Realty tax rationalization

Central and Eastern European countries, which only entered the European Union 16 months ago, are having no trouble attracting foreign investment to their real estate market. Poland, Hungary and the Czech Republic are standing out for receiving an unprecedented investment wave in several sectors. Property investments certainly take a major share, as thousands of institutional investors such as investment funds, operating on behalf of other countries’ social security funds, waste no time in investing in real estate. The Czech Republic is a typical example of that. According to local officials professional and commercial spaces on lease have doubled within just three years. Demand has exploded particularly after the country’s accession to the EU, as several foreign investors rushed to position themselves in the Czech market, expecting a rise in values in the near future until they approach the higher levels of the developed countries in Western Europe. The same, if to a lesser extent, is happening in certain countries in the Balkans, but with Greece excluded since a series of tax and red-tape obstacles discourage investments. A simple comparison of transfer tax in Greece with that in other countries is enough to show why foreign capital opts for other destinations. For instance, in Poland transfer tax is just 2 percent, in the Czech Republic 5 percent, while Romania it ranges from 1 to 3 percent depending on the size and the value of the property transferred. In Turkey it does not exceed 1 percent and in Bulgaria it is just 2 percent. Greece still imposes a 9 to 11 percent transfer tax. The existence of two different values for a property in Greece – the market value and the officially determined one known as «objective» – leave only negative impressions. This is a world exclusive which foreign buyers cannot understand as market professionals often remark after speaking with investors from abroad. More transparency On the other hand, the introduction of value added tax (VAT) on new constructions from the new year is a positive development as it is believed to add more transparency to the Greek real estate market. This has in the last few years been intensely requested by foreigners who have scanned the local property market. As the chart shows, the majority of Central and Eastern European countries as well as those in the Balkans have already introduced VAT on property transactions. Romania and the Czech Republic set it at 19 percent, the same as Greece. Poland has introduced VAT at 22 percent, while Russia, Turkey and Serbia & Montenegro set it at 18 percent and Bulgaria at 20 percent. The latter went through an in-depth restructuring of its property market a few months ago, in an effort to align itself with developments. Not only does this allow foreign nationals to buy properties (which until recently had been forbidden and forced foreigners to buy properties through companies they set up), but it also returns properties confiscated by the communist regime to their rightful owners. The downward adjustment of tax brackets and the gradual abolition of transfer tax for properties built by the end of 2005 is undoubtedly seen as a positive development for the prospect of attracting foreign investors to the Greek market. Property development professionals believe the introduction of VAT in replacement of the transfer tax is much closer to the mentality of foreigners, particularly the Anglo-Saxons. Consequently, many experts believe that from the new year there will be more action coming from abroad, particularly from investors who continue to study the possibility of positioning themselves in the Greek market.