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New real estate taxation and Taiwan market outlook

On 25 March 2016 the ECCT's Tax committee hosted a lunch on the real estate taxes and the outlook for the market in Taiwan. The event featured presentations by Sam Chen, Tax Manager at KPMG and Joseph Lin, Managing Director of CBRE Taiwan.

Chen gave an overview of the new consolidated housing and land tax regime which was devised by the Ministry of Finance and took effect on 1 January 2016. Under the new regime capital gains tax are calculated based on the fair market value of the sale of buildings and underlying land and the land for which a construction permit may lawfully be issued. Under previous rules, land value increment taxes were assessed by the government and were much lower than the market value.

Under the new rules, resident companies will have to pay capital gains of 17% while enterprises with head offices outside Taiwan will have to pay 45% if they hold the property for less than one year and 35% if they hold it for more than a year. Capital gains on property owned by individuals is determined according to one's tax status (whether one is a tax resident or not) and the holding period. Individual non-tax residents will be subject to the same tax rates as foreign enterprises (45% for holding the property for less than a year and 35% for more than a year). For local tax residents, taxes vary significantly depending on whether to property is for personal use and the holding period. The first NT$4 million in gains from property purchased for individual use is exempt from tax and addition gains from these property are only subject to 10% tax. For other cases, selling a property within a year will be subject to a 45% tax rate. The rate falls to 35% for selling within two years, to 20% for holding for between two and 10 years and to 15% for holding over 10 years.

The new rules do not apply to property acquired before 1 January 2014. For property acquired between 1 January 2014 and 31 December 2016, as long as it is held for more than two years, it will subject to the old tax rules. Property bought after 1 January 2016 or held for less than two years, will be subject to the new tax rules. Chen gave some case examples of how the new rules will result in a considerable increase in taxes for high-end properties that have seen significant rises in value.

In his presentation Joseph Lin said that the recent downturn is not the result of the imposition of capital gains tax, since the rules only apply to property bought since 2014 and because taxes are only imposed on gains, not decreases in value, which has been the case for most of the market in the past year. However, the new rules have put a dampener on an already difficult market.

Based on statistics of real estate transaction volumes referred to by Lin, the market peaked at the beginning of 2011 and has been steadily declining ever since, dipping below the 10-year average at the end of 2015. He noted that Taiwanese investors have shifted attention to overseas property markets given that property investment yields in Taiwan, at around 2.2%, are some of the lowest in the world.

While he does not expect much of an impact from the capital gains tax, there could be an impact from the increase in land value tax and building tax. Land value tax has risen by around 30% in Taipei city, for example, while government-assessed building values have been raised by between 35% and 160% around Taiwan, depending on the area. While rates remain fairly negligible for the average household, luxury properties at the upper end of the market may have to pay three times more than previously. Owners of properties in prime locations could now face annual tax bills of up to 1% of their property values. This could come as a big shock to those owning and holding properties not leased out, which had previously cost next to nothing to hold on to and leave vacant.

Looking ahead, Lin said the property market will be affected by the economic slow-down and is therefore likely to remain challenging. However, given ample liquidity and inventory, there will be good opportunities for bargain-hunters to negotiate lower prices.