investments in real estate - heuking kÜhn lÜer wojtek
TRANSCRIPT
Investments in Real Estate Co-chairs: Marion Sangen-Emden - HEUKING KÜHN LÜER WOJTEK (Germany) Peter Ni – Zhong Lun Law Firm (China) Panelists: Demetri Rackos - LaSalle Investment Management (US) Eric N. Roose - Morrison & Foerster (Japan) Leon Kwong Wing – KhattarWong (Singapore) Antonio Barba - CUATRECASAS, GONÇALVES PEREIRA (Spain) Kristin Konschnik – Withers LLP (US)
Current Tax Developments in Cross-Border Real Estate
Demetri Rackos Managing Director of Tax LaSalle Investment Management
October 2014
Agenda for Discussion
Fund structures illustrated
Common techniques or approaches to reducing tax burdens
Global challenges
Underwriting policies
Investor Feeder Vehicle
General Partner
SPV SPV SPV
Fund Vehicle
2 3
1
6 7 7
Fund Investment Structure Illustrated
Offshore
Onshore
Advisor
4
Local Advisor Affiliate
7
Holding Company
5
Other Limited Partners
Equity
Debt
Advisory
1. The Fund vehicle is usually fiscally transparent and exempt from income taxation
2. On occasion, feeder vehicle house specific investors for regulatory or tax requirements
3. The Fund usually has a general partner or fund manager which manages the day to day affairs of the funds
4. The Fund advisor is usually the fund sponsor or an affiliate
5. In most instances, an intermediate holding company is formed to hold interests in special purpose vehicles (“SPVs”)
6. Local affiliates (typically corporations and limited liability companies) provide tailored services to local SPVs
7. Special Purpose Vehicles (typically corporations and limited liability companies) generally own the assets and are organized in the jurisdiction in which the asset is located. They are financed with debt and equity from the intermediate holding company
Notes to Fund Investment Structure
Inbound Capital into Asia
China SPV
Japan TMK
Australian SPV
Cayman L.P.
Offshore
Onshore
Advisor
Local Advisor Affiliate
Singapore Company
Equity
Debt
Advisory
Hong Kong or
Singapore
Japan GK
Singapore
Inbound Capital into Europe
French OPCI
Cayman L.P.
Offshore
Onshore
Advisor
Local Advisor Affiliate
Luxembourg Company
Equity
Debt
Advisory
Lux SPV
Jersey or non UK Company
UK L.P (optional).
German Real Estate
U.K. Real Estate
French Estate
Inbound Capital into U.S.
U.S. JV
Partner
Cayman L.P.
Offshore
Onshore
Advisor
Local Advisor Affiliate
Equity
Debt
Advisory
U.S. REIT
Limited Liability
Co.
Common techniques for reducing tax burdens
Maximizing deductible advisory fees at the SPV level
Financing a SPVs acquisition with shareholder loans - Interest deduction at the local level only partially offset by withholding taxes - Subject to “thin-capitalization” and earnings stripping limitations
Maximizing deductible depreciation expense (valuable timing benefit)
From the buyer’s perspective - Always buy assets - No need to worry about actual or contingent liabilities from a share deal
From the seller’s perspective - Always sell shares – potential to capture treaty benefits - Ease of exit might result in a price discount
Statutory Incentives - Investing in blighted areas - Special exemptions for exempt pension funds - Regulated vehicles to hold real estate assets (e.g., REITS)
- Must meet asset, income and organizational tests
Global challenges – has your job gotten tougher?
Impatient with core based returns? There is lower tolerance for tax leakage within the structure
Narrowing and reconciling the complex web of - Regulatory (AIFMD, Dodd Frank) - Tax - Commercial objectives
Substance - Where are you? - Are you really there? Who is there? - Investors are expecting more
Tax Residency – - Who are you? - Who is making decisions?
The Paradox of Control and non-discretionary arrangements
Taking profits off the table – are you a trader?
Global challenges (continued)
Aggressiveness of the tax authorities in collecting revenues - Greater communication between tax authorities - Local statutory benefits are now narrowly defined - Tried and true investment structures are now being challenged - What are the boundaries in interpreting treaty benefits – each country has an evolving view
- Transfer pricing, transfer pricing, transfer pricing - Are you a tax resident – do you have a permanent establishment
Are you ready for BEPS? - Tax authorities are having a head start - Aligning people, activities, decisions and revenues - Rationalizing structures - Treaty benefits – pick one – primary purpose or limitation of benefits?
Politics of taxation
Underwriting policies
Disclose, disclose, disclose!
Always disclose to senior management - The impact (basis point drag) of potential adverse legislation - The cost of implementing a tax advantaged structure
- Regulatory/Licensing - Infrastructure (reporting obligations, dedicated staff) - Leverage limitations - Exit options
- Does you structure have a shelf life? - Risk premiums - Is your after-tax IRR still acceptable on a full taxable deal
Questions?
This presentation is for discussion purposes only and is not intended to be legal or tax advice. This presentation cannot be relied upon for the avoidance of the imposition of penalties under the Internal Revenue Code or any other taxing jurisdiction. All information obtained from third party sources is believed to be reliable and current, but accuracy cannot be guaranteed and we do not undertake to update any information contained in this document.
Copyright © LaSalle Investment Management 2014. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior permission of LaSalle Investment Management.
Inbound Real Estate Investment into China
Peter Ni
Table of content
• Current market conditions • PRC taxation of real estate investment • Typical investment structure • Structuring issues for foreign investment
Current market conditions
• China arguably has the biggest real estate bubble in the world
• Price to income ratio is very high - 8-10 to 1 on average and 30 to 1 in Shanghai and Beijing
• The residential home buying restrictions are gradually being lifted but the market response is not as strong as expected, because the price has not gone down significantly
• Real estate accounts for 20% of the total GDP in China so the common wisdom is that the central government simply would not let the bubble burst
• Foreign investment in real estate has slowed down
PRC taxation of real estate investment
• Main taxes – Land VAT – Business tax – Enterprise income tax – Deed tax – Real estate tax – Stamp duty
• Sale of equity/share is much more tax efficient than sale of property
Typical Investment Structure
Fund (Cayman)
Fund IM Co (Singapore or HK)
Investment Committee
Fund GP Limited (Cayman)
GP
Asset
Offshore
Onshore
Cayman
HK
PRC
Structuring issues for foreign investment
• Regulatory restrictions on investment – Overall, foreign investment in real estate has been
heavily restricted and controlled since 2006 – Direct ownership by a foreign entity or individual is
not allowed unless the property is for self-use – An onshore project company is needed and the
establishment of which is subject to strict control – Debt to equity ratio is limited to 1:1 – Only onshore borrowing is allowed and foreign debt
financing is prohibited – Offshore share acquisition between two foreign
parties is generally not within the control scope
Structuring issues for foreign investment
• Cash repatriation restrictions – The repatriation choices are extremely limited mainly
because foreign debt financing is currently not allowed
– Return of capital is allowed in exceptional cases – Dividend payments are subject to company law
restrictions – Offshore share transfer is still the common exit
strategy
Structuring issues for foreign investment
• Anti-tax avoidance restrictions – Offshore exit now taxable under Circular 698 – Extremely strict beneficial ownership requirement for
treaty benefit claim under Circular 601 and Circular 124
– HK holding company does not enjoy any special treatment
– A typical offshore holding company without enough substance is generally disregarded
• The PE issue commonly seen in other countries has not become an issue in China
Tokyo, October 22, 2014
HEUKING KÜHN LÜER WOJTEK Marion Sangen-Emden
REAL ESTATE INVESTMENTS INTO GERMANY
Relatively stable market conditions; not yet over-heated
Long term investments preferred (+/- 10 years)
External debt financing prevailing; current loan to value ratio +/- 60%
Concrete investment site analysis required
Typical portfolio size < € 500 mio.
Market Environment
Investments via Dutch BV / Lux SARL
Debt financing into acquisition vehicle; interest > € 3 mio. deductible up to 30% of tax EBITDA
Property / asset management through separate entities (external / affiliates); PE risks to be avoided
Main taxes Corporate income tax (15.8%) trade income tax (ca. 15% can be avoided) Real estate transfer tax (3.5% - 6.5%) VAT (usually exempt)
Typical Investment Structures
Berlin Unter den Linden 10 · 10117 Berlin T +49 30 88 00 97-0 · F +49 30 88 00 97-99 [email protected]
Brüssel Rue Froissart 95 · 1040 Brüssel · Belgien T +32 2 646 20-00 · F +32 2 646 20-40 [email protected]
Chemnitz Weststraße 16 · 09112 Chemnitz T +49 371 382 03-0 · F +49 371 382 03-100 [email protected]
Düsseldorf Georg-Glock-Straße 4 · 40474 Düsseldorf T +49 211 600 55-00 · F +49 211 600 55-050 [email protected]
Frankfurt Goetheplatz 5-7 · 60313 Frankfurt am Main T +49 69 975 61-0 · F +49 69 975 61-200 [email protected]
Hamburg Neuer Wall 63 · 20354 Hamburg T +49 40 35 52 80-0 · F +49 40 35 52 80-80 [email protected]
Köln Magnusstraße 13 · 50672 Köln T +49 221 20 52-0 · F +49 221 20 52-1 [email protected]
München Prinzregentenstraße 48 · 80538 München T +49 89 540 31-0 · F +49 89 540 31-540 [email protected]
Zürich Bahnhofstrasse 3 · 8001 Zürich · Schweiz T +41 44 200 71-00 · F +41 44 200 71-01 [email protected]
www.heuking.de
Marion Sangen-Emden Lawyer / Tax advisor Georg-Glock-Straße 4 40474 Düsseldorf Telefon +49 211 600 55-525 Fax +49 211 600 55-520 [email protected]
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JAPAN
FOREIGN INVESTMENT IN REAL ESTATE AND REITS
International Bar Association Conference - Tokyo October 22, 2014
Presented By ERIC N. ROOSE
This is MoFo.
TOPICS
JAPAN REAL ESTATE MARKET THE ALTERNATIVE STRUCTURES KEY TAX STRUCTURES J-REITS
This is MoFo.
JAPAN REAL ESTATE MARKET HOT …. AND MOVING UPWARDS Kanto – Deals Harder to Find Quickly Moving to Outer Areas Implications – Creative and Fast Movers Rewarded
SURGE IN INBOUND INVESTMENT ACTIVITY Funds – Japan is the Global RE Fund Flavor of the Year Private investment – SEA Strong Interest Foreign HNW activity – PB Products
This is MoFo.
STRUCTURES: PRIVATE FOREIGN “DIRECT” INVESTMENT IN JAPAN REAL ESTATE
FCCo (Country X)
Real Estate
Subsidiary (Japan)
Japan 100%
FCCo (Country X)
Real Estate
Country X
BRANCH DIRECT
SUBSIDIARY
Kumiai In (Country X)
Real Estate
Eigyosha (Japan)
TK
Real Estate
TMK (Japan)
Onshore (Japan)
FCCo (Country X)
≥50% Common & Preferred
<50% Common & Preferred
TMK
This is MoFo.
JAPANESE SUBSIDIARY
Business Operations
Subsidiary: Net Income ¥100 Less: Corporation Tax (@40%) (40)
Net Income ¥ 60
FCCo: Subsidiary Dividend ¥ 60.0 Less: Withholding Tax (20%) (12.0)
Net Income ¥ 48.0
Effective Tax on Subsidiary Income: 52.0%
Japan
Subsidiary (Japan)
Country X
FCCo (Country X)
This is MoFo.
TOKUMEI KUMIAI - TK
Kumiai In: TK Distribution ¥ 50 Less: Withholding Tax (20%) (10)
Net Income ¥ 40
Effective Tax on TK Income: 20%
Japan
Country X
Kumiai In (Country X)
Business Operations
Eigyosha (Japan) Eigyosha:
Income ¥100 Less: TK Distribution (50) Less: Corporation Tax (@40%) (20)
Net Income ¥ 30
Effective Tax on TK Income 40%
If the Kumiai in is an affiliate or otherwise related to the Eigyosha, then the TK arrangement may instead be treated as an NK between the Kumiai in and Eigyosha, in which case, the Kumiai in is deemed to have a PE in Japan.
This is MoFo.
TMK
FCCo: TMK Distribution ¥ 49.0 Less: Withholding Tax (20%) (9.8)
Net Income ¥ 39.2
Effective Tax on TMK Income: 20% (Sing Treaty - 5%)
Japan
Country X
Onshore: Income ¥ 51.0 Less: Corporation Tax (@40%) (20.4)
Net Income ¥ 30.6
Effective Tax on TMK Income 40.5%
Asset
TMK (Japan)
Onshore (Japan)
FCCo (Country X)
≥50% Common & Preferred
<50% Common & Preferred TMK:
Income ¥ 100 Less: TMK Distribution - Onshore (51) TMK Distribution – FCCo (49) Less: Corporation Tax (@40%) (0)
Net Income ¥ 0
Effective Tax on TMK Income 0%
ETR 27.5% on CGs Sing Treaty: 7.5% - 14.5%
This is MoFo.
Cayman Fund – Singapore Treaty – Japan TMK Structure
B Co (Singapore)
A Co (Singapore)
TMK
GK
Offshore
100%
Assets
Common 100% (No Economics) Preferred 49% Preferred 51%
TK (or Loan) IM Co
Asset Management Agreements
Effective Tax Rate: 12.7%
ISH (Representative
Member)
Voting
Fund (Cayman)
Investor
Fund IM Co (Singapore)
Investment Advisory Agreement
Japan Withholding Tax on Dividends - 5%
Japan Effective Tax to Equity ≅ 38%
Japan Withholding Tax on TK Distribution – 20.42% or on Interest -20%)
No Singapore Withholding Tax on Dividends
No Singapore Tax on TK Distributions (but Interest taxed (with FTC)) No Singapore Tax
On Dividends
Investment Committee
Investment Advisory Agreement
Fund GP Limited (Cayman)
GP
Japan
100%
Investor Investor Investor
This is MoFo.
Singapore – Japan TMK Tax Structure Japan Tax Consequences - Dividends to Singapore B Co : 5% Withholding Tax (assuming Singapore treaty benefit
respected) - TK Distributions to Singapore A Co : 20.42% Withholding Tax - Interest on Loans to GK – 20% withholding tax (deductions are subject to thin cap and
base erosion local tax rules) Singapore Tax Consequences - Dividends to Singapore B Co : No Singapore Tax (under special foreign dividends exemption) - TK Distributions to Singapore A Co : No Singapore Tax (if structured properly – e.g. remitted to offshore bank
account) - Interest Income to Singapore A Co: Subject to Singapore taxation (remittance clause in tax treaty) - Dividends to Fund from Singapore A Co and B Co : No Singapore Tax
Singapore B Co’s Tax Substance and Business Purpose VERY Important
This is MoFo.
JREIT Two Types: corporate type or trust type. Most are corporate listed on TSE. Limitation on JREIT shares held by lead investors (75% or less) under the TSE
rules. Taxation. Same as a corporation except it can deduct dividends distributed to its
shareholders, subject to certain requirements. Withholding tax to corporations – 15.315% withholding tax (may be reduced under
a tax treaty). Major Requirements for Distribution Deduction. JREIT offers JPY100M or more through public offering, or JREIT shares are
held by only by QIIs or 50 or more investors. Limitation on JREIT held by nonresidents (offshore). At least 50% shares must
be offered and held by residents (onshore). JREIT is not a “family corporation”.
This is MoFo.
JREIT
FCCo: JREIT Distribution ¥ 49.0 Less: Withholding Tax (15%) (7.4)
Net Income ¥ 41.6
Effective Tax on JREIT Income: 15% (Sing Treaty - 5%)
Japan
Country X
Asset
JREIT (Japan)
Onshore Investors
FCCo (Country X)
JREIT: Income ¥ 100 Less: Distribution (100)
Less: Corporation Tax (@40%) (0)
Net Income ¥ 0
Effective Tax on JREIT Income 0%
<50% >50%
This is MoFo.
CLASSIC PITFALLS UNDERESTIMATING THE JAPAN NTA – Sophisticated and Aggressive
PE RISK for the FUND INVESTORS and for the FUND SPONSORS Set the carry program for your key Japan execs Up-Front (don’t rely on bonus
schemes alone if the dollars are big) TREATY SHOPPERS BEWARE – Substance PLUS Business Purpose LACKADAISICAL and OVER AGGRESSIVE TAX STRUCTURING RISKY
This is MoFo.
TAX TRENDS CORPORATE TAX REDUCTIONS (HOPEFULLY) ON THE WAY
BEPS – SUBSTANCE - SUBSTANCE - SUBSTANCE
Investments in Real Estate In and Through Singapore Leon Kwong Wing IBA Tokyo Oct 2014
1. Singapore Real Estate Investment Trusts
2. European Investment: Spanish Case Study
3. Substance
4. Case Study: Qualifying Debt Securities
Contents
Quality tax advice, globally
Singapore Real Estate Investment Trusts
What is an S-REIT? Trust
Collective investment scheme regulated by the Monetary Authority of Singapore under the Securities and Futures Act
Listed on the SGX
Investing in property and property-related assets
Distributes not less than 90% of taxable income
Facts and figures First S-REIT (Capitamall Trust) listed in July 2002
Presently 23 S-REITs
Properties in Singapore, Japan, China, Indonesia, Europe, Hong Kong, Malaysia, Australia Lippo Malls Indonesia Retail Trust—Indonesia
CapitaRetail China Trust—China
Starhill Global REIT—Singapore, Malaysia, Australia, China and Japan
Keppel REIT—Singapore and Australia
S-REITs
S-REIT taxation
REIT
Sub-trust Sub-trust
Tax-transparent (Except 17% on sale of
properties if trading)
Fn Co 10% WhT
Indv Exempt
SG Co 17%
Tax-transparent income:
Non-taxable: Trustee-taxed profits; tax-exempt income; capital gains; operating cash flows; unrealised revaluation gains
Income tax Normally tax transparent
Approved sub-trusts also tax transparent
Otherwise trustee taxed at corporate tax rate (17%) Undistributed income
Profits from trade in properties (not capital gains)
Distributions can be made in units
Individual unit holders (resident & non-resident) exempt on distributions
10% withholding tax on distributions to qualifying non-resident, non-individual unit holders Ie, no Singapore permanent establishment
Or investment in the REIT was not funded by a Singapore permanent establishment
S-REIT taxation
Quality tax advice, globally
European Investment Spanish Case Study
Singapore-Spanish REIT structure
SG Fund
SG Co
ES SOCIMI
Shareholding > 10% Dividend WhT 0% SG-ES treaty Art 10(2)(a)(i)
SG bank a/c €6m @ 17%
€1.02m Fn bank a/c
€4m
SG bank a/c €5m
Fn bank a/c €4m
Fn Investors
Spanish REITs Sociedades Anónimas cotizadas de Inversíon en el Mercado Inmobiliario (SOCIMI)
In English, “listed investment companies in the real estate market”
Distributions are company dividends for treaty purposes
Corporate income tax rate of a SOCIMI is 0%
Treaty rate of dividend withholding tax is 0% If the beneficial owner is a SG co holding at least 10% of the capital of the ES co
But 19% special tax on SOCIMI Paying dividends or making distributions to shareholders holding 5% or more
And the dividends/distributions are tax-exempt or taxed at less than 10%
Corporate tax rate in SG is 17% But only if the income from outside SG is received in SG
Foreign-sourced income not remitted is out-of-scope
Remitting €6 million of every €10 million @ 17% = effective tax rate of just over 10%
Income kept offshore to pay dividends to shareholders does not create a remittance So long as in doing so the money is not brought back to Singapore
Singapore-Spanish REIT taxation
Quality tax advice, globally
Substance
Substance requirements for tax residence
Legal residence Statutory definition: Control and management of the business
Case law: Board meetings are held in Singapore
IRAS test Legal residence
Plus
Related companies tax-resident and/or carrying on business in Singapore
Or
Support and/or administrative services from a related company in Singapore
Or
One or more executive directors (not nominees) based in Singapore
Or
One or more key employees (CEO, CFO, COO) based in Singapore
Quality tax advice, globally
Case Study Qualifying Debt Securities
QDS structure
Hold Co
Issuing SPV
Trustee
Seller Acquired for $500m Year 0
Income support pool
Nominal ordinary shares
SG Bank
Manager, Arranger and
Underwriter Fn
Investors
$500m Senior bonds: 0% WhT
Junior bonds: 0% WhT Pref shares: Exempt dividends
Asset manager
RE Fund (Buyer)
Sold for $900m Year 10 Dividends tax-exempt
17% corp income tax
No CGT
Qualifying Debt Securities The securities are substantially arranged by financial institutions in Singapore
Qualifying companies and bodies of persons in SG pay 10% concessionary tax rate on QDS income
Qualifying non-residents and qualifying individuals exempt from tax on QDS income
Qualifying Debt Securities Plus The securities are substantially arranged by financial institutions in Singapore
Original maturity of at least 10 years (apart from standard early termination clauses)
Islamic debt securities or sukuk
All investors exempt from tax on QDS income
QDS and QDS+ tax incentive schemes
Key contacts
LEON Kwong Wing T. + 65 6238 3018 / + 65 9071 8021 E. [email protected]
CHUA Yee Hoong T. + 65 6238 3016 E. [email protected]
Joanna Yap T. + 65 6238 3333 E. [email protected]
TAX STRUCTURES AND LATEST ISSUES IN SPANISH REAL ESTATE INVESTMENTS
ANTONIO BARBA
OCTOBER 2014
SUMMARY
A little bit of history: traditional investment structures.
Recent and expected changes.
Hot topics: current investment environment; dos and don’ts
TRADITIONAL INVESTMENT STRUCTURES (I)
Spanish real estate investments were traditionally based in over-leveraged schemes since:
− Thin capitalization rules only applied to non- EU related lenders
− Interest paid to EU lenders are tax exempt in Spain
− Interest payments are generally deductible for tax purposes
Traditionally, foreign investors have invested in Spain through entities located in The Netherlands (NL) because of the favorable Spain – NL tax treaty and the application of the Parent-Subsidiary Directive on the distribution of dividends.
However, when repatriation of income from NL to the UBO jurisdictions could be somehow complicated, it was not strange to see on top of the Dutch entities, entities located in Luxembourg or Dutch partnerships.
TRADITIONAL INVESTMENT STRUCTURES (II)
LUX - DUTCH STRUCTURE
Investment Committee
PECs/CPECs
Fund Anglosaxon Fund IM Co
Fund GP Limited
Asset
Lux co
Dutch co
Spanish Prop Co
Taxation of Dutch Co. − Participation exemption on dividend
distributions and capital gains stemming from Spanish Prop Co.
Cash repatriation
− No wht on interest payments
− No wht on dividend (P-S Directive
requirements). Sale of Spanish Prop co
− Exempt Gains in Spain (Netherlands –
Spain DTA).
Taxation of Prop Co − Prop Co. subject to Spanish CIT (30%).
− No limitation on the tax deductibility of financial expenses.
Luxembourg as a gate to US/non EU investors
− Interest payments are exempt from Luxembourg withholding tax.
SPANISH LEGISLATIVE RECENT CHANGES (I)
As from fiscal year 2012, the Spanish government introduced a German type “earnings stripping rule”, by which the deductibility of net financial expenses is 30% of the entities' EBITDA with an exception for interest expenses not exceeding EUR 1 million which are fully deductible.
The offset of tax losses carried forward has been restricted temporarily from 2011 to 2015:
− offset is limited to 50% of the tax base for entities whose turnover is between €20m and €60m
− for entities with a turnover >€60m, the offset is restricted to 25% of the tax base.
Expense for assets depreciation deducible for tax purposes has been limited temporarily (2013 – 2014) to 70% of the total expense.
SPANISH LEGISLATIVE FUTURE CHANGES (I)
Major tax reform under parliamentary discussions; will enter into force in 2015
Offset of tax losses carried forward will be limited to 60% of previous tax basese.
Non deduction of impairment of assets
FIGHT AGAINST AGGRESSIVE TAX PLANNING
International institutions are now focus on the fight against aggressive tax planning.
OCDE is actively working on this area. More recent works:
- Aggressive Tax Planning based on After-Tax Hedging (2013) - Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues
(October 2012) - Addressing Base Erosion and Profit Shifting (BEPS) and Action Plan
on Base Erosion and Profit Shifting (2013)
The EU is also working against tax fraud:
- Commission Recommendation on aggressive tax planning (December 2012)
- Communication from the Commission to the European Parliament and
the Council: An Action Plan to strengthen the fight against tax fraud and tax evasion (December 2012)
Renegotiation of tax treaties in Spain (mainly NL and UK) removing the
full exemption on capital gains on the transfer of shares of a Spanish real estate company.
CURRENT ENVIRONMENT: SLIGHT RECOVERY SYMPTONS
From 2012 worst moment of “pain in Spain” to slight signals of recovery.
CURRENT ENVIRONMENT: REAL STATE, AGAIN
Not surprisingly, real estate becomes again the key factor of recovery.
After years of decrease, prices are beginning to grow or at least stable.
New legislative measures to foster foreign investment in real estate properties:
Spanish REITs – Improvement of the “Socimis” regime
Spanish real estate “bad bank” – SAREB – Thousands of properties and non-performing loans in the market through fully exempt funds
Golden visa for private individuals
KEY FEATURES OF THE SPANISH REITS (SOCIMI)
Main advantages:
special tax regime for the company itself (0% Corporate Income Tax)
No leverage limitations.
Main disadvantages:
Listing requirements
Compulsory dividend distributions
French SIIC inspired Substitutory 19% tax when dividends paid to low-taxed shareholders (5% or more)
CURRENT ENVIRONMENT: DOS AND DON´TS
Time to revisit Spain
Attractive market and good prices for NPLs and commercial properties.
A proper mix of depreciation and interest expenses normally result in low taxable base.
CIT rate rates lowering down (from current 30% to 25% in 2016)
Spanish REITs finally working!
But don’t forget some lessons from the past
Don’t overleverage (30% EBITDA barrier).
New BEPS treatment for intra-group profit-sharing loans: non deductible charges.
Stamp duties, local taxes can be substantial.
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Foreign Investment in US Real Estate
International Bar Association Conference – Tokyo 22 October 2014 Kristin Konschnik Withers LLP
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
US Real Estate Market
• Remains a top real estate market for foreign investors
• Asian, Middle Eastern, sovereign wealth, institutional investors
• Anbang Insurance - $1.95B for the Waldorf Astoria
• NBIM - $1.5B for minority interests in Boston and Manhattan
• Commercial and residential
• Local partners, large minority stakes, beyond gateway cities
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Basic Structuring AlternativesDirect/Through Tax Transparent Entity
NRA(s)/Trust(s)• 39.6% US tax on operating income
• 20% US tax on sale
• No US withholding tax on distributions
• Direct US tax filing obligations for owners
• FIRPTA withholding (10% of gross sales proceeds) for foreign sellers –purchaser withholdsUSRPI
PS/LLC
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Basic Structuring AlternativesThrough Single-Tier Corporate Structure
USCo/ForCo
USRPI
NRA/ForCo• 35% US tax on net operating income and
gain on sale by corporate owner
• 30% US withholding/branch profits tax on dividends (15%/5% under UK treaty)
• FIRPTA withholding on excess distributions
• 54.5% effective tax rate (44.75%/38.25% under UK treaty)
• US tax filing obligation for USCo/ForCo
• FIRPTA withholding for foreign seller of US real estate or USCo
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Basic Structuring AlternativesThrough Two-Tier Corporate 'Stack'
• 35% US tax on net operating income and gain on sale
• 30% US withholding tax on dividends (15%/5% under UK treaty)
• FIRPTA withholding on excess distributions
• 54.5% effective tax rate (44.75%/38.25% under UK treaty)
• US tax filing obligation on USCo
• FIRPTA withholding other than on sale of ForCo
ForCo
USCo
USRPI
NRA/ForCo
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
REITs - Qualification
• Taxed as US corporation ‘but for’ REIT provisions
• ‘Professionally managed’ with transferrable ownership interests
• Not a financial institution or insurance company
• At least 100 shareholders and not ‘closely held’
• REIT election
• Asset and income tests for real estate assets, diversification and passive income
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Fund Structure with Private REIT
• 30% dividend withholding tax
• 35% tax/30% BPT • on capital gain
distribution (corporates)
• 20% tax on capital gain distribution (non-corporates)
• No US tax on sale of DREIT
• Blocks ECI
USUS Investors/
FeederForeignFeeder
General Partner(Cayman)
Inv Mgr(Cayman)
Cayman Master Fund
REIT
OperatingPartnership
Taxable REIT subsidiary
Real Estate Assets
Qualified REIT subsidiary
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Alternative Investment Thoughts
• Portfolio debt/treaty-based lending
• Can eliminate withholding tax (assuming not ECI)
• Lender cannot own 10% or greater vote (portfolio debt)
• Participating loans
• Interest component not subject to FIRPTA withholding
• Sale of instrument and participation component would be
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
SALT
• State income tax rates vary widely
• Conveyance/transfer tax/stamp duty - varies by state
• May be subject to exceptions for transfers of non-controlling interests in entities owning real property
• Eg, NYS/NYC RETT/RPTT applies at a rate of 3.025%
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Common Traps
• Proper operation of structure is critical
• Particular REIT traps
• Disqualifying income/assets
• Prohibited transactions
• Ownership thresholds (DREITs)
• PE risk for fund/sponsors if US activities not properly structured
London
Hong Kong
Greenwich
New York
Geneva
Milan
New Haven
Other Thoughts
• Transfer pricing – arm’s length pricing for related party services
• Treaty qualification (US treaty LOB provisions)
• Compliance and defending the structure
Any Questions?
Thank You!