Taxation of property on foreclosure: trick or treat?
The Tax Code of the Republic of Armenia (hereinafter: Code) regulates the whole relationship regarding taxation in the territory of Republic of Armenia.
According to the Code Income tax is subject for payment only for resident and non-resident physical persons. Each physical person should pay income tax in cases set by the Code. Income tax is subject to payment in cases of property alienation, too. Article 147 classifies alienation of property from physical person to another person as deductible tax. This means that alienation of own property will not be considered as income and will not be taxed.
The 146 article sets rules in respect of alienation of the pledged property, which states that if the property, which was pledged in the bank by the physical person owner, will be subject of alienation by bank as its own property, the positive balance between the sold price of property and credit liability, which should be returned to prior owner, will be subject to tax for the prior physical person owner.
For example, if a physical person sells his property to another physical person, the income from the alienation would be considered as deductible income and taxes for this transaction will be zero. If the bank sells the pledged property for paying the credit liabilities, the money, which will remain after credit payment should be returned to the prior owner of the property and according to article 147 the returned money would be considered as income for the physical person and it could be subject to tax.
So if the bank alienates property, the received money by physical person is taxable income. In this case the property was pledged and it was alienated for the liabilities of the owner. This means pledgee is not in a good financial position and taking tax from the remaining part of money will be unfair. Moreover, in cases, if the bank sold the property will raise other expenses which would not be profitable for the prior owner too.
The best solution for this issue could be either stating the income from alienation of pledged property as deductible income or giving opportunity to a physical person to alienate the property by himself and pay credit liabilities without paying any tax.
This is not a legal advice. If you need legal advice regarding this or other issues of taxation our lawyers can help you.
Associate - Vahe Poghosyan