Real Estate Fraud Series – No 2: Cyprus IPT Scam

Posted by Jaimie Kanwar on Thursday, April 17, 2008

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.

Immovable Property Tax Scam

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

Fraud 'in the name of the Government'?

Leading Cypriot newspaper the Cyprus Mail recently reported how the Cyprus Property Action Group (CPAG) had obtained a legal opinion which concluded that developers had been 'effectively scamming buyers by overcharging them for Immovable Property Tax (IPT) and pocketing the difference'.

The CPAG said that property developers were 'charging owners hundreds of euros per year for IPT, when they themselves were paying as little as €25 per owner to the Inland Revenue'.

The legal opinion obtained by the CPAG states that the purchaser:

• “May ask the developer to provide him with evidence on the IPT he paid for the property”, and:
  
  
• “May refuse to pay more than what he will be entitled to recover from the Inland Revenue, without committing breach of his agreement”.

Denis O'Hare of the CPAG slammed the 'massive fraud' that was being “carried out in the name of the Government”, adding that the whole issue was 'confusing for foreign buyers'

He added: “According to feedback from CPAG clients, most developers are charging 4 per cent per £1,000 on the value of the property.  In the case where the developer waits until the title-deed handover, they often threaten to withhold until the buyer pays the lump sum for IPT.

”One buyer has already challenged a requested IPT charge of €2,500 from a developer, who then “offered to reduce it” to €850. The buyer still refused without seeing proof that this was how much he had to pay.

”Based on the legal opinion we have obtained, the CPAG has now sent out updates to buyers telling them not to pay anyone until they are given proof of how much is being given to the Inland Revenue, or proof of how the charge was calculated”

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."

Cyprus property consultant Nigel Howarth Cyprus Property Perspective also highlighted this scam on his website recently, and observed:  “In one case in which I was recently involved, these 'unpaid' taxes amounted to 50 per cent of the property's purchase price.

"Imagine buying a property for €350,000 and then, some years later, receiving a demand from the developer for a further €175,000 for 'Immovable Property Tax'!”

Due diligence essential

Dan Johnson, 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”.

Cyprus Property Perspective offered the following advice for buyers wishing to reclaim their IPT:

• Once buyers receive their Title Deed they may apply to the Inland Revenue, using Form IR 314, to reclaim any overpayment of Immovable Property Tax paid by the developer on their behalf.
  
  
• Buyers should take the completed Form IR 314, together with the invoices and receipts issued by the developer, to their local Inland Revenue Office.

Buyers should also note that:

• Tax refunds resulting from overpayments can only be claimed for the previous six years
  .

• The 1980 value of their property (the value on which Immovable Property Tax is calculated) will be assessed by the 'Valuations Desk' at the Land Registry at the time their Title Deeds are issued

Tips for avoiding the scam

TheMoveChannel.com recommends that buyers should not pay a developer any Immovable Property Tax unless the following has been provided by the developer:

• Written evidence of the amount of IPT paid to the Inland Revenue for the land on which your development has been constructed.
   
• A written statement identifying your share of that land.
  
  
• A written invoice on the company's letterhead for the amount to be paid.
  
  
• A written company receipt for the total amount paid.

Next week: Illegal property flipping

For further information about how to safely buy property in Cyprus, please read TheMoveChannel's comprehensive Cyprus property buying guide, which can be accessed for free here: http://cyprus.themovechannel.com/guides/

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