Newly published Directive 09/2021 sets out the Tax Department’s process of determination of whether foreclosed property proceeds are taxed as Income or Capital Gains. Though undeniably enhancing transparency, whether it will reduce delays from non-submission of income statements by property owners is uncertain.
The disposal of mortgaged property under articles 44A to 44 IAA of the Law 9/1965 on ‘Transfer and Mortgaging of Property’ may not prima facie be characterised as commercial or concerning capital. This is because it is not conducted in the ordinary course of business of trading and land development, but rather under foreclosure procedures contemplated under Law 9/1965. Nonetheless, the majority of foreclosures concerning property stem from commercial stock of persons who engage in real estate and development sector. Circular 9/2016 of 19 July 2016 deals with foreclosure, but practical difficulties persist, the highest being the non-submission of income statements or other satisfactory information from property owners. These would facilitate the correct taxation of the foreclosure proceeds, as the whole process is initiated by the mortgage lender, who bears no obligation to submit income statements of the mortgaged property owner, and/or often lacks other relevant information. The overall result is a delay in the process, which in turn increases the number of pending cases.
Tax Department Directive 09/2021 (‘the Directive’) sets out the template for the determination of the correct taxation of foreclosed property proceeds. These proceeds may be taxed either under the Law on ‘Taxation of Income’, or the Law on ‘Taxation of Capital Gains’, following the objective review of criteria laid out in case law, and viewed in light of the individual case facts. Under the Directive, Tax Officers are to proceed as follows:
The Directive sets out a detailed framework to determine whether foreclosed property proceeds are to be taxed as Income or Capital Gains. It also establishes written communication of the Tax Department’s handling and decision on both the mortgage lender and property owner, which increases transparency. It does not however offer a panacea against the non-submission of income statements by the property owners, though it does make tax returns conditional on submission. Whether it results in speeding up the process remains to be seen.