Tax on Purchase Price

[kaf]

We are in the process of drawing up the final contract on our property purchase and have been asked by the vendor to agree to lower "official" purchase price to reduce the tax paid by him and us. We are a little uncomfortable with this as we don't understand or appreciate the possible come back at a later date for tax evasion.

Apparently all other sales in the block of apartments ie. 15 others, have been logged at a lower purchase price so the vendor is somewhat fed up that we have initially refused to sign at the lower level as he now feels that everyone else and himself will end up paying more. Is this customary? Whats the score if we are investigated? Does this happen? Is this definitely illegal? Are we reasonably safe to assume that if once the tax has been paid and the "official" price therefore accepted by the authorities that this would be the end of their interest? The amount we would be underpaying is not a huge amount ie 950 euro so we aren't really that bothered! We don't want the risks to outweigh the small financial benefit.

Having read previous posts on this topic it seems that provided the price is not too low and appears realistic then a blind eye is turned to this practice. Are we getting worried about something that is usual and relatively risk free?

[Peter Ellis]

The practice is certainly illegal. The reality, though, is that the builder will be paying his VAT(PDV) and absorbing it in the price, on the reduced price, provided it is not totally unrealistic.
Many builders find that if they don't do it, their costs are increased and their properties become uncompetitive.
No doubt, the authorities will gradually eliminate the practice, but with pressure on to reduce state jobs, there are not enough people to investigate.
From an investor's viewpoint, the builder is deferring the capital gain for them. A buyer will be getting a contract that shows that the property is at a certain price and if the investor sells it, there could be an enhanced capital gains tax liability on the difference between the recorded buying price and the recorded selling price. If they intend holding on to the property for at least three years, capital gains tax is waived in Croatia, although, as there is a double taxation treaty with the UK, I think you could still have a UK CGT liability if you tell them.
The essence of a double taxation treaty, as I understand it, and I'm no tax expert, is that no-one should have to pay the same tax twice; if you pay it in one country, you don't have to pay it in the other. The corollary would seem to be that if you haven't paid it in one country, because of a waiver in that country, you could be liable for it in the other.

In your case, you could have a liability on 34% of the extra Eur950, so potentially a bill, if you were very unlucky, of Eur323 over and above any otherwise capital gain, if you sold in less than three years.

If the building is unfinished, your lawyer could do a seperate building contract for the extra Eur950, specifying work in it up to that value. The purchase value for CGT purposes would be taken as the two amounts together and you would thus avoid the extra CGT liability.

In general, it is very difficult to state absolutely what the correct price of a property should have been many months before, in a market that is rising. Any official even thinking of investigating would have a hard time arguing comparables a year after the event. and would probably opt for an easier life.

[Peter Ellis]

Incidentally, if the property is being sold by a company and they are PDV(VAT) registered, your 5% property transfer tax will be levied solely on your share of the assessed value of the land, not the building as a whole. It follows that a reduced contract value will make no difference to the property transfer tax that you will pay.

[JC]

We have had two cases where the tax commision did not accept the contract price - they thought it was too low eventhough it was the real price we paid. Three guys showed up to inspect the properties and declared the market value as X. We eventually convinced them but without 'clean hands' we would have been at their mercy. They do focus on certain agents that have a reputation for that sort of thing.

My advice would be don't do it. Even leaving ethics aside, as a foreigner in Croatia you are much less likely to get away with anything and any such 'dodge' can come back to haunt you in many ways. Do you realise for example that both the buyer and the seller is liable for the PDV on new builds? If he has underpaid pdv, you may end up with the bill at some point down the line...

It is interesting that by refusing you could be getting the others into trouble. Peer pressure! The secondary contract sounds like a good idea.

[kaf]

Thanks for your comments, your input is greatly appreciated, still don't what to do though!