Hol­i­day homes and in­come tax

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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