that if he intends to rent out the property in future, that this will be declared to the local or tax authorities.
• When transferring property to a new buyer, a declaration must be signed that the unit has never before been rented, or if it has, to provide the necessary details (false declaration to the authorities is major legal offence).
• To submit an annual declaration to the Local Authority if the property has been rented during the year, and for how much, so that the Authority should be able to collect the local tax for renting, after which the Authority will inform the Inland Revenue, accordingly.
• Developers, real estate agents and other professionals involved in the rent business, including rent management and administration, must declare those units rented under their own responsibility, with yearly reports.
• In relation to the above and to encourage owners to declare the rent, there should be a provision that when proof of payment of rent is submitted, 5% be refunded from the income tax of the total rent, provided that the tax has already been paid by the landlord.
Even if the last provision is adopted and the state loses, say, about EUR 2 mln a year (compared to the EUR 22 mln it should be collecting), the general tax increase will have a positive effect because it will help increase demand for hotel holidays, increase the income of local authorities from rental fees, limit to some extent the rampant rent, reduce tax evasion and will certainly increase the sense of fairness and stability among all other normal tax-paying citizens and home owners.