TAXATION

As with any tax situation, it’s always tricky to establish exactly how much you will be liable to pay, when, and – if you have assets in more than one country – to which tax office. Thankfully, member states within the EU have double-taxation treaties with the UK and so you shouldn’t end up paying two lots of tax. The following Eastern European countries have such an agreement with the UK:

• Bulgaria

• Croatia (Croatia does not have a unique agreement with the UK, but does have an agreement in place which dates back to the days of the Yugoslav Republic. This covers income tax, capital gains tax and corporation tax.)
• Czech Republic
• Estonia
• Hungary
• Latvia
• Lithuania
• Montenegro
• Poland
• Romania
• Slovakia
• Slovenia
• Turkey.

Currently no Eastern European country has a double taxation treaty which covers inheritance tax. See www.hmrc.gov.uk/si/double.htm for more details.

Buyers should always consult experts to get the best, up-to-the-minute tax advice, while UK nationals should consider their tax position with both HM Revenue & Customs (www.hmrc.gov.uk), as well as the foreign tax authorities, as you will be obliged to report any worldwide income to UK authorities, regardless of whether they tax you on it or not.

The main taxes you will be liable to pay in Eastern Europe are:

• Stamp Duty
• Capital Gains Tax
• Tax on rental income
• Council Tax.

Rates vary. See Section 2 of this book for country-specific details.

Tax residency

Your position as a tax resident is what determines where you will be taxed and on what income, although the rules governing tax residency vary from country to country. The rule generally states that if you are resident in a country for 183 days out of the tax year (this doesn’t have to be continuous) you will be taxed on income in that country. Residency doesn’t require you to be a legally recognised resident of the country, nor does it require you to own a home there, (although in both cases this will generally mean you are classed as a tax resident) – it merely depends on the number of days spent residing in a country. To take Bulgaria as an example, you are considered to be a tax resident in Bulgaria if you have a permanent residence in the country or if you are a permanent resident, i.e. if you spend more than 183 days in Bulgaria in any year. If you aren’t a permanent resident and are only working in Bulgaria temporarily, then tax is payable only on your income earned while you’re there.

Gains may or may not be taxable in the overseas country, depending on the circumstances, but are likely to be taxable back in the UK. In the UK, you will also be considered a resident if you spend more than 183 days here (excluding days of arrival and departure) in any given tax year, or more than 91 days on average per year, over four UK tax years.

Property ownership through a company

Many countries only allow foreign individuals to acquire property through a local company due to restrictions on property ownership by foreign buyers. If you remain UK resident and use the property you’ve purchased as a holiday home, the UK Revenue and Customs department may charge you tax on an annual ‘benefit in kind’, even though you will have financed the property and the running costs. Also, depending on the circumstances, a foreign company effectively managed and controlled in the UK by you could, itself, be viewed as a UK tax resident and become subject to UK company taxation and compliance requirements.

Country examples

Details provided by Blevin Franks Mortgage and Tax advisors, www.blevinsfranks.com.

Croatia

• For individuals, rental income is taxed at an effective rate of either 7.5% or 10.5%. There are also surcharges for residents of up to 18%.
• Companies pay tax at 20% on rental profits, and rental losses can be carried forward for up to five years.
• Capital gains are taxed at 35% for individuals and at 20% for companies. Assets held for more than three years on your first home are exempt.
• VAT is levied at a rate of 22% on leasing of real estate, except on real estate used for residential purposes.
• 5% transfer tax is levied on transfer of real estate ownership.
• Annual property taxes are levied based on the size and the location of the property.

Czech Republic

• Foreign investors can only invest through a Czech company, although this restriction has to be removed for EU residents by May 2009.
• Rental income and capital gains are taxed at progressive rates of up to 32% for individuals, and for companies as part of corporate income at 24%.
• Rental losses can be carried forward for up to five years.
• Real estate transfer tax is payable at 3% and is payable by the vendor (or purchaser as the guarantor).
• Real estate taxes are payable at variable rates.

Estonia

• For individuals, rental income is taxed at 21%. Companies pay tax at a flat rate of 28.2%.
• Capital gains are taxed as part of other income at 21%.
• Land tax is payable at 0.1%, up to 2.5%, and is payable by the owner of the land.
• There are no transfer taxes or stamp duties, but state fees and notary fees are due.

Hungary

• Usually it is easier to acquire property through a property holding company.
• For individuals, rental income is taxed at either 25% of gross rental income or at progressive rates of 18% to 38% (in this case actual business accounts have to be prepared).
• The corporate tax rate of 16% (plus 2% local tax) is payable by companies.
• Capital gains are taxed at either 25% with a 10% reduction after five years or for companies, capital gains are taxed as part of income.
• Share sales are exempt from capital gains tax.
• Building tax is payable by the legal owner at 3%, or a maximum of HUF 1,006 per square metre.
• Land tax is payable at a maximum of 3% or HUF 224 per square metre.
• Transfer tax is payable by the person acquiring the property at 2% up to HUF 4 million and 6% above that.

Latvia

• Net rental income is taxed at a corporate income tax rate of 15% or personal income tax rate of 25%.
• Capital gains on real estate are exempt from capital gains tax provided that the property has been owned for more than 12 months.

• Capital gains tax for companies is 2% of the proceeds of the sale.
• Real estate tax is payable on land at 1.5% and on buildings at 1.5%, but houses and apartments which are used for residential purposes are exempt from real estate tax.
• Registration duty is payable between 0.5% to 3%.

Lithuania

• For individuals, rental income is taxed at progressive rates from 15% to 33%. Companies pay corporation tax on rental income at 15% plus 3% social tax.
• Tax losses can be carried forward for up to three years.
• Capital gains are treated as part of income and non-residents are taxed at 10% on gains on real estate. However, residents are exempt provided they only purchase one piece of real estate per year.
• Real estate is subject to 1% real estate tax.
• Land owned by a legal entity is subject to land tax at 1.5%.
• Notary dues of between 0.5% and 1% upon transfer of real estate.
• State use imposed upon transfer of real estate is charged from LTL100 to LTL10,000, depending on the value of real estate.

Poland

• For individuals, rental income is taxed at progressive rates up to 40%. Net income received by corporate taxpayers is taxable in Poland at 19%.
• Capital gains on real estate is taxed at 10% of the sale price, but the payment of tax on gains is exempt provided you have owned the real estate for over five years.
• Sale of land and buildings is generally subject to VAT at 22%.

Romania

• Rental income is subject to individual income tax at a flat rate of 16%. Net income is determined by deducting 25% of the gross rental income.

• Companies pay corporation tax at 16%.
• Capital gains are taxed at 16% but share sales are subject to a special 1% rate under specific conditions.
• Rental losses can be carried forward for five years.
• Stamp duty and notary fees are payable on purchase of real estate.

Slovakia

• Rental income is taxed as ordinary income and is subject to a tax rate of 19%. For companies, the standard corporate tax rate is also 19%.
• Capital gains tax is also payable at 19%, but gains are exempt after five years under certain conditions.
• Real estate tax is levied on individuals and companies owning real property at approximately SKK280 per square metre.
• Real estate transfer tax has been fully abolished.

Slovenia

• Rental income is taxed at progressive rates from 16% to 50% and companies pay corporation tax on rental income at 25%.
• Rental losses can be carried forward for up to seven years.
• Capital gains are taxed as part of other income and are exempt if the property has been held for three years or more.
• Immovable property transfer tax is levied if VAT has not been charged on the transfer (at 2% of the market value of the transaction).
• New real estate tax is likely to be introduced soon.

Turkey

• Rental income is taxed at progressive rates from 15% to 40%.
• Companies pay corporation tax at 20%.
• Capital gains are taxed as part of other income and gains on property are exempt after four years. There is also an annual exemption of approximately £4,000.

• Title deed charges are imposed on the acquisition of legal title at 1.5%, and the same charge applies when the property is sold.
• Stamp tax is calculated on the sale price of real estate at 0.75%, with a ceiling of YTL800,000.
• Property tax is levied on the owner of real estate at 0.2% on buildings. If in residential use the rate is reduced to 0.1%.

Montenegro

• Rental income is taxed at progressive rates from 0% to 23%.
• Companies pay corporation tax at 9%.
• Capital gains are taxed as part of other income, but only 50% of the actual gain is taxable.
• Rental income received by non-residents is subject to withholding tax at 15%.
• Annual property tax of between 0.08% and 0.8% is levied (in most cases, 0.2% on buildings).
• Property transfer tax of 2% is payable by the purchaser on the acquisition of real estate.
• Transfer of newly-built property located in Montenegro is subject to VAT at 17% but the lease of residential real estate is not subject to VAT. Any other transfer of real estate is subject to property transfer tax.

Bulgaria

• Foreign individuals can only acquire land through a Bulgarian company.
• Transfer tax at 2% is payable on transfer of property.
• Registration fees at 0.1% of the price of the property are payable.
• The notary fee is calculated as a percentage of the agreed price (between 1.5% for property up to BGN1,000 and 0.1% for values above BGN 100,000).
• VAT is charged at 20% if the seller is registered for Bulgarian VAT purposes.

• Real estate tax is payable at 0.15%.
• There are also garbage collection fees imposed by the local authorities.
• Rental income is subject to 15% withholding tax on gross income and no expenses can be deducted.
• Capital gains are subject to 15% Bulgarian withholding tax. Two properties are exempt after five years.
• Property inherited by a spouse or heirs of a direct line is tax exempt, but inheritance tax is levied on a property exceeding BGN250,000 at 0.7% if the property is inherited by brothers, sisters and their descendants. An additional 5% is charged for other heirs.
• Significant changes are expected to Bulgarian tax laws following EU accession.