Investment Property Abroad Tax Implications

One of the main considerations for anyone thinking about buying investment property abroad will likely be the potential tax implications of property purchase and ongoing ownership.

With international real estate proving an ever popular investment portfolio addition let’s look at some of the taxation implications property owners should consider, and also examine the use of offshore companies and trusts for the reduction or negation of a property taxation burden.

When you list the potential taxes that a property owner can face the prospect of securing that real estate investment becomes less appealing!  From stamp duty and transfer tax to taxation on rental income and capital gains tax, from VAT to inheritance tax and ongoing land tax!  Tax has to be the least favourite subject on anyone’s mind at any one time, but if you take the necessary time to research your country of choice and the taxation it will levy against you as a property purchaser and owner before you buy, you will be forearmed and well able to budget for the costs you will likely incur. 

Furthermore, if you understand the taxation regime in a chosen jurisdiction you can work to find ways to legally reduce your taxation burden!  Alternatively if you find that the likely costs will be too high you can change your focus to a more tax friendly country and save yourself from a costly mistake.

Every single country in the world taxes differently but there is a basic guideline to follow, and that is that most countries worldwide will impose heavier taxes on anyone they consider to be a commercial property investor!  I.e., if you habitually purchase swathes of land and develop on them or you buy property, renovate it, sell it and purchase again to renovate you may well be considered to be making a commercial business out of property and you will most likely be taxed more heavily.  If on the other hand you’re looking to buy one or two homes for rental income or even just a holiday home in the sun that you hope will gain value, you will be looking ‘only’ at paying domestic taxes.

So, aside from commercial property taxation there are four main areas of taxation consideration for the ‘average’ international property investor and they are: -

1) The taxes payable upon purchase or acquisition of property from stamp duty to title transfer tax or inheritance tax.

2) The taxes payable for the ongoing ownership of the property from land tax to local taxes.

3) Any taxes payable from the letting or rental of your property including income tax and sometimes an extra non-resident landlord tax.

4) Tax on the disposal of the property - usually in the form of capital gains tax or estate tax.

So to reduce your tax burden as far as possible is the solution to purchase a property in an offshore tax haven where no taxation will be levied against you?  It’s certainly a consideration!  However in some of these jurisdictions there is a restriction on who can and cannot own property and exactly how much property can actually be sold to non-residents.  Other jurisdictions may not have the potential investment returns either from letting or ongoing price increases!  Taxation is unlikely to be a person’s sole choice when deciding on the ideal location for their investment property abroad and we would not recommend someone based their entire decision on the taxation implications of a given jurisdiction.  After all, the property is the investment vehicle and it has to generate gains to be a worthwhile investment.

There are other ways to potentially reduce the tax on purchasing and owning investment property abroad and these include purchasing property through a non-resident company or holding real estate assets in a non-resident trust.  These solutions are not suitable in every circumstance or for every individual however, and professional advice should always be sought before considering offshore trusts and companies for this purpose.

Here are just two examples of ways these offshore structures can help to reduce or negate a tax burden - offshore trusts are sometimes highly effective vehicles for property owners who wish to shield their heirs from inheritance tax.  Offshore companies can be used to purchase property in countries such as Greece because the Greek taxation system does not tax any assets belonging to a foreign owned company.

You have to consider your likely tax burden and any potential solutions for the successful reduction of said tax burden on a country by country basis.  And in a country such as Cyprus for example you have to consider it depending on which side of the Green Line you wish to buy!  For example in the Republic of Cyprus you could consider the use of an offshore trust or company but in the Turkish Republic of Northern Cyprus there is no trust law and the use of an offshore company would be totally ineffective for the reduction of tax for 99% of people!  However, in the Republic of Cyprus purchasers face a 15% VAT bill whereas in North Cyprus VAT is only 5% and houses of equal quality and size sell for up to 5 times less than their equivalent on the South!

Just with this simple example you can see how important it is to research your favoured country for your international investment property purchase carefully.  And remember to take into account any double taxation agreements between your country of residence and your preferred country for property investment.

There are specialist property tax advisers who can assist you, and there are companies who specialise in the formation of offshore companies and trust structures specifically for overseas property purchase.  Make sure you secure best advice.

And finally, if all this has put you off considering buying property abroad for investment purposes remember that there are many attractive property investment funds from commercial funds to ground rent funds and that these might be a more attractive addition to your investment portfolio!  If you would more information about funds, offshore company formation or offshore trusts please contact us with your requirements.