China Most Expensive Country For Buy-To-Let Investors
Research reveals huge disparity across the globe in taxation of buy-to-let properties
Taxand T3 (Total Tax Take)1 research conducted by Taxand, the world's largest global organisation of tax advisors to multinational businesses, has uncovered a staggering difference in the taxation of income on residential properties with 50% taken in China and under half of this (19%) taken in Cyprus, the country with the lowest rate.
China commands a considerably greater tax-take for home rentals than the other 22 countries researched by Taxand although Norway (41%) and Romania (40%), which are all new participants in this year's T3 study, are also significantly higher than the average rate of 32.54%.
The particularly high rate in China, which has increased by over 10% since 2009, is in response to the dramatic surge in property prices which has occurred over the last two years and is part of a package of measures introduced by the Chinese government to increase the regulation of the rental market and to discourage speculative buyers, amid concerns of a property bubble.
The Chinese Ministry of Finance has readjusted contract tax and personal income tax in the property trading process and strengthened supervision and inspection of the collection of land appreciation tax, especially on property projects whose prices are higher than adjacent properties. 2010 has seen the introduction of high levels of land use tax, which amounts to RMB 18 per sqm p.a. and high levels of VAT on rental properties, which stands at a rate of 17% as a mixed rate of business tax (5%) and real estate tax (12%) for rental.
At the other end of the scale, Cyprus (19%), the UK (22%), Luxembourg (22%) and Switzerland (23%) recorded the most attractive tax rates on rental properties, followed by Italy and Poland at 25%.
The UK is second only to Cyprus in having the lowest tax-take on buy-to-let property owners with just 22% of rental income retrieved in tax. This is explained by the absence of VAT on construction and also the medium rate of income tax in operation (28%), when compared to other countries and proves the value for property investors of buy-to-let portfolios in the UK as a means of regular, tax-efficient income.
The rate in the UK is in stark contrast to other Western European countries analysed in the rankings, with France, Spain, Netherlands, Portugal and Germany all enforcing a tax-take of over 30% on rental income.
Keith O'Donnell of Taxand, said:
"Our research on buy-to-let markets reveals the startling disparity across the globe in the tax-take on residential property income for landlords, with a difference of 31% between those countries with the highest and lowest rates.
There are no particular correlations between developed and developing countries when it comes to applying tax on the income of residential properties although it is noteworthy that the six countries boasting the lower rates are all located in Europe, and North America sits firmly in the top half of the table.
Our research therefore draws us to the conclusion that the application of tax rates on rental properties is controlled by macro-economic fundamentals endemic to each country. There is no obvious correlation between tax policy and the depth of the recent corrections that took place in a particular market. What is clear however, as illustrated by the Chinese property market, is that countries do react to overheating by increasing the tax cost, particularly on buy-to-rent where speculative activity is the most intense.
As governments, combating the global economic downturn, continue to bolster their total revenues through increased tax on residential property, investors need to carefully consider where their next buy-to-let purchases will be, given these greatly varying rates across the World."
The research also shows that the USA (39%) - which topped last year's table as the most expensive country for buy-to-let investors, Malta (38%), the Netherlands (38%) and France (37%) are among the most expensive countries for buy-to-let properties with the taxman taking a sizeable chunk of rental earnings.
The high tax rate on buy-to-let in Northern America (the USA and Canada) is due to high levels of income tax (35% and 28.5% respectively), as well as, for the USA, further taxes such as sales tax on construction materials (8%) or state tax (6.65%) and for Canada, VAT on fair market value of acquisition residential rental property (10%).
- ### -
NOTES TO EDITORS
Taxand T3 research methodology
Taxand has updated and expanded last year's Taxand T3 data.
To arrive at the figures, Taxand has taken into account VAT (or its local equivalent), corporate income tax, and property taxes. The property taxes were usually subject to country specific assumptions and modifications as they often differ on a municipality basis or sometimes just location basis.
Those were reviewed by the coordinating Taxand team to assure comparability. Administrative fees, notary fees, court fees were excluded as having a relatively low impact on the overall tax take.
To ensure comparability of the results, certain data has been fixed such as size of the building, investment costs, and 100 percent non-interest bearing equity financing. With all of that built into the model, each real estate team from Taxand adopted it to the local law to ensure comparability.
Taxand T3 is a global research tool. Initial findings have focused on reviewing major jurisdictions. Other interesting findings include the high tax take on property in the healthcare sector, commercial property income and the cost of selling your home. The research is carried out on an annual basis to establish year on year trends.
Your Taxand contact for further queries is:
Abigail Tarren, Global Operations Director
T. +44 (0)207715 5243