The Italian real estate market has suffered a severe setback with the planned introduction of a swingeing tax on buying property

New prime minister Romano Prodi has signed a proposal for a law that would replace VAT on property transactions with a new transfer tax regime. The new legislation is due to be presented to the Italian parliament tomorrow.

Agreement must be reached within 60 days. If approved, the legislation would be introduced retrospectively as from Tuesday this week.

At present, VAT of 20% is levied on 100% of the purchase price. This can be offset against corporate income tax for up to 30% or recovered against VAT credits upon a sale for up to 70%. This effectively means negligible tax is paid. However, under the new proposal, VAT will be replaced by a new transfer tax.

‘Although consistent information is not yet available, we understand that under the proposed transfer tax regime, the sale of an investment property would incur a 10% to 11% transfer tax levy,’ said Boudewijn Schoon, property analyst at Dutch investment bank Kempen & Co.

‘Trading property – held for a period of less than three years – will likely be charged by a lower 1% to 3% transfer tax charge.’

Historic VAT credits are likely to be lost.

‘The biggest uncertainty in our view is maybe not the direct impact on valuation of real estate but the impact on growth opportunities for the Italian real estate companies,’ added Schoon.

‘The introduction of a transfer tax has serious implications for the liquidity of the real estate market, thereby impacting future growth opportunities.’