The State Tax Inspectorate (VMI) has launched a new investigation into cash purchases of property in Lithuania over the last number of years and is already focused in on which individuals' cash transactions will be investigated more thoroughly.
In the two years before the introduction of the euro, the number of property transactions completed by Lithuanians using cash grew by more than 20%. After deciding to investigate the details of some of these deals, the VMI chose more than 5,600 people for further scrutiny.
The investigation revealed that 1,074 of them had used cash to purchase assets worth €161 million (555.9 million LTL) between 2013 and 2014. To put that in perspective, that sum is larger than the total budget of the city of Klaipėda this year.
The average value of the cash transactions completed by the aforementioned individuals was more than €150,000 according to Lithuania’s revenue service. These transactions were for land, apartments, homes and other structures.
Half of these transactions were completed in the Vilnius region, with 16.2% and 15.5% completed in Kaunas and Klaipėda respectively. Overall, 364,000 Lithuanians completed large cash transactions confirmed by notaries between 2013 and 2014.
It seems that those buying real estate with cash do so to avoid real-estate agencies. Audrius Šapoka, the head of the Accommodation Department at Ober Haus, told Delfi that at least half of all real estate is purchased using people's own money without using loans.
However, he said that very few of these purchases are made with cash.
“There are not many such buyers, they represent individual cases. Looking at all sales, they will make up a few percent at best. We don't ask why people pay using cash, but I believe it could be related to their savings. Cash purchases are usually made by older clients, 45-50 years old at the youngest,” said Šapoka.
Expensive purchases without income
Darius Buta, the director of communications at VMI, said that some transactions using cash seemed very strange.
“For example, in 2013, one Vilnius resident paid 1.3 million LTL (€376,000) in cash when purchasing an apartment and a garage. Next year, he bought another apartment for 45,000 LTL (€13,000). In the meantime, his family's official income was only 1,049 LTL (€303).
“Neither the person nor their spouse worked anywhere with an employment contract, and neither ever submitted an income declaration. Therefore, the large asset purchases were made with money earned from an unknown source,” said Buta.
According to him, information provided by Financial Crime Investigation Services (FNTT) indicates that there were cases in which real estate worth 1.9 million LTL (€550,000) and 2.5 million LTL (€725,000) was purchased using cash.
Suspicious transactions are automatically flagged by the Lithuanian investigation service’s IT systems using certain criteria, explained Buta. Some of them will be investigated in more detail by specialists who will try to pick up anything important that the system may have missed.
“For some transactions, tax investigations have already begun. The investigations can have a variety of outcomes: if the person honestly earned that income and paid the appropriate taxes, the VMI will simply find out about sources of income that it had not previously documented.
“If someone bought real estate using cash but is unable to validate that they received that money in a legal way, VMI will calculate the taxes they owe for their illegal income. In any case, if any signs of illegal activity are detected during the audit, that information will be transferred to the FNTT or to the police,” said Buta.
What do notaries have to tell FNTT?
Data about large cash transactions in 2015 is not yet available, but according to the Lithuanian Chamber of Notaries president Marius Stračkaitis, they have noticed that the cash payment trend is decreasing and that more people are paying with transfers.
“Long-time international practices show that when large cash sums are paid, like for real estate transfers, there is additional risk that the money could have been laundered or that some other illegal activity is involved,” said Stračkaitis, adding that notaries do not have the opportunity to confirm the money's source.
A notary cannot approve a transaction if he suspects that it involves illegal circumstances, he said. If the transaction matches the signs of money laundering, notaries must notify the FNTT. This service is also notified of all transactions in which the funds transferred in cash exceed €15,000.
Is paying with cash more convenient?
Žilvinas Šilėnas, the president of the Lithuanian Free Market Institute, doubts that the VMI's measures for evaluating cash transactions will be justified.
“We need to separate cash and black market activities. Not everyone paying with cash does so to hide taxes. Cash is also popular because it's convenient. Some people believe that having cash in a drawer at home is safer than electronic money at a bank,” he said.
The fight against black market activities in Lithuania has been twisted, according to Šilėnas.
“There are disproportionately large efforts being made to fight the consequences of this problem, like following people's bank accounts. However, the cause – that income is taxed too heavily – is essentially being ignored. If we hear any initiatives, they are quite the opposite – to tax the people even more,” said Šilėnas.
He believes that people hide their taxes because they are so high. Some recent research studies have claimed that excessive taxation is the cause of up to 67% of black market activity in Lithuania.
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