Is it common for real estate transfers to be effected by way of share transfer as well as asset transfer?
Real Estate (3rd edition)
Yes, both the acquisition of real estate by way of an asset deal or as a share deal are very common. The advantage of a share deal construction may be tax savings (e.g. low real estate transfer tax and no registration fee, as the property owner remains unchanged).
Yes. Real estate transfers are commonly effected by both corporate and asset transfers. In said cases, the target companies shall also be subject to the legal due diligence.
10.1 It is relatively uncommon as a purchaser would generally wish to acquire the asset without exposing itself to any liabilities of the corporate vehicle. There are no local tax advantages to structuring the purchase by way of share transfer.
10.2 It is, however, perfectly possible to structure an acquisition in this way and there may be valid reasons for doing so, particularly where the real property is sold as part of a going concern.
When the immovable property is owned by a company, the conveyancing process can be effected by transferring the shares of the company instead of transferring the assets itself. This way, the purchaser saves the transfer fees payable at the land registry upon tranfer and registration of the property into the purchaser’s name. However, the risk involved with this process is that the purchaser is acquiring a company with all its past obligations. In such cases thorough checks must be performed to make sure (as much as possible) that the company is not burdened with obligations.
Transfers of real estate in Denmark are effected by way of share transfers as well as asset transfers. The parties are free to decide and negotiate whether the transfer is to be effected by share or asset transfer.
Typically, the transaction structure is determined by factors such as the current and potential liabilities of the property company, registration fees payable, VAT and other property taxes and whether the statutory right of first refusal granted to the tenants (if relevant) will be triggered by the transaction.
A share transfer does not trigger registration fee, VAT (if applicable) and other property taxes. An asset transfer does trigger registration fees, taxes and for certain new properties VAT. However, deferred taxes in relation to the property are usually taken into account in share transfers and the purchase price will usually be adjusted accordingly.
Transfer of properties with a specific number of residential units will trigger a statutory right of first refusal, whereby the residential tenants are granted a right to acquire the property on the same terms as the buyer. This statutory right of first refusal applies if the property in question is transferred or if shares in the company that owns the property is transferred. According to current case law, the statutory right of first refusal does, however, not apply in case of transfers of shares in the parent company of the company that owns the property.
The parties may prefer to transfer commercial real estate through a sale of shares rather than through an asset transfer mainly to obtain a saving on registration duties, real estate security contribution and notary fees.
The sale and purchase agreement for a share transfer does not need to be drawn up in a notarial form and registered at the land registry, and is subject to registration duties at the rate of 5% calculated based on the sale price of the shares (i.e., external debt contracted by the company the shares of which are transferred reduces the tax basis).
The taxes and duties to be paid for an asset transfer mentioned below are therefore often more important.
Yes, both deal structures are very common. As noted in Q6, real estate is commonly held through specially formed entities and there may be a tax advantage to transferring the interests in those entities rather than the underlying real estate (for example, there may be a real estate transfer tax advantage under certain circumstances for the buyer and, in the case of corporations, an advantage with regard to capital gains taxation and/or a trade tax advantage for the seller).
If a real estate plot is held by a company and it is the company’s sole asset, a share transfer may be advisable or convenient. Otherwise, it is not common to effect a commercial real estate transfer by way of share transfer. The tax implications and benefits would then be the criteria for the choice of structure.
Real estates are commonly held through entities specially formed for this purpose and there could be advantages of transferring the interests in those entities, rather than the underlying real estate (for example, pre-emption right connected solely to the sale of real estate can be avoided; there could be operating agreements that shall not be transferred separately; or there could be loss carry forward in the property holding company that could be used up by the future owner), but there can be also risks linked to historical liabilities (for example tax risk), therefore applying a share or asset deal must be decided on a case by case basis. Please note that in general, the payment of property transfer tax cannot be avoided with the transfer of the property holding company instead of a direct asset sale).
Yes. In case the asset to be transferred is the main asset held by the limited company and all shareholders are in favour of the transfer, shareholders prefer transfer of shares, as in the case of transfer of an asset, the consideration remains with the company. Taxation implications (specifically, tax on capital gains for the transferor and “income from other sources” for the transferee) will also have to be taken into account when considering how best to structure the transfer. Stamp duty on transfer of shares is lower than on transfer of assets.
Yes, however share transfers were not as common for the period 2012-2018 as there was only a small difference in respective stamp duty rates on asset and share transfers. This is likely to become more commonplace again as Budget 2020 increased stamp duty on commercial property asset transfers to 7.5%, while stamp duty on share transfers remains at 1%. Transfers of corporate entities and partnerships can be subject to 7.5% duty where the entity derives over 50% of its value from Irish land which is intended for development, held as trading stock, or held with the sole or main object of realising a gain on disposal. This provision is subject to a number of conditions, including that the transfer is one which transfers control of the land. Minority holdings may not be impacted.
Share transfer is not a common way to transfer real estate since many more factors are involved in share transfer transactions. For example, the purchaser may need to conduct due diligence on the company issuing the shares as well as the target real estate held by the company, and latent obligations and duties which are not on financial statements disclosed may become red flags to the transaction.
There are, however, share transfer transactions in some cases. For example, in the case where the target real estate has unrealized capital gains, the seller and purchaser may prefer selling the shares of the company holding the real estate rather than the sale of the real estate to avoid realization of the capital gain in the real estate, and, in turn, to circumvent corporate tax that would be triggered. Also, other taxes associated with the transfer of real estate, such as real estate acquisition tax, are not charged in share transfer transactions (please refer to Question No. 14). There may be tax benefits for choosing a share transfer depending on the details of the transaction.
Real estate in Kenya can be transferred either by transfer of the asset or by transfer of shares in a
land-holding entity. However, people shy away from share transfers where the company is a trading company, as opposed to a land-holding company, as buyers do not want to inherit corporate issues when purchasing the company as opposed to an outright purchase of the property.
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 (whether equity or beneficial interest).
The transfer of real estate can be effected either by way of asset transfer as well as share transfer when the seller owns the real estate through a legal entity.
Both structures are commonly used to complete real estate transactions. The choice of one form or the other will depend on tax, liability and commercial issues. The share transfer structure is more convenient in terms of transfer taxes as it does not entail mortgage and registration taxes which are applicable to asset transfer.
The share transfer structure is generally implemented through the same phases summarized above with the following specificities:
- it requires an extended due diligence process to corporate matters and accounting;
- the share purchase agreement does not have to be executed before a notary as the sale does not affect the owner itself but only its shareholders. However, to be opposable to the company, the agreement needs sometimes to be notified to the company which will lead to its registration with the Tax department.
However, if the real estate is owned by a legal entity, any share transfer will lead to the payment of a specific tax as the Tax department considers that it leads to a change of beneficial owner of the real estate.
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 property itself, an asset deal is usually preferred by the purchaser, as risks inherent in the owner-company’s history are eliminated and the seller will directly guarantee against any flaws in the title or nature of the transferred asset.
In Russia, complex real estate transactions are usually implemented by selling the company that owns and operates the respective assets (share deal), rather than via the sale of the property itself (asset deal). Share deals facilitate the sale of real estate as a going concern, which is much more difficult in case of asset deals. Moreover, share purchase agreements are VAT exempt.
However, asset deals are often used for purchasing land plots (sale of land is also VAT exempt) and/or individual real estate objects as opposed to operating businesses and complex facilities. Asset deals are also advantageous where due diligence of the seller’s company revealed tax, corporate or other company-related risks, or where such information is not available.
Both transaction options are applicable in case of real estate transfer, while the choice between the two is contingent upon the aim of the transfer and the tax aspects.
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 vendors 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 Land of an Urban Nature ("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 vendor provided that (a) the vendor is entitled to apply the provisions of the Spanish participation exemption regime or (b) the vendor 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).
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.
Yes, it is common to transfer real estate either way. The selection of means and manner heavily depends on the commercial aspects, for example: consideration of the purpose of the acquisition –business operation or only assets -- and pricing. One issue worth noting is that if it is an asset transfer, then registration will be required and the registration fees will need to be taken into account –it is always advisable that the parties should agree and specify in the agreement who will be responsible for relevant fees and registration expenses.
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.
Yes. As noted in Q6, real estate is commonly held through specially formed entities or structures and there can be 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).
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 a share transfer, additional due diligence needs to be carried out in respect of the applicable entity or entities.
Yes – it is common for transfer of real estate ownership to occur indirectly as a consequence of a share transfer in a company. In this case, there will be no change to the registered owners of the real estate in the land certificate. In the event of a share acquisition transaction, due diligence on the company owning the real estate will also need to be conducted in addition to the real estate due diligence.
Both asset transfers and share transfers are common, depending on many circumstances.
The sale and transfer of commercial real estate can be made either in the form of an asset deal or a share deal. Both forms are commonly used in practice. The choice of one form or the other will depend on tax, liability and commercial issues and must therefore be decided on a case by case basis.
Basically, transferring the interests of the legal entity holding the real estate asset rather than the underlying real estate could be advantageous notably for saving tax and notary's fee, but there can be also risks linked to historical liabilities (tax, corporate and operating activities risk).