By Paul Sanderson | International Property Tax Institute (IPTI)
The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep members up to date with the latest developments in property taxes both in the USA and Europe.
IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).
As far as Europe is concerned, this month’s report includes articles on France, Germany, Greece and Poland. There is a separate IPTI report on the United States, with a focus on New York.
France: Macron’s wealth tax reform: a red light for France’s property industry?
The owners of luxury French properties are facing a reformed wealth tax, designed to encourage them to shift capital into business investments.
New French president Emmanuel Macron has just introduced a major reform of the country’s wealth tax, focusing it directly on property investments in a bid to push more cash into other sectors of the economy.
Nearly a year after Emmanuel Macron became president of France, his much-touted programme of economic reforms is coming into effect. And one of the first measures out of the blocks is reform of the country’s wealth tax, the charge on assets dubbed an ‘invitation to leave France’ by economic liberals. So how are the changes likely to affect growth, and does the reformed system provide a useful model for other countries?
First introduced by the Socialist Party in the 1980s, the wealth tax was levied on individuals with assets above 1.3m euros (US$1.5m). Given France’s left-leaning politics, successive governments of both left and right saw the redistributive tax as politically untouchable. And François Hollande, Socialist president between 2012 and 2017, introduced even tougher fiscal measures – imposing a 75% income tax on high earners, and declaring finance “the enemy”.
But Hollande’s protégé Macron, who left the Socialist Party to found the independent En Marche! Movement, promised as part of his election campaign to break with this heritage – creating a more modern France that would be open to business. Wealth tax reform was a key part of that pledge.
The goals of reform
From 1 January, the wealth tax was abolished and replaced by a new tax on property holdings. Other kinds of assets are exempt from the new tax, which retains both the old eligibility threshold of 1.3m euros, and the charging schedule: rates start at 0.5% of the assets’ value and climb to reach 1.5% when portfolios top 10m euros. It also retains the discount on taxpayers’ primary residence, which is assessed at 70% of market value.
Macron hopes to invigorate growth by pushing cash away from property and into more productive forms of investment, and to attract businesses and high-net worth individuals considering relocating from the UK in the light of the Brexit vote.
According to Paris tax attorney Stéphanie Ernould, the reforms are also designed to align the French system with other European countries where taxes on capital are lower, such as Belgium and Portugal; and, ultimately, to reduce the unemployment rate by triggering investment into innovation and research.
Macron’s economy minister, Bruno Le Maire, points out that far fewer people will pay the tax in its new guise: numbers will fall about 40% to just 150,000, he says, with receipts tumbling by some 3.2b euros to just 850m euros.
This represents a major tax cut for the rich – and Ernould argues that ministers should be doing more to ensure that savings are redirected into useful investments. The reform “surely implies a responsibility for the government to set up a policy to get taxpayers to ‘transfer’ that excess cash from the tax savings into businesses,” she says.
Given successive governments’ reluctance to lighten the taxes paid by the rich, the changes have sparked relatively little public opposition – something that surprises Sonia Bonnabry, partner at the Lexcom firm of tax lawyers in Paris. However, Bonnabry points out that the reform is set to run into resistance from the property sector: real estate professionals are the biggest single losers in the new system, she points out, and they “deplore the fact that the new property tax does not distinguish between property investment for rental income, and dynamic types of property investment that create jobs and are part of the real economy.”
As the new tax focuses on relatively illiquid investments, Bonnabry adds, the tax office will face greater problems in valuing people’s assets. “To try to get around this, the reform seeks to unify the declaration system,” she explains. “For the wealth tax, only taxpayers with assets of more than 2.6m euros had to fill in a declaration detailing the composition of their wealth and the value of each asset. With the property tax, all taxpayers – whatever their assets – will have to complete this onerous task each year.”
Economic doubts and perverse incentives
Stéphanie Ernould says the reforms are also designed to align the French system with other European countries.
It is far from clear that all this extra paperwork will help to divert more cash into business development, R&D and capital investment. The left-wing French economist Thomas Piketty, writing in Le Monde in May 2017, argued that there’s no reason to assume that financial investment is necessarily more productive than property investment. And Frédéric Douet, professor in fiscal law at the University of Rouen-Normandie, warns that the French people’s traditional risk aversion remains a formidable obstacle to increased business investment.
Savings contracts introduced by former finance minister Dominique Strauss-Kahn and former president Nicolas Sarkozy offered tax breaks in return for exposure to French and European stock markets, Douet recalls, but the French public largely steered clear. And he argues that Macron’s distinction between the ‘real economy’ and property income ignores the fact that the construction industry involves more than 400,000 businesses employing more than a million people.
Douet also points out that the old wealth tax offered exemptions for those investing in small businesses – either directly, or via pooled investment funds. This provided a valuable flow of capital into start-ups and small enterprises, he says; and this stream has now dried up. Professor Douet fears that regional small businesses, which find it the hardest to get financing, will be forced into other forms of capital raising such as crowdfunding. Macron could have stimulated investment in small businesses without such a major tax reform, he argues, simply by raising the wealth tax exemption for these investments from 50 to 100%.
Germany: Top court just made a landmark ruling that affects everyone
The Constitutional Court ruled the Grundsteuer (land tax) for obsolete on Tuesday. Since almost everyone in Germany is affected by the tax, it is worth understanding its relevance.
What is the Grundsteuer?
The land tax is the most important form of income for local governments in Germany, bringing roughly €14 billion in revenue into their coffers every year.
And we all pay it – either directly or indirectly. The tax is levied on everyone who owns a property. But even if you are a tenant you still probably pay, as landlords almost always pass the cost onto tenants in the form of Nebenkosten (supplementary costs) in their contract.
You know that strange difference in Germany between Kaltmiete and Warmmiete? Well some of that is heating costs, but a lot is also the land tax.
Research by the Institute for the German Economy shows that the Grundsteuer on a typical apartment is €299 each year.
Why did the Constitutional Court rule on it?
Landowners have been complaining for years that the tax is unfair – and it’s not hard to see why. The tax is based on an estimate of the value of a property which is, er, well, rather out of date.
Properties were last valued for the tax in west Germany in 1964 and in east Germany in 1935. So when your local Finanzamt calculates the tax, they are doing so based on the value of your property over half a century ago.
Property owners argue that values have changed somewhat since then. For instance an apartment that was stuck next to the Berlin Wall in 1964 could now be in one of the trendiest neighbourhoods in Germany.
Why has nothing been done about this before?
The small print of the land tax calls on the federal government to carry out a reassessment of property values every six years. But for the past 50 years governments have always said that new assessments are too time intensive.
Even before Tuesday’s ruling though, there was general consensus among politicians across the country that something needed to change. A majority of the federal states therefore suggested a new way of assessing the tax back in 2016.
The proposal foresaw that property value would be replaced by a calculation based upon size of property, location, transport connections and cost of build.
But both Bavaria and Hamburg blocked the change, fearing that it would lead to a rise in taxes for their inhabitants.
What happens now?
The Constitutional Court has given the federal government until the end of 2019 to come up with a new way of calculating the tax. Once the new law has passed through the Bundestag, the government will have a bridging period of 2024 to carry out the assessments necessary to start levying the tax accordingly.
The courts thus took into account the fact that it could take a long time to reassess all 35 million properties that exist in Germany.
How will the ruling affect us?
It is really hard to say at this point what the ruling means for the normal tax payer. The Constitutional Court rules on the validity of current laws, it doesn’t prescribe how new laws should look.
Therefore it is too early to say what a new way of assessing the land tax might look like.
But the Süddeutsche Zeitung (SZ) reports that tax could increase for some properties by a multiple of forty if they were to be re-assessed according to value.
Property values have generally risen most sharply in inner city areas and in suburban areas with good transport connections. It is therefore possible that a new way of assessing the tax could lead to higher payments in areas of downtown Berlin and Munich where property prices have risen most dramatically in recent years.
The government reportedly favours a method of assessing the tax which would penalize properties that are unused, thus deterring speculation and freeing up land for badly needed new housing.
Greece: Creditors block gov’t plan to hike the supplementary property tax
Greece’s creditors have blocked the government’s plans to increase the tax load on owners of medium-sized and large property. According to sources, the government had intended to shift the new burden resulting from the adjustment of the taxable property rates to 500,000 owners with assets adding up to over 200,000 euros.
The government had been planning to modify the supplementary Single Property Tax (ENFIA), either by reducing the tax-free threshold or the tax rates, in order to avoid hikes to the main ENFIA tax in areas such as Perama, Keratsini and Drapetsona, among others, and so they wouldn’t have to send increased tax notices to small property owners. (It is noted that the surveyors employed to issue recommendations for the new “objective values” of properties – used for tax purposes – have proposed hikes for 60 percent of zones across the country.)
The country’s creditors have responded to this idea saying that ENFIA is not supposed to be used for social policies, thereby stopping the government in its tracks, sending it back to the drawing board instead.
Compliments of IPTI, a member of the EACCNY