The Global Property Guide provides figures for effective income taxes, and effective capital gains taxes payable on gross rental earnings from residential property for nearly every country. These figures are normally based on calculations supplied by leading accountants
We give effective tax rate figures. The 'effective' rate is very different from the (usually higher) 'headline' rate. The 'headline rate' merely reports a series of tax bands. The 'effective rate' is an 'after deductions' figure, and is the tax actually payable on your gross earnings, expressed as a per cent of earnings.
We compute the 'effective rate' of tax on rental income at key bands (E/US$1,5000/month, E/US$6,000/month, or E/US$12,000/month). When we make cross-continent comparisons of tax burdens, we always assume gross rental earnings of E/US$1,500/month.
We also assume:
- The property is personally directly owned jointly by husband and wife
- Both owners are foreigners and non-residents
- They have no other local income
- There is no mortgage, i.e., no loan is taken for the purchase
Treatment of VAT
We use the term 'tax on gross rental earnings' in a broad sense, as 'any tax levied, proportionately to the amount of gross rental earnings received by the owner for letting property'.
Thus VAT on renting property, whether it is theoretically borne by the landlord or the tenant, would be considered a "(broad definition) tax on gross rental earnings", but municipal taxes payable by all home-owners whether renting or not, would not be considered such a tax. This is not the definition of income used by accountants, who are adamant that VAT is not a tax on income.
We adopt this (somewhat unusual) calculation practice because it represents reality. Landlords often have to pay taxes on gross rental earnings which are not called income tax, but which are in fact proportional to their income. Counting these tax expenses also allows us to make cross-country comparisons.
In arriving at the pre-tax profit figure, we calculate, and deduct:
- Depreciation / capital allowances – if available. We assume a typical value for the apartment, based on our valuation research, and depreciate on this basis
- Deduct any other typical costs which a landlord pays, management charges, buildings insurance, realtor agency fees, etc. Either choose a standard percentage deduction (if available) or typical 'actually incurred' costs. If real estate tax is normally payable by the landlord, we deduct that.
The result is a 'worked example':
The 'effective' income tax rates shown are in almost all instances different from the 'headline' rates. These effective rates represent what taxes are really payable, after all allowances and deductions. We believe it is more useful, easier, and more realistic to show effective rental income tax rates, instead of concentrating on headline rates.
An example of our effective income tax comparison: Europe (based on an income of €/US$1,500/month)
Holding rented residential property through a company can, in some countries, reduce tax, or be the only legal way for foreigners to hold residential property. If so, we provide the relevant tax information.
Rental income tax figures are, in every case, based on computations provided by accountants commissioned by us. Their logos appear alongside the data, on the country pages.
CAPITAL GAINS TAX
Capital gains tax assumptions
The Global Property Guide uses “effective capital gains” tax rates, i.e., the percentage that you really will pay on a capital gain. In arriving at our “effective capital gains” tax numbers, we make the following assumptions:
- The property was worth US$250,000 or €250,000 at purchase
- It has appreciated in value by 100% over the 10 years to sale
- The property is directly and jointly owned by husband and wife
- They have owned it for 10 years
- It is their only source of capital gains in the country
- It is not their sole or principal residence
These assumptions are critical. In many countries a holding period of less than 5 years results in capital gains being taxable. But a longer holding period often results in no capital gains tax being payable.
Capital gains taxes are often punitive
Capital gains taxes can be punitive in some European countries and are also high in much of Asia, but are zero in the Middle East (Morocco excepted). An effective capital gains tax of 22% signifies that out of the capital gain of €250,000, €55,000 is payable in capital gains tax.
Terminology versus reality
The Global Property Guide ignores terminology in calculating capital gains taxes, and looks at the reality – is this tax actually a capital gains tax? For instance, the Philippines imposes a 6% 'Capital Gains Tax' on the total purchase price or zonal value, whichever is higher. Despite its name, this is not really a capital gains tax (i.e, a tax on the gain), but is a tax on the transaction value, i.e., it is really a specialized form of sales tax, but mis-named by the tax authorities. Conversely in some countries there are some taxes which really are Capital Gains Taxes, but which are not called by that name. Obviously, these are included in our capital gains tax computation (leading to frequent protests from readers that 'our country doesn't levy capital gains tax').
The Global Property Guide's capital gains tax figures are based either our own computations, generated from publicly-available data, or (increasingly) are provided by accountants.