More Countries Target the Property Tax

September 17, 2020

A recent report from the Organisation for Economic Co-operation and Development (OECD) on tax reforms during the past year reveals a tendency towards higher property taxes, often in the form of base broadening, tax rate increases, or both.

Even though countries have increasingly targeted property taxes as a source of revenue, on average, they still only account for 5.6 percent of total tax revenue among OECD countries. Property taxes, especially those on real property, can be a relatively efficient way to raise revenue. This is because real property is not easily hidden from tax authorities and often has sufficient benchmarks for valuation purposes. Other types of property taxes that are common among countries include estate, gift, and inheritance taxes and taxes on financial and capital transactions. Net wealth taxes are less common.

As countries reform their property taxes, they shouldn’t miss the opportunity to implement reforms that spur investment and economic activity and follow the 4 principles of sound tax policy. Countries have an opportunity to improve the structure of real property taxes and eliminate transaction taxes, especially financial transaction taxes that have the potential to negatively impact capital formation, growth, and economic recovery. Last but not least, countries should consider the abolition of net wealth taxes, which harm innovation, reduce investment, and negatively impact long-term growth.

Real Property Tax Reforms

When compared to previous periods, 2019 and 2020 (so far) have registered an increase in the number of real property tax reforms implemented. That said, there is no clear tendency towards increases or decreases. Three countries increased their property tax rates, two decreased them, and reforms in Italy and Germany were essentially revenue neutral.

Chile

From 2020 on, anyone who owns real property in Chile with an overall fiscal value that exceeds CLP 400 million ($518,941) will face a progressive property tax surcharge, with marginal tax rates ranging from 0.075 percent to 0.275 percent.

France

In France, only property owners whose 2020 taxable income exceeds €27,706 owe property tax. Now, even those taxpayers will see their bill’s gradually reduced until 2023, when they will no longer owe any real property taxes at all. Individuals who own second homes will not benefit from this measure and will continue to pay the property tax.

Germany

On April 10, 2018, the German Federal Constitutional Court declared the current method for calculating property tax values unconstitutional. This is because taxpayers with similarly priced properties in the same municipality often end up paying different real property taxes. Although a new law was already approved, taxpayers will have to wait until 2025 to see their property tax recalculated. The reform is expected to be revenue neutral.

Greece

In 2019, Greece implemented property tax rebates ranging from 10 percent for properties valued above €1 million ($1.18 million), to 30 percent for properties valued under €60,000 ($70,761), which went into effect in 2020. Greece is also planning to reduce the supplementary property tax by raising the threshold from €250,000 to €300,000 ($353,807).

Italy

In 2020, Italy unified the local property tax with the municipal service tax into a single local property tax. Additionally, starting in 2022, the property tax will be fully deductible against business’ taxable income. Italy also broadened the base of the tax to include marine platforms.

Lithuania

Lithuania implemented both base broadening and tax rate adjustments as part of increasing the property tax. The minimum tax rate was increased from 0.3 percent to 0.5 percent for commercial properties and the threshold for non-commercial properties was reduced from €220,000 to €150,000 ($176,903).

Turkey

Since 2020, Turkey approved an additional property tax on properties valued over TRY 5 million ($668,655). The tax has 3 brackets with rates between 0.3 percent and 1 percent.

Increases in Property Transaction Taxes

Four out of the six countries that either implemented or proposed reforms to their property transaction taxes increased them. 

Argentina

Argentina introduced a new transaction tax of 30 percent on the acquisition of goods and services denominated in a foreign currency or of a foreign currency itself.

Ireland

Ireland introduced a stamp duty of 1 percent aimed at company acquisitions that occur under certain conditions, including when the shares of the acquired company are canceled instead of being transferred.

Korea

Looking to encourage investment, Korea reduced the transaction tax applied to securities. The trading tax for stocks listed on KOSPI and KOSDAQ markets were cut by 0.05 percentage points to 0.10 percent and 0.25 percent, respectively. Also, the tax for the KONEX market was cut by 0.2 percentage points to 0.1 percent.

Netherlands

The Netherlands increased the stamp duty applied to non-residential property from 6 percent to 7.5 percent and the transfer tax rate on such properties from 6 percent to 7 percent.

Poland

For 2020, Poland reduced the civil law transaction tax rate from 2 percent to 0.5 percent.

Spain

In 2020, Spain proposed a financial transaction tax of 0.2 percent on the purchase of shares of Spanish companies with a market capitalization of more than €1 billion ($1.18 billion).

Net Wealth and Wealth Transfer Taxes Have Seen Small Increases Several Countries

Argentina

The wealth tax in Argentina was drastically reformed over the past year. Tax rates for non-residents who hold assets in Argentina were raised and now range from 0.25 percent to 0.5 percent. Additionally, residents are now taxed more than non-residents at rates ranging from 0.5 percent to 1.25 percent. Those with overseas assets are taxed at rates ranging from 0.7 percent to 2.25 percent. Also, tax rates on equity interests for both residents and non-residents were increased by 0.25 points to 0.5 percent.

Denmark

Denmark eliminated the inheritance tax deduction for business owners.

Ireland

Ireland raised the gift and inheritance tax threshold for direct heirs from €320,000 ($377,394) to €335,000 ($395,083).

Norway

Norway abolished the special estimation of provisions for new companies, thus broadening the base of the net wealth tax.

Spain

Spain extended the application of the wealth tax for one more year. In 2011, the 100 percent tax rebate (originally approved in 2008) was eliminated temporarily for two years, 2011 and 2012. Since 2012, the 100 percent tax rebate has been temporarily abandoned yearly. In this way, the application of the wealth tax has continued.

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A tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions.

A wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary.

A 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.

An inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate.

Base broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability.

The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax.

Taxable 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.