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News: Cyprus IPT scam exposed

Tue, 08 Apr 08

In the second special feature in TheMoveChannel.com’s series highlighting the world's most prevalent real estate scams, we take a look at an Immovable Property Tax scam that is on the rise in Cyprus, an otherwise entirely safe property investment destination...

What is it?

IPT is a tax imposed by the government on property owners annually. The calculation is based on the 1980 total value of a property, so the average home owner does not generally need to pay, as most homes were unlikely to have been worth as much as the threshold €171,000 at that time. Property under that value has a zero IPT rate.

The IPT on property worth more than €171,000 goes up in varying degrees to a maximum of 4.0 per cent, if the property was worth €850,000 or more in 1980.

Large property developers, however, would have had land worth between €171,000 and €850,000 at 1980 prices, which have now been built on and sold to foreigners. The developers are still liable for the IPT because they still hold the title deeds if the total property remains mortgaged.

They then calculate how much they need to pay to Inland Revenue based on the total value of the land, and divide the charge, based on the number of home owners on the property development.

Owners are then charged individually by the developer, who deposits the much-lower IPT charges with Inland Revenue. Effectively, the buyers are being asked to fork out for the IPT, even if their individual homes would have been worth less than €171,000 in 1980

IPT law can be very confusing for overseas investors as there is no corresponding law in other EU countries.

How does it work?  

Unscrupulous developers use their own illegal formula to calculate an inflated amount of IPT, which of course is always hundreds (and sometimes thousands) of pounds more than the buyer is actually liable for.

Another trick used by dishonest developers is waiting until the Title Deeds are issued, and then demanding ‘unpaid’ taxes dating back to the time that the buyer acquired the property. This method often involves extorting money from buyers by threatening to withhold the Title Deeds unless payment is received.

Imposition of IPT can go on for years, depending on how long it takes for the developer finally to hand over individual title deeds. Owners are allowed to claim six years’ worth of IPT back from the Inland Revenue once they have obtained their title deeds, but by the time the developers hand over the deeds, buyers sometimes end up for 10 or 15 years’ worth

Furthermore, they are only entitled to get back the amounts paid to Inland Revenue by the developer, and not what the developer charges them. The difference is huge in most instances.

Due diligence essential

Dan Johnson, Managing Director of TheMoveChannel.com, which receives masses on inquiries about investment properties in Cyprus, revealed his experience of the scam: “I've heard of cases where a developer has used the title on the land as collateral for loan finance, after a sale has gone through, but before the deeds have been handed over. Although the client managed to resolve the situation, had the developer gone bust, the client would have been liable for the debt."

Dan Johnson also urged prospective buyers to ensure they were thorough in every aspect of the purchase process: "It's not usual practice to pay taxes directly to the developer. These should almost always be collected directly by the government body that ultimately receives them, unless you have paid for some sort of tax management service.

"If you start getting tax demands from the developer, this should set the warning bells ringing, and it's probably time to star consulting with your lawyer. Similarly, you should make sure your lawyer checks for unpaid taxes, debts and liens against your property at the time of purchase, otherwise you could be liable. You should also ensure that your lawyer presses for a fast transfer of title deeds, otherwise your position is weak”.

To read the complete article, please visit our property features section: http://www.themovechannel.com/articles/viewpoints/108-27-1.asp

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