United Kingdom
The time is ripe for cross-border real estate transactions
As European markets slowly begin to emerge from the economic downturn, investors looking for long-term returns and yields could 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.
In the coming year, we anticipate that there will be opportunities to make new investments focusing both on rental yield and future capital growth and to revisit existing acquisition arrangements and ownership entities, thereby enabling investors to implement more favourable tax structures.
Angus McIntosh, Head of Research at King Sturge agrees that the time is right to seize these 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.”
Real estate tax considerations
Before embarking on an acquisition, investors need to consider and understand the tax implications in the relevant jurisdiction.
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.
The investor needs to consider the following:
- location of the real estate,
- 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.
It is invariably sensible firstly to consider the tax implications of the local real estate market. Registration taxes, capital duties, withholding taxes on rent and interest, the treatment of capital gains and the calculation of taxable rental income including tax depreciation and earnings stripping or thin capitalisation aspects will all be key considerations.
It will often, but by no means always, be appropriate to interpose a conduit entity in a separate jurisdiction which does not tax capital gains or dividends. The commercial
needs for this include the flexibility of inward investment and the options available for partial or total exits on the realisation of the investments.
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 increasingly restrictive, a fiscally efficient model for investors would 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.
To find out more about the specific tax issues affecting various European locations please download a copy of the report (pdf, <5.9mb). Or view the report online (links to external website).
For further information or advice on this subject, please email Stephen Herring, Tax Partner, Real Estate & Construction, BDO LLP.