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Real estate tax to start on limited set of properties

26.02.2013

Author: Maksym Kopeychykov, Attorney at Law, Partner at Ilyashev & Partners Law Firm
Source: Kyiv Post

Catching up to a practice adopted long ago in Western nations, owners of large apartments and houses in Ukraine will start paying real estate taxes this year.

While experts praise the introduction of the new tax, they also note that the rate is unreasonably low, does not cover commercial property and is very difficult to administer due to the absence of a property registry in the country.

The real estate tax applies to owners of large apartments of more than 120 square meters and houses bigger that 250 square meters, irrespective of market value. The tax rate for each square meter over the limit is to be set by local councils. The Kyiv City Council has established the rate of Hr 11.47 for each square meter over the minimum.

The tax rate is twice as high for large apartments and houses – apartments over 240 square meters and houses over 500 square meters.

«It is important to understand that the real estate tax covers the living square only, and not the general square of the property. According to Ukrainian law, the living square excludes kitchens, dining rooms, corridors, bathrooms, storage rooms,» says Viktor Nesin, head of the real estate consultants union. «In my opinion, this is a mistake. Say a person owns a house of general 700 square meters. But it might involve a lot of non-living areas like indoors swimming pool, large dining rooms and other. Then the living square of the house might be not much bigger than 120 and the person will pay ridiculously low tax like.»

The article has other loopholes allowing people to avoid taxation. For example, if people co-own property they each enjoy the minimal limit. Thus a couple who co-owns a house of 240 square meter will not pay any real estate tax, as they each have a maximum allowed 120 square meters limit.

«Another problem is that very rich people register very little property, if any, in their name. It is usually all in relatives and friends to avoid troubles with Tax Service,» Nesin says.

Experts say the tax will not influence vast majority of people, as most Ukrainians own much smaller apartments than the minimal 120 square meters, if any.

«It is unclear, even to most of authority’s bodies, how many people own oversized apartments and houses in Ukraine. It can be that this tax only applies for a very small group of people,» says Volodymyr Kotenko, a partner of Ernst & Young and head of the company’s taxation legal practice in Ukraine.

Ukraine does not have a national list of real estate owners as property rights registry in each region keeps paper files which are completely closed to the general public.

«In order to learn which property belongs to whom the Tax Ministry will have to request the information on each address from the Justice Ministry. However, even the Justice Ministry does not have all the information from the property rights registry,» says lawyer Tetyana Montyan, who specializes in property rights.

The government has been working on the creation of a national property registry since 2012, but it is still not clear if the database will be made public.

But experts say the biggest flaw in the logic of the property tax is completely ignoring commercial property.

«It is definitely much easier to tax apartments and houses because then nobody’s business interest is hurt. First of all, the tax pressure on business is quite high even without real estate tax. Also, let us not forget how influential large financial groups in Ukraine are,» says Maksym Kopeichikov, a partner at Ilyashev & Partners law firm.

«So far there was no comprehensive discussion on taxation of commercial property. Imagine if all factories, hotels, shopping malls would be taxed. This would require a significant analysis of how it could be done without adding an additional burden on business,» Kotenko says.

Aside from rich people who have property registered in their name, construction companies will be paying tax on newly built property, until it finds a new owner. However, experts say the tax rate is so insignificant it is unlikely to influence the real estate market. Kopeichikov says that the tax is so low it is «incomparable to the price of real estate in Ukraine.»

The government promises to identify all owners of the real estate who qualify for the tax and send them letters by July 1. Letters will contain calculations of the tax to be paid within 60 days.

 
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