An increase in the military tax will not reduce the investment attractiveness of real estate and will not increase the shadowing of the market, according to lawyers interviewed by Interfax-Ukraine.
“In my opinion, the increase in the military tax will not greatly affect the investment attractiveness of really good real estate. In addition, in most cases, at the investment stage, real estate is sold through investment funds, and the military duty is not paid at the initial purchase,” Ivan Marynyuk, Head of Tax Practice at Ilyashev & Partners Law Firm, told the agency.
He clarified that the obligation to pay the military duty in real estate sales transactions arises depending on the existence of an object of taxation by personal income tax (PIT). Certain transactions with residential real estate and land are exempt from personal income tax under certain conditions, so the military fee will not be paid.
At the same time, transactions on the sale of non-residential real estate are always subject to personal income tax and military duty, regardless of the period of ownership and the number of sales during the calendar year.
At the same time, commenting on possible ways to optimize taxes in real estate transactions, Mr. Maryniuk noted that the most common option is to understate the actual sale price of the property and make payments outside the contract, alternate residential real estate sales (if two or more properties are planned to be sold during the year) or gift transactions.
In his opinion, the increase in the military duty rate will not have a major impact on the real estate market and will not significantly contribute to the development of shadow transactions.
“Now real estate transactions are more regulated by the state for taxation purposes, there are certain minimum values that cannot be lowered. Transactions will be carried out in the same manner as before the military duty increase,” he said.
For his part, Sayenko Kharenko’s counsel Timur Enkhbayar said that the market cannot ignore the more than threefold increase in the military duty, but this does not apply to the entire real estate market.
“Large players with well-structured businesses from a corporate and tax perspective are unlikely to experience significant fluctuations. Roughly speaking, the sale price of residential and commercial real estate from developers or transaction prices in the corporate segment should not react to these changes,” he said.
At the same time, Enkhbayar noted that in certain niches, in particular when individuals sell investment property, it will indeed become a significant factor and lead to an increase in price in direct proportion to the increase in the military tax, but such an increase can be directly accounted for in the price.
“The seller can simply pass the costs on to the buyer without specifying their amount, and the actual price of the property will not change in such circumstances,” he explained.
The lawyer predicts that after the increase in the military duty, it is obvious that “at the household level, the most attractive objects on the secondary market will be those that have been owned for more than three years or are inherited.”
“In this case, the military fee, as well as personal income tax, is not paid at all. Also, military personnel are exempt from paying it, so their properties can also gain a certain advantage in the market in the eyes of potential buyers,” he said.
At the same time, commenting on possible ways to optimize taxation, Enkhbayar emphasized that the real estate industry has long had mechanisms that allow it to structure its operations in a completely legal manner from a corporate and tax perspective.
“For example, when contributing real estate to the authorized capital of an LLC, an investor may in the future sell a share in the authorized capital of such a company at the value of the contributed real estate, which will be a tax-neutral transaction. Of course, this is a somewhat complicated model for the sale of a single apartment by an individual. However, the law allows ordinary individuals to sell real estate and inherited real estate once every three years without tax. This is a fairly reasonable limit. Everything else is more related to activities that are somewhat speculative,” he said.
At the same time, the lawyer noted that in fact the effect of the increase in the military tax can be quite positive.
“An investor who deals with real estate purchase and sale transactions on a regular basis for profit has the right to confirm his or her expenses for the acquisition of the property, and then the tax will be paid only on the difference. In this case, the additional burden of the increased military tax in real money may be the equivalent of several hundred dollars. In turn, this may push investors who traditionally preferred optimization with lower purchase prices to come out of the shadows and conduct their transactions completely “in the white” to pay less taxes,” Enkhbayar summarized.
As reported, on October 10, the Verkhovna Rada adopted as a whole the draft law No. 11416-d on amendments to the Tax Code regarding the peculiarities of taxation during the martial law period. The document envisages an increase in the military tax from 1.5% to 5%, the bank profit tax to 50% in 2024, and an increase in a number of other taxes and fees starting from October 1 this year.
