Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Historically yes, but not in the last six years when there was only a small difference in respective stamp duty rates on asset and share transfers. It is likely to become more commonplace again in light of the increase in rate of stamp duty on asset transfers from 2% to 6% in 2017 unless the Government increases duty on transfers of shares deriving their value from real estate. Also, as many large commercial properties are now held in ICAVs with no stamp duty payable on ICAV share transfers, we expect that disposal of ICAV owned properties will frequently be by way of share transfer.
Yes, depending on the parties’ needs and tax circumstances real estate transactions can take place either through an asset sale or through a share or interest sale.
Although the majority of commercial real estate transactions still concern asset deals, over the past decade more and more of these transactions are structured as a share deal.
Most commercial real estate is owned through single purpose vehicles, and commercial real estate is normally transferred as a share deal in order to avoid tax and stamp duty. These companies are most common organised as private limited companies, where capital gains on the sale of shares is being tax exempt for corporate shareholders (individual shareholders will be taxable on any gains from the transaction). For asset deals, taxable gains are taxed at 24% (23 % from 2018). In addition, a stamp duty of 2,5% of the market value of the property will be incurred in an asset deal when the purchase is registered in the land register, while there is no stamp duty on the sale of shares. Capital gains and stamp duty are also avoided in transactions where the target company is a partnership; either a general partnership (no: ANS), or limited partnership (no: KS).
A decision on a share deal vs. and asset deal is usually taken based on fiscal considerations and requirements of the financing entity and both types of transactions are rather common in Romania.
If the main economic interest of the transaction is the real estate asset itself, an asset deal is usually preferred by the purchaser, as risks inherent in the owner-company history are eliminated and the seller will directly guarantee for any flaws in the title or nature of the transferred asset.
Both share transfer and asset transfer are commonly used in Russia for real estate transfers.
Share transfer is normally used for top quality commercial property and by international institutional investors. Share transfer is also commonly used for transferring construction in progress or development projects because of pending permits that would otherwise require re-issue in the event of a formal change of project owner, i.e., of an asset transfer.
It is common to use asset transfer for small and medium-sized real estate.
Although a share deal is rather simple and quick compared to an asset transfer, it has an obvious downside: the buyer acquires both the assets and potentially unknown liabilities and claims (tax, regulatory, environmental, etc.).
Commercial real estate transfers are (currently) most commonly conducted by way of share transfer, please see Q6 above for a more thorough description. As noted, one of the main driving factors behind this is applicable tax (including VAT) rules.
The sale and transfer of commercial real estate can be made either in the form of an asset deal or a share deal, should the seller own the real estate through a legal entity. Both forms are commonly used in practice. The choice of one form or the other will depend on tax, liability and commercial issues.
It will often take the form of a share deal when the real estate is used in the business activities of the seller and the business is also acquired by the buyer along with the real estate. In such case, the seller, being a company owning commercial real estate and having a commercial activity other than leasing its real estate to third parties, is considered for tax purposes as a commercial company, as opposed to a real estate company. By selling the shares of a commercial company (owning real estate for the conduct of its own commercial activities), no real estate capital gain tax or real estate transfer tax will be levied. These are the clear advantages of a share deal in the case of commercial companies. Nevertheless, because of liability issues and deferred real estate capital gain tax for the buyer, even in the case of a commercial company, buyers may prefer acquiring the commercial real estate and the business activities of the seller through an asset deal.
If the sole purpose of a company is the leasing of its real estate to third-party tenants, the company will be considered as a real estate company for tax purposes. By selling the shares of a real estate company (depending on the Canton), the buyer may avoid the real estate transfer tax, which is significant. On the other hand, the real estate capital gain tax will generally be due even in the case of a share deal, in which case the company is considered a real estate company.
The answer depends on the characteristic of the company and scope of the investment to be made. In case it is an SPV set up for holding the real estate only or a new company having no trading activities yet but owning a real estate, it is more common to transfer the shares of the company. On the other hand, if the company owning the real estate has a history and have many operating activities, it would be risky to obtain the shares instead of directly transferring the real estate because the share purchaser also would be liable for the previous debts of the company. In such as case there will be a need for further and more detailed due diligence of the company and more safeguards and collaterals may be asked by the purchaser.
Generally, the transmission of a property is made by means of a public deed, formality that transfers the real property itself to the buyer. However, in certain cases, the sale of a property may occur by means of a transfer (acquisition, consolidation or merger) of the shares of a company which owns a real estate property. Such procedure is common in merger and acquisition transactions and also in wealth and succession planning. However, a special care in the use of corporate transactions with the purpose of transferring a real property is recommended, since the tax authorities may understand that there is a simulated transaction involved therein – especially when absence of a business purpose is verified – solely aiming at avoiding the payment of a real estate transfer tax (ITBI), which is not levied on the sale or transfer of corporate shares.
It is far more common for real estate transfers to be effected by way of deed (asset transfer) than by way of share transfer. Generally, unless there is a compelling commercial reason to do so, purchasers prefer to purchase the asset rather than to purchase the shares of the property owner because in a share transfer the property owner's liabilities continue after the transfer. In the case where a transaction is to be effected through share transfer, additional due diligence needs to be carried out in respect of the applicable entity.
Yes. As noted in Q6, real estate is commonly held through specially formed entities or structures and there is frequently a tax advantage to transferring the interests in those entities or structures rather than the underlying real estate (for example, a transfer of units in a JPUT will typically not require any stamp duty or transfer tax, compared to the stamp duty land tax that would be payable on a direct asset sale - see Q14 below for more details).
Sometimes transfer of ownership is effected by way of share transfer or asset transfer (by selling all or part of the commercial enterprise as a combination of assets, obligations and receivables). In this case the acquirer avoids paying taxes for acquiring ownership over the immovable asset (the so called stamp duty land tax).
Despite the tax benefit though, more often parties agree and prefer direct acquisition of property, although in this case the respective stamp duty land taxes arises. The reason for this trend is that selling a company is very different from selling a property. When transferred by way of share or asset transfer, the property is often part of the main commercial enterprise of the seller - along with many other assets, receivable and obligations (SPVs holding separate property rights are rather rare). Thus, in the process the buyer may acquire a range of other assets and liabilities, which can lead to bigger losses. Further, the required due diligence investigation differs significantly and may cause additional costs and concerns. It will be difficult to assess what is the exact amount and nature of the obligations of the sellers, especially if their accounting is not accurate. The contractual protection which the buyer needs also increases and purchase contracts need to be more precise and detailed if the property is acquired indirectly and in combination with other assets.
Commercial real estates are transferred either through sales of assets as well as sales of shares. However, the sale of shares generally enables the parties to save transfer taxes since the tax basis for the registration duties is equal to the sale price of the shares which takes into account the indebtedness of the company. In addition, for sale of share, the rate of the transfer tax is equal to 5% instead of a maximum rate of 6.41% (increased by notary fees at a rate of circa 0.85%) for assets transfers.
Yes. As noted in Q6, real estate is commonly held through specially formed entities or structures and there is frequently a tax advantage to transferring the interests in those entities or structures rather than the underlying real estate (for example, there may be a transfer tax advantage under certain circumstances for the buyer and a trade tax advantage for the seller).
Transfers are commonly effected by way of share transfer as well as asset transfer in Hong Kong. Share transfer is becoming more and more common, as the the stamp duty payable on the sale and purchase of shares, is currently equivalent to 0.2% of the higher of the consideration and the fair market value of the shares being transferred.
Both asset transfers and share transfers are common, depending on many circumstances.
There is often a tax advantage in transferring the interests in a company (share deal) rather than the underlying real estate (asset deal). For instance, the following reasons may be an incentive for sellers to divest through a share deal:
- Latent gains linked to the underlying asset (calculated as the difference between the market value of the asset at the time of the transfer minus its acquisition cost) do not materialise since there is no direct transfer of the asset.
- Local Tax on the Increase in Value of the Urban Land ("Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana") does not materialise since there is no direct transfer of the asset.
- Under certain circumstances, the capital gains arising from the transfer of the shares may not entail effective taxation in the case of the seller provided that (a) the seller is entitled to apply the provisions of the Spanish participation exemption regime or (b) the seller is entitled to apply the provisions of a specific Double Tax Treaty which prevents Spain from taxing capital gains arising from share transfers (even in the case of real estate underlying assets).