Real estate and other taxation Reform and rationalization 7 October 2015 Angela Iliadis Partner, Tax
Doing successful business: the corporate model Greece should think like a business: (a) Identify strengths and comparative advantages; (b) Raise funds and channel investment; (c) Factor taxation in Strengths Funds Taxes Successful business Well-planned investment/ development strategy Growth of businesses Increased profitability Increased taxes 1
Factor 1: strengths / comparative advantages Making a strategic decision: what are we good at? May be, but requires specific know-how, significant financial resources and, more importantly, enormous effort to successfully confront competition and gain market share! 2
Factor 1: strengths / comparative advantages (cnt d) So where can Greece realistically focus to excel in the short / medium run? A strategic plan does not have to be complicated; it must be simple and well-focused! Greece should capitalize on what it already has: Location, Location, Location Promote sectors that rely on the 3L factor, that take advantage of landscape, weather, strategic position; boost start these sectors and real estate market will follow! 3
Factor 1: strengths / comparative advantages (cnt d) Develop more areas of tourism, not just beaches and islands, including : - agro-tourism - destination for the retired - food tourism 4
Factor 1: strengths / comparative advantages (cnt d) and other areas of tourism, such as : - year-round sports tourism - medical tourism - cultural/religious tourism 5
Factor 1: strengths / comparative advantages (cnt d) Re-examine agricultural policy, emphasizing on field production, processing and promotion of end products, which also leads to increased exports 6
Factor 1: strengths / comparative advantages (cnt d) Increase production of renewable energy (solar, wind, wave) 7
Factor 1: strengths / comparative advantages (cnt d) Invest in silicon-valley type of services (e.g. R&D), benefiting from strong Greek minds 8
Factor 2: funds Investors need to believe in an appealing plan! Greece s plan could include: promoting education to support strategic plan for growth; creating an EU center of excellence to develop top-qualified professionals in tourism, agriculture, energy.; rationally benefiting from immigration; re-addressing tax policy to stabilize tax environment, reduce rates and increase tax base; creating a dialogue between politicians and experts to form the next decade s tax system. 9
Factor 3: taxation Long-term policy Short-term policy Two types of taxation policy + lower tax rates increased tax bases increased investments immediate tax collection deferment of tax collection higher tax rates increase of tax evasion/avoidance no economic expansion Greek governments (+ current lenders) typically tend to implement short-term policies without re-assessing goals. But this approach has not proven fruitful Need long-term stable tax policy. 10
Factor 3: taxation (cnt d) Acquisition taxes Holding taxes Disposal taxes Main types of taxes affecting real estate investment Businesses Individuals Real Estate Transfer Tax (ΦΜΑ) or VAT Unified Real Estate Ownership Tax (ΕΝΦΙΑ), Special Real Estate Tax (ΕΦΑ), Income Tax on lease income, VAT or Stamp Duty on commercial leases Gain subject to Corporate Income Tax Unified Real Estate Ownership Tax (ΕΝΦΙΑ), Income Tax on lease income, Stamp Duty on commercial leases, deemed income taxation (τεκμήρια) 15% Capital Gains Tax (currently suspended for 2015 and 2016) 11
Factor 3: taxation (cnt d) Taxation on the ownership of real estate Main tax: Unified Real Estate Ownership Tax (ΕΝΦΙΑ) Main and supplementary tax supplementary tax often to be higher than main tax; Questionable fairness? Objective tax values do not correspond to market values; NOT unified - several additional duties/levies apply to real estate holdings; Difficult and complex calculation, rendering comparison with respective taxes applying abroad hard 12
Factor 3: taxation (cnt d) Let s see where we stand vis-à-vis competition in South Europe Country Corporate Income Tax (CIT) Dividend withholding tax Advance CIT Portugal 21% 25% 95% Spain 28% 19.5% 54-81% Italy 31.4% 26% 100% Malta 35% 0% 100% Croatia 20% 12% 8.33% Turkey 20% 15% 20% Cyprus 12.5% 0% N/A Average 24% * 14% ** 54%-58% Greece 29% 10% 100% * 20.3%, excluding Italy and Malta ** 20%, excluding Malta and Cyprus Observations: Greece applies third highest CIT rate; Greek CIT rate greater than average by 5 percentage points (8.7 points if average excludes Italy and Malta); Greece applies second lowest dividend withholding tax rate; Greek dividend withholding tax rate lower than average by 4 percentage points (10 points if average excludes Malta and Cyprus); 100% advance CIT applies only in Greece, Italy and Malta 13
Factor 3: taxation (cnt d) Let s see where we stand vis-à-vis competition in South Europe VAT Country standard new hotels restaurants rate buildings Portugal 23% 0% 6% 23% Spain 21% 21% 10% 10% Italy 22% 22% 10% 10% Malta 18% 0% 7% 18% Croatia 25% 0% 13% 13% Turkey 18% 18% 8% 18% Cyprus 19% 19% 9% 9% Average 20.8% 11% 9% 14.4% Greece 23% 23% 13% 23% Observations for Greece s VAT rates: Second highest standard VAT rate and highest VAT rate on hotel accommodation together with Croatia; Highest VAT rate on the purchase of new property, exceeding average by 12 percentage points; VAT rate on hotel accommodation greater than average by 4 percentage points; Highest VAT rate on restaurants, together with Portugal; VAT rate on restaurants greater than average by 8.6 percentage points 14
Factor 3: taxation (cnt d) Let s see where we stand vis-à-vis competition in South Europe Country Individual income tax top marginal rate kicks in at Portugal 48% 80 000 Spain 47% 60 000 Italy 43% 75 000 Malta 35% 28 501 Croatia 40% 20 800 Turkey 35% 28 471 Cyprus 35% 60 000 Greece 42% 42 000 Observations: Greece applies fourth highest top marginal rate on individual income; Second only to Croatia and Portugal (which applies higher top marginal rate (45%) for income of EUR 42 000), Greece demonstrates most hostile combination of top marginal rate and level of income at which such top marginal rate kicks in 15
Factor 3: taxation (cnt d) Conclusions / suggestions to decrease tax rates/increase tax bases : Reduce VAT rates directly associated with real estate (e.g. purchase of new buildings, hotel accommodation); Reduce CIT and maintain a dividend withholding tax, at least introduce tax reductions when investing distributed profits; Reduce advance CIT for companies investing during the year or with scheduled long-term investments; Reduce top marginal individual tax rate and/or increase income bracket where such rate kicks in, to attract individual investors Other suggestions that could foster investment : Extend to more cases option to defer/exempt VAT burden associated with construction of real estate; Introduce a shared system for the imposition of property ownership tax to tenants occupying large properties 16
Summary Increase economic activity (focus on 3Ls comparative advantage sectors) Develop longterm stable manageable (lower) taxes Increased tax collection in the aggregate from more taxpayers 17
Final note KPMG s 6 th Property Lending Barometer (2015) Survey of 90 banks on financing channeled to real estate sector in 21 European countries Greece included for first time Very interesting findings, generally showing hand-inhand growth of real estate sector and bank financing 18
Thank you! Angela Iliadis Partner, Tax
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