Property tax chaos may continue

Nigel Howarth
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3
Property tax chaos may continue

immovable property taxACCORDING to a report in today’s Phileleftheros, government policy on Immovable Property Tax (IPT) remains unchanged, i.e. it will be imposed on a property’s 2013 value, as required in the MoU between the government and the troika of international lenders.

However, Inland Revenue officials have expressed serious doubts as to whether there is sufficient time to complete the revaluation of all properties and carry out the work necessary so that Immovable Property Tax can be levied on their updated 2013 values.

The director of the Department of Lands and Surveys is optimistic that the revaluation project will completed by June 30, as required by the MoU. Speaking to Phileleftheros he also said that the Department intends to provide preliminary data to the Finance Ministry in late May, so that a new scale of IPT charges can be prepared for this year.

Regrettably it seems that the problem that arose last year by taxing property developers at a high rate for properties that they had sold but which had not been transferred to their buyers will remain. But as previously unknown properties have now been identified, the tax burden should be fairer this year.

Another source was reported as saying “unfortunately this year, like last, will be a transition period and a comprehensive reform of this tax will be implemented in 2015.”

We await further developments.

Land registry’s hands tied on foreclosures

Angelos Anastasiou
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2

BANK-initiated foreclosures of mortgaged properties have already been executed, according to the lands and surveys department, adding to Wednesday’s row between the House legal affairs committee and Finance Minister Harris Georgiades.

“Property foreclosures have already begun, but we are currently unable to confirm whether they relate to primary residences,” deputy director of the lands and surveys department Petros Petrides said. This is because “the criteria of what constitutes a ‘primary residence’ are unclear.”

“If a parent, who already owns a property, buys his child a flat, is that house then a primary residence for the child or not? Does the time spent living in a property make it a primary residence?” mused Petrides.

The official was unable to confirm anecdotal reports that his department has so far received around 6,000 applications for property foreclosures in general.

That figure was cited by Yiannos Lamaris, an AKEL MP and member of the House legal affairs committee.

The committee has been discussing a joint AKEL-EDEK legislative proposal aiming to protect primary residences and the premises of small businesses that are unable to repay their mortgage, by allowing court-mandated suspensions of repayment for a fixed term.

While small businesses eligible to apply for protection under the proposed bill are capped at employing up to 10 people and with a €2 million maximum turnover, no such cap is being considered for eligibility based on home value. The reason, according to sources, is that such a provision would likely raise discrimination issues.

Wednesday’s session at the House was addressed by Georgiades in a letter to the committee, which subtly requests that it abandon its efforts to bring the bill to a plenum vote pending the preparation of a broader-scoped government bill as part of the troika-mandated adjustment programme, the submission of which the ministry has placed near year end.

The finance ministry, the letter argues, agrees with the Central Bank of Cyprus (CBC) and the banks association that lenders cannot be asked to subsidise insolvent borrowers and that the committee proposals create the risk of moral hazard.

“Borrowers that may or may not face crisis-related solvency issues would likely inundate the courts with requests to suspend repayment,” a spokesman from the banks association said.

Committee members deny such a risk, with Lamaris asserting that borrowers who apply for protection would bear the burden of proof as to their inability to pay due to the financial crisis.

“Even the troika, during the latest review, acknowledged the need to protect primary residences,” another committee member said.

The CBC had issued a directive on how non-performing loans (NPLs) should be dealt with by banks, listing guiding principles and offering examples of loan restructuring mechanisms. It has also empowered the – not yet operational – Financial Ombudsman with the authority to mediate disputes between borrowers and lenders. The directive explicitly denotes seeking a court decision on NPLs as the last resort, only to be employed after all other restructuring options have been exhausted.

Finalising the duties of the Financial Ombudsman and rendering the department operational will form part of the government bill. Georgiades’ letter conceded that the troika also favours protection and pledged that such a provision will be included in the government bill, but argued that going the way of the courts cannot be allowed prior to exhausting every restructuring option.

“The finance minister says we should wait for the government bill,” the committee’s chairman and DISY MP Sotiris Sampson said.

“The House has no problem waiting, but the people whose homes are on the line do,” he added.

“If we were presented with a simultaneous commitment by the banks to suspend repossession procedures until the government bill is ready, we would be more than happy to wait.”

Land registry's hands tied on foreclosures

Primary residence protection bill by end-March

Angelos Anastasiou
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8
Primary residence protection bill by end-March

primary residence foreclosureTHE House Legal committee is determined to press ahead with finalising a bill to protect families’ primary residence “through fire and water”, its head Sotiris Sampson said, placing the bill’s estimated date of submission to a plenary vote around the end of March.

The committee, convened on Wednesday to discuss the bill, was addressed by Finance minister Harris Georgiades through a letter. In it, he informed the committee that the government agreed with the view of the banks’ association and the Central Bank of Cyprus (CBC) that feel that the issue should be viewed as part of a wider bill concerning non-viable borrowers.

The government is preparing the non-viability bill as part of the Troika-imposed adjustment programme.

The committee was told it should expect the submission of the government bill by year’s end.

Nonetheless, most committee members expressed their determination to move the bill to an earlier vote.

Speaking after the committee session, Sampson conceded that the legal issues raised were extremely serious, but said that discussion will continue on Friday morning, aiming for a month-end submission to the plenum.

He went on to thank all stakeholders, whether opposed or voicing serious reservations, for their contribution of various opinions to the discussion, and described the objections raised as “serious and complex, yet manageable.”

The bill under discussion aims to ensure that no family is left homeless due to difficulty in repaying loans as a result of the financial crisis. On the other hand, banks are determined to proceed with the recovery of assets in an effort to reduce their high level of non-performing loans, one of the conditions imposed by the Troika as part of the Cyprus bailout programme.

According to statistics released on Wednesday by the CBC, Cyprus continues to top the Eurozone list of high interest rates on housing loans with 4.65 per cent, despite this being the lowest the country has seen since June 2010. The average interest rate offered in the Eurozone on housing loans is 2.8 per cent.

Sampson reported an effort to rein in the committee’s legislative work, but said that while all opinions are respected, “the committee will protect the family residence through fire and water.”

According to committee member and AKEL MP Yiannos Lamaris, after all other means of repayment have been examined and exhausted, the bill will serve as a last resort to borrowers, allowing them to request a court-mandated repayment freeze for a limited period of time.

Even the Troika, Lamaris said, supports the concept of protecting the family residence.

Meanwhile, several committee members reiterated Sampson’s claim that government services have attempted to further delay the bill, including Lamaris, EDEK MP Nikos Nikolaides, and the Greens’ Yiorgos Perdikis.

“The risk of foreclosure is no longer merely abstract”, Nikolaides said.

“Protection of the primary residence and small-to-medium businesses is the least the state can offer its citizens,” he concluded.

Permission granted for Oroklini theme park

Nigel Howarth
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20
Permission granted for Oroklini theme park

theme park orokliniGOLD News reports that the Cyprus government has granted permission for the construction of a Disneyland-style theme park near the village of Oroklini in Larnaca district.

According to the report, the permission was contained in a policy document published yesterday, and includes the construction of touristic village and a five star hotel set in 500,000m2 of land.

The project first hit the news in 2009 when the Greek-language newspaper Politis revealed plans to build a Disneyland-style tourist theme park near Pyla on 80 hectares of land (800,000m2).

The venue subsequently shifted to Oroklini, but two years ago plans stalled as discussions continued between the Government, Russian investors and land owners in the area to see how the land would be used.

It looks as if the five-year wait may be over and although smaller than originally planned, the theme park should generate much-needed revenue from tourism when completed.

Refunding developers’ Immovable Property Tax

Nigel Howarth
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3
Refunding developers’ Immovable Property Tax

ALTHOUGH the majority of developers are billing their clients correctly for IPT they have paid on their behalf to the Inland Revenue, a handful are up to their old tricks and have reverted to charging their clients IPT based on a percentage of the property’s selling price.

Some of these developers are demanding prompt payment and threatening to impose penalties if clients fail to comply with their demands. A scare tactic that has prompted many of their worried and angry clients to write to Cyprus Property News seeking advice.

Background

Immovable Property Tax is levied on the registered owners of immovable property; this includes land, and commercial, industrial and residential property. It is calculated on the total of the assessed 1980 values of all the properties registered in the name of individual and company tax payers and paid annually.

Until 2013, the Inland Revenue Department did not sent out IPT tax notices relying on the honesty of individuals and companies to submit their annual return. However, the Inland Revenue did fine those who delayed paying their IPT by the due date.

But this reliance on the honesty and integrity of individuals and companies changed last year following the Memorandum of Understanding (MoU) between the Cyprus Government and the troika of international lenders. IPT notices were sent to all registered owners of immovable property. The vast majority paid, enabling the government to achieve the property tax revenue target it had agreed with the troika.

However there were a number of notable exceptions who failed to pay by the due date. These were ignominiously named and shamed in ‘Politis’, a local Greek language newspaper.

Who pays Immovable Property Tax?

IPT is paid by registered owners of property, i.e. those whose name appears on the property’s Title Deed as its legal, registered owner.

Those who have purchased property off-plan may be obliged to refund their developer the IPT that the company has paid on their behalf. In this case their contact of sale will contain a clause similar to the following:

“From the date of delivery of the Property to the Purchasers, the Purchasers shall be obliged to pay all taxes or rates corresponding to the Property in proportion to the whole project during the period prior to the registration of the Property in the name of the Purchasers.”

Or perhaps

“The Purchasers shall, as from the date of delivery of the Property, pay all taxes and rates, in respect of the Property during the period prior to the registration of the Property in the name of the Purchasers.”

However, before reimbursing the developer for the IPT paid on their behalf, the developer is required to supply their buyers with records of the amount paid as Immovable Property Tax (IPT) and a certificate showing the rate of IPT applicable to the property. Please see this letter issued by the Interior Ministry.

If developers provide their buyers with this information, buyers may be able to claim back part or the entire amount they have paid. In the majority of cases, buyers will be able to submit a claim that will result in them recovering all the IPT they have paid for years up to and including 2012 and the majority of the tax paid for 2013.

Buyers are cautioned that if their developer fails to provide them with the information contained in the letter issued by the Interior Ministry:

  • There is no guarantee that their developer will use the money to pay IPT.
  • They will be unable to recover any overpayments of IPT.

To be able to reclaim any legitimate overpayments of IPT it is imperative that this information is printed on company letterhead bearing the company’s registration number, which has been stamped and signed by a representative of the company.

How is IPT calculated for off-plan properties?

Calculating Immovable Property Tax for a development can be a bit complicated, here’s an example of how it works:

Let us suppose that a developer has a plot of land registered in their name with a 1980 value of €150,000 shown on its Title Deed:

  • In the first year, before he starts building, he submits an IPT declaration showing just the 1980 value of the land (€150,000) and the Inland Revenue would issue him with a tax demand based on €150,000.
  • In the second year he starts building – let’s say he spends €100,000. He then calculates the 1980 value of this €100,000 worth of ‘improvements’ using tables provided by the Inland Revenue Department (let’s say their 1980 value is €20,000) and adds that figure to the 1980 value of the land and submits an IPT return for €170,000 (€150,000-land + €20,000-improvements). The Inland Revenue then issues the developer with a tax demand based on €170,000.
  • In the third year he spends a further €300,000 and completes the development. He then submits a IPT declaration that includes the 1980 value of the land including previous improvements (€170,000) plus the 1980 value of the ‘improvements’ he has made this year (let’s say their 1980 value is €60,000). The Inland Revenue then issues the developer with a tax demand based on €230,000.

If it’s a large development company it will have a number of other developments and its tax rate will be calculated on the total 1980 value of those developments and it will be paying tax at the rate of 1.9% (2013).

So for the development in the example above they will pay IPT of €4,370 (€230,000 x 1.9%) in 2013.

  • In 2012 the IPT demanded would have been €1,840 (the top rate was 0.8%)
  • For years 2003 to 2011 the IPT demanded would have been €920 (the top rate was 0.4%)

Let’s assume that a property is purchased on that development, which consists of ten properties, all are identical, all have the same sized plots and were all completed in the same tax year.

The developer should apportion the IPT he has paid amongst you equitably, so each household should refund him €437.00 for 2013, €184 for 2012, €92 for 2011, etc. for the amount of IPT he has paid on their behalf.

When the development is split eventually split into 10 individual properties, the Land Registry will assess their 1980 value using its historical data and issue a Title Deed for each property showing its 1980 value. This 1980 value may not be exactly the same as one tenth of the amount assessed by the Inland Revenue – but that doesn’t matter as any IPT overpayment can be recovered from the Inland Revenue.

(Note that the Inland Revenue will not refund any penalties it imposed on the developer due to his late tax return submission and/or payment. And of course a developer should not pass on these penalties to his clients, which result from his incompetence in running the business or through his negligence.)

After a buyer has paid the Property Transfer Fees and the property has been registered in their name, they will be able to claim any overpayments of IPT (assuming their developer supplies them with the information contained in the in the letter issued by the Interior Ministry) from the year they took delivery of the property.

This is because, as the registered owner of a single property, the 1980 value of that property will be enormously less than the total 1980 value of all the properties registered in the name of the developer. Consequently the rate at which IPT is levied is much lower.

In the majority of cases buyers will be able to reclaim from the Inland Revenue Department  all the IPT they paid to the developer for years up to and including 2012 and much of the amount they paid for 2013. (Before 2013 the registered owners of properties whose total value was below €170,000 were exempted from paying IPT).

Further information from CPAG

In 2008 the Cyprus Property Action Group (CPAG) sought legal opinion on IPT and the charging practices of developers by Advocate, Partner and Head of Real Estate and Property Department of one of the largest law firms in Cyprus. You may read their report at: Immovable property tax & fraudulent practices.

How many properties without Title Deeds?

Nigel Howarth
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8

Title Deed Gordian KnotIN OCTOBER 2008, the Land Registry presented figures showing the overseas demand for property and highlighting delays in the issuance of their Title Deeds.

In summary:

  • Between January 2005 and June 2008 a total of 37,769 overseas buyers purchased 29,949 properties whose Title Deeds had yet to be transferred. This figure of 29,949 included properties for which Title Deeds had yet to be issued plus those whose Title Deeds were in the process of being issued.
  • During the same three and a half year period, 4,440 properties were transferred to 5,988 overseas buyers.

(However, the figures did not reveal how many properties had been issued with Title Deeds that had not been transferred).

The article accompanying the figures reported that sales to overseas buyers accounted for 3 out of 10 sales of property.

Theoretical Title Deeds backlog

Based on the figures published in 2008 – and assuming that the 7 out of 10 property sold to the domestic market were also waiting for Title Deeds to be issued – we can assume that a total 17,760 properties were transferred over the three and a half year period to both domestic and overseas purchasers; an average of 423/month.

According to the figures published by the Department of Lands and Surveys, we know that  a total of 183,556 properties have been sold since 2000. If we assume that over the same period of time that the Land Registry has maintained an average transfer rate of 423 properties/month, the number of transfers since 2000 is 423 * 169 = 71,487.

Based on the various assumptions above, the number of properties whose Title Deeds have yet to be transferred is 112,069 (183,556 – 71,487). But this figure does not include sales that took place before 2000 and, therefore, the actual number will be somewhat higher; a figure of between 120,000 and 130,000 is not unreasonable.

However, the Department of Lands and Surveys has published no statistics that provide the actual numbers of properties waiting for Title Deeds.

The Troika

It seems that the Troika may have identified the problem and this resulted in them back-tracking on the requirement for Cyprus to reduce the Title Deed backlog to less than 2,000 cases of immovable property units with title deed issuance pending for more than one year by Q4-2014.

Buried in section 1.29 of the latest Memorandum of Understanding (MoU), which was issued on 12 April 2013, is the requirement that:

The authorities will establish a Task Force (comprising representatives of Central Bank of Cyprus, Ministry of Finance, the Law Office of the Republic and the Land Register) by end-March to prepare a study assessing the magnitude of registered, but untitled land sales contracts and underlying mortgages and develop recommendations by end-June.

Clearly, much work has yet to be done to assess how many properties are waiting for Title Deeds and the underlying mortgages preventing their transfer; hopefully things will become clearer later this year.

But land sales contracts? Does this include all immovable property sales – i.e. land, commercial property and residential property or just sales of land?

And what about the many other impediments that prevent the transfer of a property to its purchaser such as court judgements in favour of the vendor’s creditors, claims for unpaid Immovable Property and Capital Gains Taxes, costs for the construction of a street, etc?

What a mess!

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