Singapore and Hong Kong are most expensive for foreign property investors

Singapore and Hong Kong are the most costly places for a foreigner to invest in real estate as they are subject to more property taxes, new research has found.

They are more expensive as they are locations where the disparity between the tax burden on foreign and local investors reflects a ‘foreigner premium’, according to an analysis from international real estate firm Knight Frank.

Cooling measures in Hong Kong amount to a 15% Buyer’s Stamp Duty and in Singapore there is also a 15% Additional Buyer’s Stamp Duty and a higher tax for foreign investors.

Australia, Malaysia and Thailand also work out more expensive due to taxes which effectively amount to higher real estate tax levels for foreign buyers.

In Australia, Thailand and Singapore foreign buyers acquiring a property for investment are subject to more taxes than if they were buying for their own use.

On the other hand, Cambodia, Japan, Malaysia and South Korea do not impose such premium on both foreign and local investors.

In the analysis, the Special Stamp Duty and Seller’s Stamp Duty in Hong Kong and Singapore respectively are found to be the most potent policies to deter property flipping.

The report explains that following the global financial crisis and its significant impact on fiscal revenues for countries around the world, the global tax landscape has been rapidly changing.

‘Not only has there been more aggressive clamping down on loopholes and a pressure to improve tax governance, we are seeing more cooperation between countries on an international scale,’ it explains.

The tax burden ranges between 12.6% and 15.5% in Australia mainly because stamp duty varies among states. In Cambodia, if the investor opts for a ‘hard title’ registered with the national Land Office, as opposed to a ‘soft title’ issued by local authority, he will incur the 4% transfer tax which accounts for the huge cost difference.

Some markets effectively charge an investment premium, according to the report. For example, a foreigner buying a property in Australia for investment is subject to 7.4% more taxes than if he purchases it for self use, excluding income tax on rents which is not applicable to an owner occupier.

For a local buying a second property for investment purposes, the premium varies considerably depending on the reference point. If the second home is for self use instead, he pays only slightly less in tax. The huge difference in premium implies that Australia taxes more on the purchase of a second property per se than on the purpose of the purchase.

Similarly, the cooling measures in Hong Kong and Singapore target the number of properties owned but do not distinguish between investment and self use homes. In contrast, Thailand taxes on investment properties, regardless of the number of houses possessed.

Even though Australia and Cambodia do not tax according to holding period, average annual tax burden is lower for long term ownership mainly because one off costs, namely stamp duty and capital gains tax, etc, are spread over more years.

The difference in average tax burden is more pronounced in places where such costs constitute a larger proportion of the total. While capital gains tax does vary with holding period in Japan and South Korea, both two year and five year scenarios fall in the same tax bracket and the difference in tax burden is due to the same reason.
 
On the other hand, in Malaysia, due to a more graduated capital gains tax regime for locals, different rates apply to locals in the two scenarios. In Hong Kong and Singapore, divesting a property two years after purchase incurs Special Stamp Duty and a higher Seller’s Stamp Duty respectively, both designed to deter speculation. Similarly, Thailand levies business tax and municipal tax on property flippers.

The report also points out that many countries tax on worldwide income. Hence, on top of the income and capital gains taxes paid overseas, investors may still face taxes at home on income earned abroad, depending on the provisions of the tax treaty on double taxation avoidance agreed between the relevant countries.

In the Asia-Pacific region helping balance the books has not been the only motivation for the introduction of new taxes when it comes to property. The report points out that taxes have been introduced to cool residential markets.

‘The strong price growth in a number of these markets has led to numerous rounds of interventions by policy makers as they look to address the issues of affordability and household debt, with tax being one of the key tools at their disposal,’ said Oliver Holt, head of Asia Pacific research at Knight Frank.
 
‘Some of these taxes have had a significant influence on the ways markets respond and perform. The imposition of a 15% additional stamp duty for foreign buyers in Hong Kong and Singapore, along with seller’s stamp duties, is the most obvious example of how fiscal measures, together with other macro-prudential measures, have engineered a market slowdown,’ he explained.

In terms of tax burdens on foreign investors, the analysis indicates that the more mature and open markets of Hong Kong and Singapore have some of the highest tax burdens, while Cambodia, South Korea, Thailand and Malaysia have more benign tax regimes.

Looking ahead the report predicts future fiscal policy changes in China and elsewhere, a market slowdown could see policy makers tweak some of the taxes brought in over the last few years.

‘Ultimately, navigating your way around the various tax considerations should be the job of professional tax experts who can best provide advice according to your circumstances,’ Holt concluded.