Appeal to revoke 12% withholding tax

15th June, 2009 – A leading real estate agent is appealing to the Finance Minister to revoke the 12 per cent withholding tax on property sales, saying that the current scenario meant it no longer made sense.

Dhalia business development director Chris Grech said the tax had been introduced in the Budget for 2006 at a time when property prices were rising fast.

Until then, Capital Gains Tax was paid on the sale of property based on set tax rates of 35 per cent on the profit made on the sale. The Finance Minister had hoped the withholding tax would circumvent the under-declaration on the value of the sale in order to reduce the amount of tax paid.

The Final Withholding Tax (FWT) was set at 12 per cent on the market value of the property sold, without allowing for expenses and other related exemptions which used to apply under the Capital Gains Tax system, and was applied upon contract of sale.

In February, 2006, Parliamentary Secretary Tonio Fenech (as he then was) unveiled a number of amendments to the property tax in an attempt to head off criticism, including a clause giving people the option of either paying tax under the old capital tax regime or the new final withholding tax, as long as a property was sold within 5 years.

Additionally, if no profit has been made on the property, then no tax has to be paid, subject to the approval of the Commissioner of Inland Revenue.

However, after 5 years, the only option is to pay the final withholding tax of 12 per cent of the sale price – whether a profit has been made on the sale or not.

Mr Grech said that the FWT came in to force at a time when the market was very buoyant and properties sold much quicker. Now, however, the glut of properties on the market means it could take much longer to sell – and anyone selling a property that he has held for more than 5 years will have no option but to pay the FWT of 12 per cent, no matter what profit he makes on the sale, if any.

“The FWT was a good idea when it was first mooted in 2005 but it needs to be reviewed in the light of the present circumstances. In the pre-Budget document, the Finance Minister should consider removing it and reverting to the previous system.

“He needs to wake up and realise that the world has changed. As it is, you could have developers who will not even be left with enough money after the sale and tax to pay off their loans,” he said.

The Central Bank of Malta reported earlier this month that there had been an annual decline of 4.4 per cent in residential property prices.

In 2005, the number of applications for development of residential properties rocketed from the annual average that hovered around 6,500 to over 9,000. Since 2005, there were applications to build over 37,600 properties.

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