High-net-worth individuals are being identified by taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policymakers these days in various ways. While Portugal recently approved a 10 percent tax on foreign pension income, putting an end to the tax-free regime for foreigners approved during the financial crisis, Greece is looking into attracting foreigners with tax reductions.
In order to transfer their tax residency to Greece, foreigners are required to make a minimum real estate investment of €500,000. To attract high-net-worth individuals, Greek policymakers are looking into reducing the unified property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. (ENFIA) by raising the threshold from €250,000 to €300,000 or €350,000.
Greece is one of the European countries that relies significantly on property taxes. In 2018, all property taxes (including both real property taxes and other property taxes) raised 7.9 percent of Greece’s total tax revenue. For European OECD countries, property tax revenue accounted for only 4.6 percent.
Property tax can be an efficient way of raising revenue, especially taxes on real property. This is because real property is not easily hidden from tax authorities and often has sufficient benchmarks for valuation purposes.
However, Greece’s real property tax system is extremely complex. The tax has two layers: a principal tax and a supplementary tax. The principal tax on buildings and land is determined by multiplying the square meters by the principal tax and certain coefficients affecting the value of the property.
On top of this principal tax, a supplementary tax applies. Companies will pay an additional 0.55 percent tax on the total value of the property. A reduced rate of 0.11 percent is applied if the property is used for the business’ activity.
For individuals, the supplementary tax is a progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. that applies on top of the €200,000 established threshold, with a progressive tax rate ranging from 0.1 percent to 1.15 percent.
Apart from the complexity of the multilayered system, the tax creates a high burden on capital. Although the real property tax burden in countries like Austria, Czech Republic, Luxemburg, or Switzerland represents less than 0.1 percent of the private capital stock, the tax collection in Greece reaches 1.1 percent of the country’s private capital stock. Greece also is among eight countries, from the 27 OECD European countries, that doesn’t allow businesses to deduct property tax from the corporate taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . All these measures increase the cost of capital and could drive businesses to invest in more business-friendly jurisdictions.
The high burden, the complexity, the fact that the property tax is levied not only on the value of the land itself but also on the buildings constructed on it, and being a non-deductible tax, put Greece at a disadvantage when compared with other OECD countries. Greece ranks 33rd out of 36 countries in terms of the Real Property Taxes in our International Tax Competitiveness Index 2019. All this shows that property taxes in Greece should be a target for reform, even before considering the impact on foreigners, particularly in light of Greece’s standing relative to other European OECD countries.
Cutting the property tax is not the only measure that Greece has considered to entice foreigners to relocate. A 7 percent income tax for foreign pensioners who move their tax residence to Greece has also been proposed. The 7 percent flat rate would apply to all income including rent or dividends, instead of the local progressive tax rates that could reach up to 45 percent. Additionally, a tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. was approved for property transferred to Greece when foreigners relocate to the country. The property is exempt from VAT and registration tax, as long as the person has been a non-resident for the two years prior to the transfer.
Policy changes to attract foreigners are not without benefits, but the Greek government should carefully weigh the costs of the tax incentives against opportunities to implement broader tax reforms in Greece. A policy to attract foreigners can be valuable, but if Greek citizens do not also reap the benefits of reforms, the government risks attracting foreigners while not making Greece an attractive place for Greeks to work, raise families, invest, and build their own businesses.
While reforming the property tax in Greece is a good way of attracting foreigners, Greece shouldn´t miss the opportunity for implementing a greater reform of the property tax that would spur investment and economic activity. In order to reshuffle this intricate property tax, a first step would be to reduce its complexity by eliminating the supplementary tax. Second, the tax paid should be deductible against corporate taxable income. Third, applying the property tax solely on the value of the land would favor renovations and any kind of property improvement, lure in capital investment, and eventually increase productivity and economic growth.
Although a property tax reform that follows these suggestions will impact revenues, policymakers can still focus on improving the structure of the property tax without undercutting the revenue potential of the tax. A more efficient property tax system in Greece is a better objective than just focusing on incentives for foreigners to change their tax residence.
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