New property tax proposal ruffles feathers

A new proposal in the government’s recently submitted 2012 tax package to increase both the base and the maximum rate of local real estate taxes has homeowners worried about another egregious tax burden they may have to bear. 

Some homeowners are worried because they fear the government is trying to introduce a wealth tax buried deep in the new tax package. Previous attempts to launch such taxes in Hungary have all failed. Others were simply shocked after trying to calculate their expected maximum tax burden from the local property tax. Who could pay an annual HUF 300,000 on a HUF 10 million flat?

The good news is that the wealth tax will not be reintroduced just yet and homeowners will probably not be saddled with higher local property taxes at this time. But given the creativity of this government in inventing new taxes, nothing should be taken for granted.

The main difference between the previously planned wealth tax and the current local real estate tax is the that the wealth tax is mandatory and is levied by the government, while municipalities have the right to impose a local real estate tax and determine the rates within limits set by the Act on Local Taxes, RSM DTM tax partner Sándor Hegedüs pointed out. 

Municipalities have the right to differentiate among the various segments, Hegedüs said. Most of them have not taxed homeowners if they actually live in the property in question. The main taxpayers have been the owners of industrial properties and offices. Thus, the new legislation could be a negative surprise for them, he added. 

Just a week after submitting the 2012 tax package, the Fidesz parliamentary group decided to propose scrapping the 3% cap on the tax altogether. “No restrictions should be placed on the scale and type of taxes that local governments may collect,” Fidesz’s caucus leader János Lázár said. This is basically passing the problems on to municipalities, after planning to take some of their assets and revenues, Hegedüs said.

Floor space or value?

The current local property tax can be based on floor space or on corrected market value, the tax expert says. The limits are either a maximum HUF 900 per square meter per year, or a maximum of 3% of the corrected market value of the building, as determined by the local government. 

As of January 2011, the tax was increased for both cases, to HUF 1,100/sqm/year and to 3.6% of corrected market value, which is 50% of actual market value. Hegedüs noted that in both cases the HUF/sqm rate could be modified by the consumer price index, consequently in 2011 the maximum rate was 1,580 HUF/sqm. Practically, the current amendment means that the previous 1.8% upper limit would be raised to 3%, Hegedüs noted.

The big question is to levy the tax based on floor space or value? Most municipalities opted for floor space, mainly due to difficulties in appraising properties, Hegedüs said. Because of the uncertainty of the market value, several municipalities taxed only at a fraction of the maximum rate. Only a few local governments apply the corrected market value for determining the base of the property tax, he added.

Leading Fidesz MP Antal Rogán said that there is zero chance of levying local property taxes in ways other than based on floor space. He indicated that the motive behind the planned changes is that “there might be municipalities in outer Budapest or in the countryside that could tax those large suppliers and shopping centers that have huge parking lots a little more.”

Ghosts of the past

At the moment, the government is not likely to try to reintroduce wealth taxes, Hegedüs said, adding that sooner or later, maybe after the next elections, it will have to. However, this would require careful preparations. 

As the government’s plan to boost consumption through cutting taxes has failed, it has been left with a choice of increasing either real estate taxes or wealth taxes, Hegedüs said. Concerning tax revenues, there are several advantages to this, as real estate cannot be moved and the owners can easily be identified and contacted. “Frankly, in many cases, the current owners acquired their properties with hidden income,” Hegedüs added. 

In 2006, the then government introduced a luxury tax for properties with a value of more than HUF 100 million. Property owners had to pay a tax of 0.5% for the part of the home’s value exceeding the HUF 100 million threshold to the local municipality. 

The 2010 tax package amended this by imposing a new tax on high-value property, which included residential and recreational real estate, high-performance cars, watercraft and aircraft. The Constitutional Court, however, repealed provisions on real property in January 2010, while keeping provisions on other types of properties valid. The new government, in turn, scrapped the wealth tax altogether in July 2010.

The Constitutional Court ruled that the provisions on real property create legal uncertainty and are therefore unconstitutional. However, the court found the principle of a property tax as such constitutional. The court said that the market value of real properties as defined by the act is uncertain, and therefore taxpayers will not be able to comply with the requirement to asses the market value of the real properties they own. 

In addition, the Court ruled that the act gives the tax authority broad powers to impose penalties, and thus the responsibility for assessing the market value rests entirely with the taxpayers. The court also said the law did not take into consideration the income of taxpayers subject to the tax, which could put some in an impossible situation.