Capital Gains and Value-added Taxes on Acquiring Immovable Collateral and Resale of the Acquired Property by Banks: the Law and the Practice

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Addis Ababa University


When banks lend money to customers, they need collateral as a guarantee that the debt will be paid, and if the borrower defaults, the Property Mortgaged or Pledged with Banks Proclamation No. 97/1998 allows the creditor banks to foreclose the collateral through a public auction and use the proceeds to pay off the borrower's debt. Furthermore, if no buyer shows up at the second auction, Property Mortgaged or Pledged with Banks (Amendment) Proclamation No. 216/2000 permits the creditor banks to acquire the collateral property at the floor price set for the second auction and transfer ownership of the property into their names. However, banks sometimes might not transfer the legal ownership of the property from the name of the mortgagor to the bank after acquiring the collateral until they resale it, which leads to the question of how taxes, particularly CGT and VAT, are being treated during the process of acquisition and resale of the acquired property by the banks. To appropriately address the issues, qualitative and doctrinal methods of conducting research have been used. As a result, the research's findings show that the five banks used as a sample do not transfer ownership of the property they acquire; instead, they sell it later while the title deed is still in the name of the mortgagor. This practice of the banks results in the non-payment of CGT and VAT both during the acquisition and resale of the acquired property, which causes the government to lose a sizable amount of revenue. The finding also reveals that the government agencies in charge of tax collection and payment are unaware of this activity on the part of the banks. This research examines how CGT and VAT are handled when banks acquire collateral property and later resell the acquired property.



Banks, Acquisition, Collateral, Mortgagor, Commercial Immovable Property, CGT, VAT, Resale,