TAX ON HOUSING

In the current year Azerbaijan's Ministry of Taxes has considerably expanded its taxation base with regard to certain forms of payments into the state budget by applying a number of articles in the Tax Code. The main changes affect municipal taxes on property and land, as well as real estate buying and selling transactions. In particular, this applies to the new rules which came into force in January this year relating to the municipal taxation on the property of physical persons and land tax. These taxes vary according to the size of the property of physical persons, and real estate with a total area of more than 30 sq m will be subject to taxation.

Concessions do exist

A few days ago the Ministry of Taxes explained the introduction of the practice of subjecting the real estate sales transactions to taxation. "Last year the Ministry of Taxes formed a real estate purchases' and sales' data base," Azerbaijan's Minister of Taxes Fazil Mammadov stated. In compliance with the instruction of the head of state, solicitors' offices are to provide the finance department with fully comprehensive information." 

Drawing on this information, in 2015 the Ministry of Taxes is to introduce an effective mechanism for applying taxation to real estate transactions. Thus, the income received from the sale of real estate is to be subject to taxation, i.e. the difference between the purchase and sale price, as fixed in the prescribed conditions, under which it is possible to avoid similar fiscal payments: the owners of housing are exempt from paying income tax, if they have been living there permanently for more than three years.

At the same time, this advantage does not apply to the owners of several housing premises, and they will have to pay income tax when selling property. The sum of tax paid on the sale of real estate is subject to regulation according to the relevant clauses in the Tax Code. In particular, if the difference between the previous price and the new price when selling the real estate is no more than 30,000 manats, then the income tax paid is 14 per cent. But if the amount exceeds this figure, then the owner of the property will have to pay an amount of 14 per cent (4,200 manats), as well as 25 per cent of the amount that exceeds 30,000 manats.

If the real estate is sold for more than 120,000 manats, then a payment of 18-per-cent VAT will be required. In this case, no concessions will be made, such as the owner of the accommodation living there permanently for three years.

The sale by juridical and physical persons of uninhabited premises regarded as business premises will also be subject to income tax and VAT. Recent amendments to the law "On the management of municipal lands" mean that a five-year moratorium has been introduced on the sale of plots of land from the moment of their sale at auctions and bidding sales held by the municipalities.

Moreover fiscal practice envisages a series of possibilities for reducing taxation on real estate buying and selling transactions. If a plot of land and the house built on it are sold in compliance with a purchase and sale contract, then the income tax is calculated on the total value. The taxable sum can be reduced if the house and land are sold with separate purchase and sale documents, which allows lower-rate tax to be paid and exemption from payment of VAT.

When a "ready to finish" new-build flat is sold, the owner must present a document confirming the expenditure on the refurbishment, so that these costs can be deducted from the taxable sum. This circumstance means moreover that flat owners will be forced to conclude legally drawn-up contracts with the contracting company or physical person carrying out the refurbishment. In an indirect way, this will help to improve tax discipline and make the turnover of money in the refurbishment and construction sphere more transparent.        

Thus, in spite of the changes in taxation practice in Azerbaijan, the existence of a three-year concession stipulation will mean that a considerable part of the population who are owners of a single, low-cost housing units will be exempt from payment of taxes. Thus, the new taxes will mainly affect the category of entrepreneurs specialising in the building of low-rise housing for sale, as well as estate agents acquiring new-build housing for subsequent refurbishment and resale at a higher price.

Are house prices rising?

What effect will the new taxation rules relating to real estate transactions have on market dynamics, and, what is most important, on housing prices? According to the statistics of the last two to three years, in Azerbaijan, primarily in Baku, a steady tendency of increasing demand has prevailed, and rising house prices have been evident. Thus, according to Central Bank data, the turnover on the real estate market has consistently grown from a rate of 25 per cent in 2012 and 41 per cent in 2013.

Last year, 2014, the flurry on the market diminished somewhat and the turnover on the real estate market (according to the turnover at the solicitors' offices) exceeded 4.746bn manats, which was an increase of 19 per cent.

 The favourable state of the market over the last few years has undoubtedly played quite a big part in this: the comparatively high oil prices and the increase in incomes from its export promoted a growth in investments in the real estate sector. The demand that had been held back in the post-crisis period made itself felt, activated by that category of the population with a steady middle income. A no less important reason for the rising prices of flats is linked with the wide-scale demolition of the dilapidated housing stock in the centre of Baku, which has acted as a catalyst to demand for low-cost housing, including on the primary real-estate market.

For this reason the rise in the price of second hand homes in 2013 was 20 per cent on average and of those newly-built ones it reached as much as 28 per cent. This trend continued, but slackened off slightly in 2014, the rise in prices of flats in Baku going up by 13 per cent.

The unjustifiably high prices of flats in the capital slightly diminished the rate on the market in the second half of last year, but that trend was only fortified by the increasingly acute global crisis. "The flurry of demand for low-cost housing caused by the demolition of the low-rise housing stock has already passed. Since that period, activity has diminished by almost 30 per cent and now no more than 12 of the 100 flats on offer are sold every month on average. Moreover, the noticeable drop in oil prices has also fuelled a drop in demand and, as a consequence, a decrease in the prices on the capital's real estate market," the MBA Group consulting company's CEO Nusrat Ibrahimov outlined the situation.

How is the further trend in the development of the housing market likely to take shape, especially in the light of the recent tax changes? In the Azerbaijani media they are discussing the probability of the negative impact of the new taxes on real estate transactions. It is thought that the additional financial "burden" will provoke a rise in prices on the market, since those selling property will try to pass on part of the tax burden to the buyer. There will possibly be a certain decrease in activity on the real estate market this year owing to the new taxation rules, the MBA Group CEO, N. Ibrahimov, is convinced. In order to avoid taxation some of the premises will be withdrawn from sale for a certain period," he said. The expert asserts that the lowest activity in 15 years will be observed on the real estate market this year.

Will all these processes have an impact on housing prices? Here the opinions of the community of experts differ. A number of experts believe that in conditions of falling supply there may be a slight, short-term rise in property prices. In the view of others, in the present economic situation, both in the world and inside the country, there are no objective prerequisites for a rise in prices. In a period of crisis, as was confirmed by the experience of 2008, prices on the real estate market fell. Moreover, the current demand, coupled with the declining ability to pay, is balanced out by the abundance of properties on offer in the new-build sector. Finally, in conditions of extremely low inflation, while the manat conversion rate remains stable, those active on the market have no need to index property prices, and that will also ensure stability in price formation in the housing sector.