Foreigner premium’ property taxes highest in Singapore and Hong Kong

Overseas property buyers have to pay significantly more tax than domestic buyers in Singapore and Hong Kong, making them the most costly places for foreigners to invest in residential real estate in Asia Pacific, says Knight Frank

Singapore and Hong Kong are the most costly places for a foreigner to invest in Asia Pacific with significant differences in the taxes charged to local and foreign investors, says a new report.

There is a large “foreigner premium” for overseas investors buying a second property for investment purpose, according to Knight Frank’s newly-published Asia Pacific Residential Review.

“Not only are they more expensive than the other markets, foreign investors have to shoulder a significantly heavier tax burden than their local counterparts,” says Research Analyst Tan Ying Kang.

Taxes include the cooling measure in Hong Kong (15% Buyer’s Stamp Duty), and a combination of both in Singapore (15% Additional Buyer’s Stamp Duty) and Malaysia (higher Real Property Gains Tax) plus higher income tax imposed on foreigners in Australia. Japan is the only country that bills locals more, as its local inhabitant tax is only levied on residents.

“Some markets effectively charge an ‘investment premium’. A foreigner buying a property in Australia for investment is subject to 7.4% more taxes than if he purchases it for self-use, excluding income tax on rents which is not applicable to an owner-occupier.

“For a local buying a second property for investment purposes, the premium varies considerably depending on the reference point. If the second home is for self-use instead, he pays only slightly less in tax [green columns in main image]. However, when compared to the taxes on his first self-use home, the investment premium is substantial [blue columns in main image].

“The huge difference in premium implies that Australia taxes more on the purchase of a second property per se than on the purpose of the purchase.

“Similarly, the cooling measures in Hong Kong and Singapore target the number of properties owned but do not distinguish between investment and self-use homes.

“In contrast, Thailand taxes on investment properties, regardless of the number of houses possessed.”

When taking into account the effect on long-term investment, even though Australia and Cambodia do not tax according to holding period, average annual tax burden is lower for long-term ownership mainly because one-off costs, including stamp duty and capital gains tax, are spread over more years.

The difference in average tax burden is more pronounced in places where such costs constitute a larger proportion of the total. While capital gains tax does vary with holding period in Japan and South Korea, both two-year and five-year scenarios fall in the same tax bracket and the difference in tax burden is due to the same reason above.

On the other hand, in Malaysia, due to a more graduated capital gains tax regime for locals, different rates apply to locals in the two scenarios.

In Hong Kong and Singapore, divesting a property two years after purchase incurs Special Stamp Duty and a higher Seller’s Stamp Duty respectively, both designed to deter speculation. Similarly, Thailand levies business tax and municipal tax on property “flippers”.

That said, many countries tax on worldwide income. Hence, on top of the income and capital gains taxes paid overseas, investors may still face taxes at home on income earned abroad, depending on the provisions of the tax treaty on double taxation avoidance agreed between the relevant countries, adds Tan Ying Kang.

Nicolas Holt, Asia Pacific Head of Research says that following the global financial crisis and its significant impact on fiscal revenues for countries around the world, the global tax landscape has been rapidly changing.

“Not only has there been more aggressive clamping down on loopholes and a pressure to improve tax governance, we are seeing more cooperation between countries on an international scale.”

In Asia-Pacific, the fiscal stimulus that many countries took to counteract the global financial crisis, while helping the region lead the global recovery, has led – with a few exceptions – to deteriorating fiscal positions.

Property taxes have been introduced to cool residential markets and bring in revenue. “The strong price growth in a number of these markets has led to numerous rounds of interventions by policy makers as they look to address the issues of affordability and household debt, with tax being one of the key tools at their disposal.

“The imposition of a 15% additional stamp duty for foreign buyers in Hong Kong and Singapore, along with seller’s stamp duties, is the most obvious example of how fiscal measures, together with other macroprudential measures, have engineered a market slowdown.

“In terms of tax burdens on foreign investors, our analysis indicates that the more mature and open markets of Hong Kong and Singapore have some of the highest tax burdens, while Cambodia, South Korea, Thailand and Malaysia have more benign tax regimes.”

Knight Frank does not rule out the possibility of the authorities introducing new monetary and fiscal measures to try to stimulate the market or changing some of the taxes brought in over the last few years.