Purchasing a property in foreign country has different purposes. It is either aimed for personal reasons (spending vacations on a beautiful place) or for commercial activities (use for renting outin Chicago or company registration in Dubai etc.). Celebrities, entrepreneursand wealthy persons are mostly seen purchasing foreign property for these reasons. The owners usually have to pay taxes of various types irrespective of the purpose of purchasing foreign property. Sometimes, these taxes prove nuisance for these property owners.
Following are few important tips that can provide some assistance to these property owners to understand the situation well. This will allow them to get some relief on high taxes.
- You will pay tax in home country too
Purchasing a foreign property doesn’t necessarily mean that you will not pay any tax on this property to your home country. Many countries laid several types of taxes on their citizens when they use this foreign property for residential or commercial purpose. E.g. you will be required to pay Inheritance tax if the foreign property is transferred to your children, Capital Gains Tax for selling the property and Income Tax if you are getting rent from your foreign property.
In this scenario, the better option is to use planning techniques that you apply on taxes in your own country. But you may need to apply few other techniques also that may assist you in saving unnecessary tax on your foreign property.
- Local taxes
On most of occasions,you will be required to pay taxes in the country where you are purchasing property. This tax can be different according to the country and type of property you are purchasing. Usually these are applied on sale, purchase and rental of a property.
But you can make things easier by applying for tax deduction on the basis of double taxation. Many countries provide relief to their citizens if they are paying same type of taxes in a foreign country.
- Tax Relief
There are several ways that you can claim tax relief. You can do so by renting your foreign property. This will be treated as your business and you will be qualified to claim relief on your business. This includes travel expenses that you pay during your business tour to any foreign location.
Apart from that, rentals of all of your foreign properties in various locations are treated as single business. This can prove advantageous for you as it provides you save additional costs for different residences on multiple locations.
- Recover VAT
In many countries, purchase of a property by foreigners is subject to VAT. In few countries, you may pay up to 20% for these purchases. An ideal way to recover this hefty amount is by using ‘leaseback scheme’. You can do so by leasing your property to a hotel operator. Under such schemes, you are allowed personal use of this residence for few weeks every year. After specific time, you can get full control of this residence.
- Always pay foreign tax
After purchasing a property in foreign land, you will mostly be required to pay tax in that country. On many occasions, you will be registered to local tax authority after purchasing a home. It is necessary to pay the tax obligated on you and don’t try to avoid tax by making lame excuses like you don’t know their language in which you received tax notice. It can result in confiscation of your property.
- Know details about foreign laws
Every country has its own legal system. Therefore, it’s unwise to presume laws of a foreign country according to those in your home country. These laws can be completely different and can create unavoidable issues if you don’t follow them before purchasing a house there.
Mona is working in Riz& Mona Consultancy, a Dubai-based consultancy firm, as a business consultant and content writer since past 6 years. During her long career, she has written on various business and investment niches including taxation, small business, legal documentation services, trade, and others.