Explained: Circular Issued to Courts to Clearly Define the Nature of Sold Properties

On October 31, the Ministry of Justice issued Circular No. 17 instructing all judges in relevant courts to specify in their judicial rulings the nature of sold properties and determine whether the real estate right is a property ownership or a “furoogh” for a shop, or if it is a non-commercial lease.

Permanent furoogh leasing contracts are indefinite term contracts, signed before the enactment of the Lease Law No. 10 of 2006, and are subject to mandatory extension, meaning the lease contract is extended regardless of the landlord’s desire.

Furthermore, the circular stressed that the Judicial Inspection Administration and the Public Prosecutors in the provinces should monitor the implementation of the circular and inform the ministry of any violations.

Circular No. 17 was issued in response to previous letters from the Prime Ministry and the Central Organisation for Financial Control. These letters pointed out an error in calculating the real estate sales tax in the financial departments of the various local administrations, which was inconsistent with the Real Estate Sales Law No. 15 of 2021. The error was attributed to the lack of clarity in the nature of the property sold in the court referral: whether it was ownership, furoogh, or both. Due to this ambiguity, financial departments required beneficiaries of judicial rulings to obtain interpretive rulings on the nature of the sold properties, leading to errors in tax calculation.

The Real Estate Sales Law No. 15 of 2021 and its executive instructions issued by Decision No. 850 differentiate between types of property ownership for tax purposes. The law sets different tax rates, the lowest being one percent of the current property value, for land located outside the zoned plans or residential properties within zoned plans. Those residential properties include licensed buildings in zoned areas, whether fully constructed, skeletal, planned, or shared ownership.

If the property is land within the zoning plan, the tax rate is two percent of the property’s current value.

The real estate sales tax rate is three per cent of the current property value for non-residential properties, including both utilised and unutilised commercial properties, whether fully built or still skeletal.

For residential or commercial properties where the right of furoogh (a type of property right) has not been relinquished, the real estate sales tax rate is 40 percent of the current value. If the right of usufruct is also sold, the tax on these sales is 60 percent of the current value.

In the case of commercially leased properties where the tenant has acquired a furoogh right while the owner retains the ownership right, there are two scenarios: first, if the tenant sells the furoogh right to another party, the tax rate is 90 percent of the current value; second, if the owner sells the ownership right to the tenant, the tax rate is 10 percent of the current value.

Law No. 15 prohibits civil courts from issuing rulings on the transfer and confirmation of property ownership or furoogh rights before the litigating parties present a document from the financial departments proving the real estate sales tax payment within a three-month deadline. If the deadline expires without presenting the document, the court will dismiss the case procedurally. The litigants must then refile the case and present the required document. If the court issues a ruling confirming the sale and it becomes final, the court must send a copy of the ruling to the financial department.

In practice, it has been observed that rulings confirming sales and referred to the financial departments often lack detailed descriptions of the sold property, leading to difficulties in levying the appropriate real estate sales tax due to uncertainty about the tax rate. Buyers are forced to return to the court that issued the original ruling to obtain an interpretive ruling that clarifies the nature of the sold real estate right. This need arises because no amendments can be made to the original ruling once it becomes final. These procedures result in additional time, financial burdens and complexity imposed on the rights holders.

Therefore, the Ministry of Justice issued Circular No. 17, emphasising the necessity of specifying the nature of the real estate right sold in judicial rulings.

An image of Circular No. 17