European office markets - review

As European markets slowly begin to emerge from the economic downturn, investors looking for long-term returns and yields may well be considering investing in Europe to capitalise on cross-border investment opportunities.  In the European Office Property Markets report recently published by King Sturge, BDO authored the commercial real estate tax guide to the 30 countries surveyed in the report. 

Angus McIntosh, Head of Research at King Sturge considers that the time is right to seize cross-border real estate opportunities; 'In six months time, we predict that the price of prime commercial assets in the key European markets will be rising again, following the trend already set in London. By Spring 2010 investors who haven't made a purchase will have missed the bottom of the market."

Unfortunately, from a tax perspective, we have noticed that the downward trend in corporate tax rates has come to something of a halt as the impact of the recession has caused many European Governments to reconsider their fiscal targets and in some jurisdictions corporate and indirect taxes have actually started to rise. For example, Lithuania raised its corporate tax rate to 20 per cent from 15 per cent and Ireland has raised its capital gains tax rate for land disposals to 25 per cent from 20 per cent and its VAT rate to 21.5 per cent from 21 per cent. 

Whilst potential tax increases are, of course, a concern for real estate investors it remains fundamental to consider and understand, before embarking on an acquisition, the tax implications in the jurisdiction where the real estate is located.  Real estate transactions are diverse and complex at the best of times and invariably need to be tailored to fit both the differing circumstances of each party involved as well as the particular nature of the assets.  As well as the commercial drivers, the investor needs to consider the following matters which will impact upon the tax planning approach:

• the tax implications of the local real estate market;
• the need for and advantages of structuring the investment through a suitable conduit jurisdiction;
• the tax position of the investment company, real estate fund or syndicate.

The structure will typically require an overarching entity which will typically be resident in the country of the investors or will often be a tax transparent entity such as a partnership, enabling investors in multiple jurisdictions to invest on a tax efficient basis.

In the current economic climate, where access to bank finance is often restrictive, a fiscally efficient model for investors could be to provide shareholder debt in order to facilitate future refinancing when debt markets return to equilibrium. Investors need to bear in mind that the location for any captive financing entity will have legal, accounting and taxation implications.

The European Office Property Markets report provides a handy reference to many of the local taxation aspects that would need to be considered and, of course, the market trends in each local market as reviewed by King Sturge. 

The report can be accessed here.