Taxation of real estate transactions: discriminatory treatment or distributional justice?
The income tax is being paid by resident and non-resident physical persons. Resident and non-resident physical persons should pay income tax from the gross income they have received according to the percentages set by Tax Code of RA (hereinafter “Code”).
The Code stipulates cases when received income should be considered as deductible and taxpayer will not be obliged to pay income tax for some transactions.
The alienation of the property by the physical person (hereinafter “Seller”) to a physical person is considered as deductible income. So in cases if a physical person alienates his/her property to a physical person it would be deducted from the gross income and Seller will not pay taxes for that transaction.
The Code states the opposite for the alienation of the property to legal persons. If the Seller alienates his/her property to a legal person (hereinafter “Buyer”), the received income will be taxed. Buyer as a tax agent should calculate and pay 10% of the property price as income tax on behalf of the Seller.
So if the Seller had purchased the property by 100.000 USD and wants to sell it by 110.000 USD to the Buyer, the taxable amount will be 10% of the 110.000 USD – 11.000 USD. Instead of getting profit from the alienation of property in the amount of 10.000 USD, Seller will be obliged to pay 11.000 USD as income tax for alienation of property. After the payment of income tax, the net value of the property becomes 99.000 USD. This means that Seller suffers damage in the amount of 1.000 USD.
This regulation of Code makes physical and legal persons avoid sale and purchase transactions between each other. Seller can easily sell his/her property to a physical person without paying any taxes.
One solution for this issue is that physical person owner will sell his property to a legal person at a higher price. In this case, the legal persons can suffer damages by paying a higher amount of money for purchasing a property from a physical person. Accordingly, this scenario places legal persons in a discriminatory environment.
Another solution is the deductible income. Code should set the alienation of property to a legal person as deductible income from the gross income of the physical person. This scenario will be much more profitable for both parties and will put them together to make a transaction.
These thoughts do not constitute legal advice. It is merely an analysis of some of the issues raised by particular events.
Associate Vahe Poghosyan