The way to real estate investment in Greece
Real estate investment in Greece
Greece stands for change and progress. Nevertheless, this cosmopolitan country is still struggling to attract investments due to the severe economic crisis inflicted on the country the past decade. In this article, we summarize our recommendations to foreign investors wishing to invest in the real estate sector in Greece.
Foreign investors are well-off individuals or are businessmen who value the sun, sea and the safe conditions in our country, while also recognising that the Greek recession has made the real estate prices in the country more competitive and thus more attractive. So, instead of investing in other Mediterranean or European countries, they realise that it is high time to buy property in Greece.
We always try to see the real estate process through our investors’ eyes so as to be able to fully support them every step of the way and ensure that they won’t feel insecure because of our country’s legal framework, which may seem unfamiliar to them.
Our law firm consists of a professional and efficient team planning real estate investments in a tax-safe and reliable manner.
Our main objective is to explain to potential investors all the steps they should follow before buying a property in Greece and then all the actions that need to be taken during the stages of property ownership and occupation.
Review of the property offered for real estate investment in Greece
We take care of the pre-contractual review, i.e. the review of the asset to be purchased. Then, detailed tax planning follows. First of all, we carry out the tax planning for the subject of the investment, i.e. we check whether the future purchase will be made by a natural person -e.g. the foreign investors themselves- or by a legal entity. The latter is preferred due to the tax advantages offered both when purchasing, owning and using the property.Of course, besides the type of person interested in investing, the investment itself is also subjected to the tax planning. A distinction is made between the case of an asset deal, i.e. when the property is purchased as a property itself or in the case of the acquisition of a property through the purchase of shares of a société anonyme, for example, that owns the property.Our guiding principle is the investors’ intentions -how they deal with their assets and how they plan to use them, as this affects the number of tax issues.Special Real Estate Tax (Greek EFA) is also included in our tax planning guide. In fact, an annual tax of 15 % of the property value may have to be paid by the investor. This may have consequences for the investments in Greece, especially when the new main investor is responsible for theseller’s debts.There is no doubt that when it comes to income tax there is a big difference between the wish of the investors to buy a property in order to travel to Zakynthos -a beautiful Greek island– for a couple of months and spend their holidays there and in the case when they want to rent out the property while absent. And of course, it makes a difference if they want to systematically purchase and sell real estate in Greece, wishing to profit from the price fluctuations of the real estate market. It should be noted that checking the conception of the investor is very important when renting a property, since the person’s tax residence in Greece must also be declared.During the planning of the investment, the necessary financing by taking out a loan from a Greek or foreign bank is also something to be taken into consideration. If there is no need for financing, the implementation of the transaction, the part of negotiation, the conclusion of the contract, the well-known procedure of the land registration and the entry to the cadastral office as well as the use of the property will take place immediately.When examining the property to be purchased, we take four steps into account: a) the legal review b) the tax inspection c) the technical verification, carried out by a technical surveyor and mainly concerned with issues of urban planning and building legality, and of course d) the verification of the financial conditions, which we find mainly in cases of company shares acquisitions in order to acquire ownership, i.e. in a share deal.The reason these four steps overlap is twofold; not only there is no chronological or prioritization order by which we conduct these reviews, but also we believe that in order to complete the transaction faster, it is very important to do these checks in parallel.A thought on legal verification: It is often wrongly assumed that legal verification is what we all know as checking titles and encumbrances on the property at the land registry. However, for large investments, where the assets to be acquired are shares in a public company, legal review means reviewing all aspects of the acquirement of the public company.During our overall checking process, we take the following points into consideration: a) The corporate documents, the Articles of Association, the share titles, the share register, various commercial contracts and the company to be acquired. b) Research whether there are loan obligations or whether rental agreements exist, etc. c) Whether there are registered trademarks (brands) in order to verify that all legal procedures have been followed. d) Whether there are employment contracts and staff. e) Whether there is tax compliance or whether we have to reckon with various “gaps” in our finances. f) Whether there are court decisions pending that may later cost several thousand or even millions of euros.To wrap up the review section, we have listed a few points requiring special attention.We are in Greece. Here, the coastline is vast and there are many beaches, coasts and archaeological sites. It is very important to handle the property we are investigating with extreme care as the property may in fact be subject to Coastal and Beach Protection Regulations. It is also possible that the property we are examining is an area of archaeological interest or an industrial area with the restrictions applicable to these regions, a nature reserve, or a forest area.Of course, some technical verification issues, as well as electronic building identity -something new and full of challenges- are also of great importance. It is not enough to just conduct an ordinary inspection of the property. We also need a safe approach and proper planning.In order to answer what is in the interest of the investors, we need to review not only the company owning the property (share deal) but also the property itself (asset deal). The verification of the property itself does not just mean a simple legal audit and a visit to the land registry so as to be informed about any encumbrances, attachments and titles related to the property, but it has now become a very complex procedure involving many other specialties such as civil engineers, urban planners, etc. At the same time, it is very important to be able to control the framework in which the property is placed. Is it a company? Is it multiple companies? Is the company domestic or foreign?
Tax planning – Real estate investment in Greece
An important tool for any investment is tax planning. The same applies to investments in real estate, especially when foreign investors are concerned.The usual question every investor asks is what is the best tax planning to ensure the maximum tax benefits and minimize the tax expenses, as well as tax risks.Therefore, when we talk about tax advantages, both during the phase of acquisition and in the phase of use and management of the property, we must always keep in mind that the planning we carry out should be aimed at a real situation, which is a business and financial purpose while ensuring that is not a method that ultimately serves tax evasion.There are two basic investment options: One option is when our investor acquires the property directly as a natural person -what we usually call an asset deal. The second option is when our investor buys the property through a company, either a new (founding a company) or an existing company that already owns the property. The first point to be considered here is the jurisdiction that exists under the double taxation agreement between Greece and various countries in order to obtain favorable taxation at the end of the distribution of dividends and the payment of interest. This is what we call “treaty shopping”. Secondly, one has to pursue a business and economically legitimate purpose in order not to be suspected of tax evasion. A third point of interest is the financing of the investment. Especially when we are dealing with a company, there are two forms of investment and financing: internal and external financing. Internal financing is the inflow of funds from the shareholders themselves, either when the company is founded or when the share capital is subsequently increased. External financing can be carried out either by taking out a loan from a Greek or foreign bank or by issuing a bond loan, which has a very favorable tax regime when regarding a domestic société anonyme. For larger investments, we usually prefer to issue a bond loan, since interest expenses are tax-deductible reducing in this way, not only our tax burden but also the taxable income.Another point to be discussed is how we can justify the amount paid for the purchase of the property. At this point, it should be emphasized that in the case of foreign natural persons there is no question of justification, i.e. the costs of acquiring the property, provided that the foreigner actually has a tax residence abroad and does not generate any income in Greece. In any case, we must ensure that these two conditions are met.Finally, another factor to be examined is the risk assessment of obtaining tax residence: is it a natural person, an individual who lives permanently in Greece? Is it a foreign legal entity? Each case is examined separately and the facts taking place in each case are taken into account; especially, the purpose of the investment, the intention of the use and the degree of utilization of the property.For example, an investor may wish to use the property as a holiday home while continuing to benefit from it for a few months of the year. If they make use of the property and at the same time provide other services -e.g. catering services- it is very likely that they will have to acquire tax residence or permanent establishment in Greece.Asset deal
In this case, we have the direct purchase of the property, the so-called asset deal. During the phase of investment and acquisition of the property, real estate transfer tax, notary fees and transfer costs are incurred, which amount to approx. 5 % and are to be borne by the buyer. In the phase of use and utilization of the property, the taxable income from letting, subletting and transfer of the property use is subjected to a progressive tax rate that can reach up to 45 %. If it is not a sole proprietorship, unfortunately, no expenses are recognized, but on the contrary, they are deducted at a rate of only 5 % from the gross income. There is also the special solidarity contribution with progressive rates of up to 10 %. Finally, during the disinvestment stage, i.e. the resale of the property, we have the problem of capital gains tax, which is currently suspended and we hope that it will continue to be so.Share deal
Now let’s turn to the scenario where the investor has bought shares in a company that will purchase the property, the so-called share deal. In the investment stage, i.e. the acquisition of shares, there are no tax costs. At the stage of use and utilization by the company though, there is a taxable profit from business activities, which as of today is taxed at 22 %. Operating costs, maintenance, etc. of the property are taken into account as deductible. Depreciation is also applied to buildings at a rate of 4 % and of course, a deduction is recognized by the Uniform Real Estate Property Tax (Greek ENFIA). This also applies to branches of foreign companies in Greece, as they enjoy the same tax treatment as any other local company.In regard to the shareholder, a rate of 5 % is applied to the distribution of the dividend profit, unless it is a distribution to a legal entity. In this case, we check whether exemption criteria from intra-group dividends are met or whether a double taxation agreement with more favorable or even zero tax rates can be applied.During the resale stage (at the corporate level), the property is sold and the profit from its sale is subjected to a 22 % rate. At the stage when shares are sold by the investor there is a capital gains tax of 15 % which occurs from the difference between the selling and the purchase price of the shares. In case the shareholder is a legal entity its business operations are subjected to a taxable profit of 22 %, unless the exemption criteria in force since the 1st of July 2020 are met.All the points mentioned above signify the need to listen carefully to the investors -the people entrusting us to work out a solution for their problems. If they want to buy a property in order to just spend their vacation at another location, we might have to choose the asset deal option. If they want to use this property to make a business profit, it is obvious that the most tax-advantageous solution for them would be to invest through a company (share deal). If the investor wants both, i.e. wants to have a holiday home at Corinth, while also making a profit out of it, we should ask them to describe how they intend to pay for the purchase of this property, because it can be profitable to use a bond loan in order to achieve a tax-efficient solution.
When can the sale of real estate be considered a business?
After the purchase of one or more Greek properties, one may decide to sell them. In Greece, according to the legal framework of Article 21 of the Income Tax Code applicable, the execution of three transactions -that is the sale of three properties over a period of two years- raises questions regarding the nature of business activities in Greece. Usually the customers have the following two concerns:
The first concern is how we define a transaction. Can the transfer of three condominiums in the same apartment building and by the same notarial deed call for the application of this provision? Or do three different notarial deeds have to be formally signed at different time periods and over a two-year frame?
The second question concerns the two-year period and in particular the cases where the investor has already transferred two properties, for example, one in April 2020 and the other in May of the same year. When can they transfer the property they are about to purchase? Next June, after two calendar years from the transfers already made, or next January 2023, when the two fiscal years after the execution of the transactions terminate?
In regard to the first question, so far court judgments have been based on the particular facts of each case, without any established case law and in regard to the second question, i.e. the calendar year or the fiscal year (biennium), is currently under consideration at the Tax Dispute Resolution Directorate level. Therefore, we usually propose the safest option to the investors and advise them to be careful when selling their property, either with one or more notarial deeds, for a period of more than two fiscal years and not calendar years.
Of course, one should not fail but notice that real estate that has been owned by the investor for more than five years, as well as hereditary or charitable assets acquired by relatives up to the second-degree, are not taken into account for the purpose of determining the conduct of business activities in accordance with Article 21 of the Income Tax Code.
Permanent residence in Greece for real estate business
Another issue that worries us is the investor’s relationship with the country. That being said, whether we like it or not, the purchase of the property can create a connection between that person and the country – in this case Greece.
What happens if the buyers do not wish for this connection?
In this case, they can either use the property as a second residence or rent it out, but they cannot provide other services at the same time with this lease agreement, such as catering or even cleaning services, as questions of conducting business activities may arise. If the investor wants to be associated with Greece, we know that since the fiscal year of 2021 a new regulation has come into force in favor of foreign taxpayers who wish to establish tax residence in Greece through investments.
This is indeed the provision of Article 5A of the Income Tax Code, which was introduced in order to attract foreign investors by providing them with a favorable tax regime.
To be more specific, this is among other things -a capital investment when buying properties in Greece, provided that this purchase of property or properties exceeds the value of 500,000 euros. This investment is expected to be completed in three years. In other words, this investment is not required to be completed at the time of the establishment of tax residency. A prerequisite for the application of this regulation is that the taxpayer has the ability to pay an annual tax of 100,000 euros and the benefit of this tax payment is their exemption from further foreign income taxation.
Word of caution: Here we are only talking about a foreign income after the establishment of tax residency in Greece, because Greek income is taxed normally, as with all Greek taxpayers. This payment of 100,000 Euros, therefore, signifies that the tax liability for foreign income has been settled without the possibility of offsetting any foreign tax already withheld on this income, but also without having to disclose the amount of the source of income when filing an annual tax return.
Investors falling under this category are not required to disclose foreign sources of income, although they usually are Greek tax residents. In addition, they enjoy an exemption from inheritance or gift tax from abroad and are required to keep the property for the entire period of their inclusion in this privileged tax regime, which can be up to a maximum of 15 years.
To sum up, investors must meet certain conditions in order to be subjected to the regime of Article 5A and to the tax credit framework:
The investor should have been a foreign tax resident in the last seven years, i.e.,
- They must not have a tax ID number in Greece
or - During these years they must have been registered at the tax office as a foreign resident
or - If none of the two above-mentioned criteria are met in order to be able to prove with certificates their actual tax residence in another country during that time frame:
– They must proceed with an investment of at least 500,000 euros in total.
– The investment must be completed within a period of three (3) years.
– They must apply for inclusion in the preferential tax regime for the year that interests them until 31/3.
-They must be willing to pay a one-off payment of 100,000 euros per year and 20,000 Euros for each family member who wants to live with them under this favorable arrangement.
It is evident that a foreign investor’s relationship with a property in Greece may or may not establish tax residence or investment in Greece. So when making this decision, it should be clear how you connect with the property-either directly with the property itself or indirectly through the company that owns the property.
If you would like to receive further information regarding the real estate investment in Greece and want to get to know us better, we would be happy to meet you in person and offer you a cup of coffee in our office!
We are happy to support you in your investments!
*Contact us for any further information or clarification.
