The "time test" stands for the necessary minimum period for which a piece of real property must be held before its sale becomes exempt from personal income tax.
The security assignment of rights is governed by Sec. 2040 through 2044 of the Civil Code, and serves to secure debt. The principle is a contractual, temporary transfer of debtor’s property rights to the creditor for the purpose of securing creditor’s claims toward the debtor for as long as the debt of the latter exists. By entering into the agreement on the security assignment, the debtor secures the debt by temporarily transferring its right to the creditor.
The Income Tax Act itself contains no comprehensive rules concerning the security assignment of rights, which is why the topic was instead addressed on the floor of what was known as the Coordination Committee. The representatives of the finance ministry on that committee disagreed with the proposal of the author of the act whereby the security assignment of rights strictly plays the role of security and thus does not lead to any increase of property; as such, it should have no influence on the time period for the tax exemption of the sale of the property (provided that it is being returned to the debtor once the secured debt has been settled).
According to the conclusions drawn by the fiscal administration, the consequence of the security assignment of rights is that the debtor de facto transfers the ownership title to a certain thing to the creditor (even if only temporarily and conditionally), i.e., the transfer is factual (as opposed to formal) in nature. The creditor becomes the actual owner of the thing. At the same time, it is true that upon payment of the debt, the creditor is obliged to surrender to the debtor all gains associated with the temporary ownership of the thing. Only if the debtor failed to duly and timely pay their debt does the creditor become the permanent owner. Given that property is not being multiplied on the part of either creditor or debtor, the transfer is not subject to personal income tax. The security assignment of rights therefore ought to be tax neutral.
However, this does not mean that the time test is not being impacted, i.e., that the time period after which the sale of real property becomes tax-exempt within the meaning of Sec. 4 (1) (b) of the Income Tax Act is not being reset.
KOOV (Coordination Committee) 557/29.01.20
Income Tax Act
30th September 2021