Discover the essentials of real estate investment and taxation for expats

  • couple visitant une maison
Published on 2024-01-09 at 10:00 by Asaël Häzaq
Feeling confident about the robust market, you've chosen to venture into property investment overseas. Despite the ongoing crisis, real estate investment remains a secure choice. However, it's crucial to navigate the tax regulations diligently as an expat. How can you ensure compliance with these rules?

Watch out for "offshore real estate"

We're all familiar with offshore companies—businesses registered in tax-advantaged countries aiming to optimize income. It's essential to distinguish between tax optimization and tax evasion. Tax optimization involves reducing the tax burden legally to enhance efficiency and competitiveness. This strategy is widely used by both companies and private individuals. Tax optimization is a mechanism created by the state to decrease taxes. In contrast, tax evasion is illegal, involving deliberate illegal actions to pay fewer taxes, launder money, conceal fraudulent business practices, etc.

Offshore real estate mirrors the practices of offshore companies. The issue is that, over the years, there has been an increase in illegal activities. In a report published on October 23, the European Tax Observatory warns that offshore real estate's objective is no longer tax optimization but tax evasion.

Property overseas must be declared

Are you considering purchasing property overseas to evade taxes? Some contemplate this, but the law is crystal clear. Any acquired property must be reported to tax authorities in the home country or abroad. Specific taxes, like income tax, may apply, particularly if the owner earns rental income.

States can share tax information.

The European Tax Observatory points out that real estate is excluded from "the automatic exchange of banking information adopted in 2017 by around a hundred countries." However, things are changing. In June 2023, Morocco was planning to introduce a bill on the automatic exchange of financial data with OECD nations. Nevertheless, it will take time for the project to materialize, with the government postponing data exchange with the OECD until 2025, as reported by the Moroccan media.

While some countries have been exchanging information for years, others joined the movement in 2014 when the United States introduced the Foreign Account Tax Compliance Act (FATCA). This act facilitates the automatic exchange of financial data. The global response to tax fraud strengthened following the 2012 Panama Papers scandal. According to the European Tax Observatory, automatic data exchange contributed to a threefold reduction in tax evasion within less than a decade.

In recent years, the European Union (EU) has been actively pursuing tax evaders (abolishing banking secrecy, creating a tax haven blacklist, etc.). In 2013, it decided to end banking secrecy for all member states, a decision also applied in Switzerland. Thus, it's advisable to adhere to regulations and declare any foreign property purchases.

Understand the law of your country

The misconception that buying property in a tax haven allows tax evasion persists. It is assumed that foreign investments are not taxable. Nevertheless, tax residents are legally obligated to pay income tax on both domestic and foreign earnings. Therefore, it's prudent to understand the laws of your home country before embarking on any investment projects.

Researching the laws of the country where you plan to invest is equally crucial. Has it signed a tax treaty with your home country? Are there restrictions on foreign property purchases? It's essential to gather this information.

Seek the expertise of professionals

The health crisis has led to a surge in seemingly attractive offers online, promising substantial profits from overseas property. While some reputable agencies have embraced online business, others engage in more dubious practices.

Investing in property close to home or in a familiar area you can easily visit is strongly recommended. A physical visit often provides better insights than a virtual tour. Where is your property located? Is it close to the beach? Is the construction feasible? You can better estimate the property's value through a personal visit. Exercise extra caution if a physical visit is impossible.

Another advice is to seek guidance from professionals in both the investment country and your home country. The laws are intricate, and consulting property and legal professionals ensures compliance with regulations in both the investment country and your home country. However, it's wise to avoid investing in a country where the language is entirely unfamiliar. While professionals provide guidance, buyers should also conduct their research. For those who prefer delegating property management, turning to a rental management company is a viable option.