Disy to file bills exempting borrowers repaying NPLs from tax

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By Stelios Orphanides

Disy chairman Averof Neofytou said that his party will submit to the plenary of the parliament on Friday four bills facilitating the reduction of non-performing loans with tax breaks concerning the sale of property.

The four bills will exempt property owners who sell their assets to third parties in order to repay part of their entire non-performing loans from income tax, capital gains tax, the extraordinary defence levy and stamp duties, Neofytou told reporters on Thursday according to an emailed transcript of his comments.

The new rules would allow the borrower to sell immovable property on the market and ensure that the sale price reflected its market value, he said.

“At the same time, the lender is not burdened with the ownership and management of immovable property resulting from loan restructurings,” the chairman of the ruling party said. “We are helping this way financial institutions to focus on banking and avoid becoming real estate management companies. The main concern of Disy and the government, as well as that of the other political parties, is to give the necessary incentives and tools to help borrowers restructure their loans in a sustainable manner.”

Neofytou, who also chairs parliament’s finance committee, said that a borrower owing the bank €5 million and owning immovable property worth €5m acquired for one fifth of the current market value might have to pay up to €800,000 in capital gains tax if he or she decided to sell the property. In the case of a debt-to-asset swap, the existing legislation would exempt the borrower from capital gains tax.

The Disy chairman added that the borrower could also in certain cases be asked to pay up to 35 per cent income tax from the income generated from the transaction and might therefore be reluctant to sell the property on the market or even accept an offer from the bank to buy it for €4m, which would leave the borrower with a remaining €1m debt.

Neofytou added that Disy discussed its proposals with the government which considers them as “an important additional tool” while “colleagues” of other parties had also raised the issue in discussions.

According to a December 2009 Supreme Court ruling, the parliament has the right to vote on its own proposals to reduce tax rates but does not have the right to do the same with proposals increasing taxation.

Delinquent loans in Cyprus, accounting for around €22 billion, or almost half of total loans, are a threat to financial stability.

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • Philippos

    I don’t know why, but I don’t like contractual defaulters being rewarded with , clearly, quite large sums of money for doing what they promised to do in order to get the loan that they have defaulted on, in the first place. I do wonder whether such people actually pay any tax anyway and i should at least have liked to see a condition that they don’t owe any tax before they get this “Hand Out”, or that any tax outstanding is deducted from this benefit, so that the first call on the “Relief” is the Tax Office, which will hopefully find its way into benefitting the population at large who have been put under sufferance by the existence of such a huge stack of NPL’s, while not having NPL’s or even being able to get a loan themselves.

  • Bystander

    Eimaste stin Kyprooo….

  • Veritas

    In Cyprus its always the same. The honest people doesn’t get any advantages, while the dishonest are rewarded with all kinds of financial incentives.
    – NPL
    – Outstanding tax
    – Outstanding VAT
    – Outstanding road tax
    Etc, etc
    We’re living in a country governed by an elite of thieves and dishonest politicians.

    • Terryw45

      They are elected by the people…….well family.

    • JS Gost

      An outstanding country then, no wonder there is so much pride here; or is it arrogance ?

  • JS Gost

    Is Cyprus in the real world ? There are many words I could use but ‘pathetic’ is the most acceptable. Averof underlines why populism kills countries.

    • Terryw45

      1960, Independence, Cyprus & Singapore, where are they now?

  • BearFace

    This has the look and smell of a nasty hack slung together in response to special pleading by certain parties (the usual suspects). It also introduces a massive perverse incentive to default on loans so as to cause them to be classified as NPLs so that one can benefit from the scheme.

    Net result would appear to be the giving of state aid to lenders by fore-going all taxes on third-party property sales by a defaulting borrower. The borrower escapes all taxes so his debt to the lender is reduced by the gross disposal proceeds and he owes no taxes. Fantastic result for the delinquent borrower and really great for the lender’s balance sheet which can be made to appear healthier much more quickly than if the state had taken its due share of sale proceeds – but not so good for the general tax-payer who has to meet the cost of this give-away.

    The reported fact that debt-to-asset swaps don’t give rise to a CGT liability under existing legislation is not a model that new legislation should copy: it’s a disposal of an asset and should be within scope of CGT. If the borrower is deemed to be a trader in immoveable property for tax purposes then it’s a sale of an item of ‘stock’ and profits should be subject to relevant taxes on trading income rather than CGT. One questions why this existing give-away exists.

    The example given by Neofytou involves a reckless lender having allowed a borrower to leverage borrowings against his property all the way to 100% loan-to-value. Both parties would have been fully aware of the taxes properly payable on a disposal by the borrower so a prudent lender and a prudent borrower should, at each application to increase borowing, have ensured that adequate provision in some form be made for payment of those taxes.

    Seems like a done deal that nobody will challenge in parliament but what safeguards will be included in the legislation to prevent wholesale abuse? For example, what checks will be thoroughly implemented to ensure that third-party transactions are genuinely at arm’s length? What control of funds movements will be exercised to ensure that cash doesn’t flow to where it shouldn’t? Given that Stamp Duty is levied on the purchaser, why is this even being waived by the state and what market distortions might it introduce? I see no mention of VAT so presume that EU regulations prevent the state from waiving that income. Any before/after qualifying dates involved? Any limit to duration of this scheme before it must be reviewed/renewed? Has it been costed? (I reckon I know the answer to that last one).

    Banks certainly don’t want to be forced to become involved in property management and/or property trading so an individual or company selling property should, indeed, be able to sell on the open market so as to achieve the best possible price for the asset – and should have been pressured to do so well before foreclosure and public auction option becomes the only remaining option. Being “reluctant to sell” (as Neofytou put it) because the proceeds (net of taxes) are insufficient to repay the excessive level of debt secured on a property is not a sensible or rational decision while the gross debt grows faster than the net realisable value of the property. It seems, however, that one can rely on eventually getting hold of some sort of ‘get out of gaol free’ card by the taxpayers’ representatives so one needn’t act sensibly or rationally after all!

    I recognise that the proposals allow a lender to reduce its book by the full sales value and that NPLs could reduce faster than might otherwise be the case but are there really no other public policy matters that should be brought into the balance?

  • Douglas

    You have to feel sympathy for the hard working honest families meeting their mortgage payments,reading this they must feel cheated.

    • Neroli

      All honest people here are cheated!

  • EGB

    It is distasteful but if it is passed it should be strictly monitored and for a period of let’s say 12 months maximum. It would not relieve people of their mortgage debt, just allow them to sell assets and give all of this money to the bank without paying the government taxes, the banks get the money, the government loses the taxes, the individual gets nothing. Distasteful but a way of getting the banks back into shape which, like it or not, needs to happen.

  • Bruce

    All tax proposals of Averof including successful abolition of the immovable property tax are geared to enriching and rewarding “the rich and powerful” including developers, hoteliers, prosperous lawyers and accountants and politicians who are the main strategic debt defaulters and tax evaders and have the greatest ability to pay. These proposals of course discriminate against the law-abiding tax-payer and debt-repayer and just further encourage tax evasion and debt defaulting.
    The article states that NPLs of 22 billion euro are “a threat to financial stability”.But if the state cannot collect taxes legally from its residents who have the greatest ability to pay by implicitly encouraging tax evasion its capacity to have the resources to provide high-quality public services including health and education as well as honoring its debt obligations will be substantially diminished.
    With its huge tax evasion and NPLs and appointments and reward of incompetents and cronies in the public and banking sectors Cyprus is displaying the prominent hallmarks of a failing state.

  • clergham

    Is capital gains tax payable on primary residences anyway?

    • BearFace

      Gains on disposal of primary personal residences are subject to the CGT regime but there are various reliefs and allowances available such that the computation of tax payable by each of the joint owners selling a qualifying property may yield a zero result.

      Given the figures used as an example by Neofytou and his mention of disposals possibly being subject to taxes on income (because of being by way of trade), I think we can take it that the ordinary owner/occupier struggling to meet mortgage repayment commitments on the family home and, perhaps, seeking to down-size or move to the rented sector, is not an intended beneficiary of this set of proposals. The cost to the public purse will serve to massage the balance sheets of lenders and provide a windfall benefit for the usual suspects.

      Whether the latter will suddenly decide to service their remaining, restructured loans in future or simply engage in some financial engineering to maximise their benefits from the proposed arrangements while conducting themselves as before remains to be seen. There are no prizes for all those commentators who correctly forecast the outcome.