What are common ownership structures for ownership of commercial real estate?
Real Estate (2nd edition)
6.1 The structures most commonly used are corporate structures, including Cayman Islands companies and foreign companies.
6.2 Because the Cayman Islands is a no-direct taxation jurisdiction (although see question 14), and real estate investment activities can be conducted though different structures, foreign investors are free to select their investment model based on factors (for example, taxation and investment regulation) not driven by Cayman regulation, except where participation may be marketed in the Cayman Islands.
6.3 REITs and real estate derivatives from Cayman Islands real estate are relatively uncommon due to the relatively small size of the jurisdiction and the taxable event that arises when an interest in land (including the equity capital of a land holding corporation) is transferred (see question 14), although there have been some instances of foreign REITs acquiring Cayman Islands commercial property.
6.4 Institutional investment in the Cayman Islands is increasing as the sizes of projects require large amounts of capital. However, at least two-thirds of commercial real estate is held privately.
The choice of the type of entity to be set up for owning a commercial real estate is usually the result of a tax analysis on a case by case basis.
Individuals often set up a French partnership named société civile immobilière (SCI) to hold and rent commercial real properties on an unfurnished basis. SCI is a fiscally transparent entity and its taxable income is, thus, taxed at the level of each of its partners.
Partners of a SCI have unlimited liability for the whole of the debts of the company but only in proportion to their holding in the capital of the partnership.
Commercial real estate can be held directly by individuals or through entities. High value commercial assets are typically held through specifically created structures which are, depending on the ultimate owner, formed inside and/or outside of Germany.
Common vehicles to hold real estate in Germany include:
- Limited liability companies: Limited liability companies, formed specifically for the purpose of holding the real estate in question, are a common holding structure and may be based in Germany or other jurisdictions. Corporate vehicles offer limited liability, which allows investors to ring-fence assets and liabilities, and they can also provide tax advantages for some classes of investors (for instance with respect to trade tax and capital gains taxation). Corporate vehicles are also used to provide privacy and anonymity for investors.
- Limited liability partnerships: Limited partnerships are also a common holding structure for German real estate. German limited liability partnerships have a legal personality and are typically transparent for corporate and individual income tax purposes. Limited partnerships are a very flexible structure from a governance perspective without many of the rules and restrictions that apply to corporate vehicles. German limited liability partnerships are registered in the commercial register and usually have a general partner with unlimited liability which in turn is usually a limited liability company.
- REITs: The German real estate investment trust (G-REIT) is formed as a stock corporation with a number of key tax advantages. However, G-REITs are subject to relatively strict governance rules (e.g. minimum distribution rules, minimum number of shareholders, minimum capital and leverage rules), and hence are often not suitable for individual investments of one investor. They are subject to the laws of the German Stock Corporation Act (Aktiengesetz) as well as the REIT Act (REIT-Gesetz) and may only hold ownership in real estate (excluding existing residential real estate) as well as participations in real estate companies.
- Open-ended funds: The German open-ended fund is a mutual investment scheme issuing units and regulated by fund rules. It is usually open to a broad range of investors, aimed at multiple investments and managed by a financial investment management company (Kapitalverwaltungsgesellschaft, KVG) as asset management company. The fund as such does not have a legal personality, but its assets are legally owned by the KVG as a so-called "separate asset" (Sondervermögen) on behalf of the open-ended fund. The KVG needs authorisation of a management company for UCITS purposes or as an AIFM. The open-ended fund has various tax advantages.
- Closed-ended funds: In contrast, German closed-ended funds are investment schemes typically set-up for a limited number of investors to collect capital for specific investments or types of investments. They are also managed by an asset management company which has authorisation as an AIFM.
Investment holding companies are commonly used to hold and dispose of commercial real estate in Hong Kong. A share transfer of the relevant company will in effect transfer the target real estate. The stamp duty applicable will therefore be the stamp duty on the sale and purchase of shares, which is equivalent to 0.2% of the higher of the consideration and the fair market value of the shares being transferred.
Commercial real estate in Hungary is typically owned by Hungarian registered limited liability companies (Kft.) and private or public companies limited by shares (Zrt., Nyrt.). These business forms are primarily chosen from a legal perspective (due to their liability being limited in general).
From a tax perspective, there is no difference between the said entities. However, special vehicles, such as real estate investment trusts and real estate funds benefit from corporate income tax exemption and lower real estate transfer tax rate.
Commercial real estate can be held directly by individuals or through entities, although it is more common for high value commercial assets to be held through specifically created structures.
Common ownership structures include:
- Limited liability companies; and
- SOCIMIs (Spanish REITs).
Limited liability companies: Sociedades Anónimas ("S.A.") and Sociedades Limitadas ("S.L.")
The S.A. and the S.L. were traditionally the corporate vehicles most used in Spain. Both companies operate in a similar way, although the S.L. requires fewer formalities.
In both companies, the liability of the shareholders or members is limited to the stake held in the share capital of the company.
The minimum share capital for an S.A. is 60,000 euros, and at least 25% of this amount should be paid up upon incorporation. In the case of an S.L., the minimum share capital is 3,000 euros, which may or may not be fully paid up upon incorporation, with the contribution of assets subject to financial valuation being possible in both cases.
It is common for companies incorporated as investment vehicles to have a relatively low share capital and to capitalise through shareholder loans, so as to minimise as far as possible the Company's Corporate Income Tax ("CIT"). Although there is no thin capitalisation rule under Spanish tax legislation (i.e. no specific debt to equity ratio is required), earning stripping rules apply as regards tax deductibility of net financial expenses.
As a general rule, net financial expenses incurred by Spanish entities would be deductible for tax purposes up to an amount of 30% of their operating profit (EBITDA) for the financial year. In any event, an expense amount of EUR 1 million would always be deductible (if incurred).
In the case of entities belonging to a tax consolidated group, the 30% limit and the EUR 1 million threshold would refer to such tax group.
Please note that additional limitations exist in the case of LBO transactions (i.e. acquisition of an entity and subsequent merger or subsequent application of the CIT consolidation regime).
Furthermore the difference between the 30% limit and the net financial expenses for the tax period could be accumulated (i.e. be added to the 30% limit) in the tax periods ending in the following 5 years.
Lastly, it should be noted that any net financial expenses not deducted for tax purposes may be deducted in the following tax periods, provided that the 30% limit is complied with in such years.
In addition to the above, fair market conditions and strict documentation obligations should be observed as regards any indebtedness incurred with related parties. In particular, the taxpayer would be obliged to carry out a comparability analysis in order to determine a fair market value of the remuneration agreed under the relevant transaction.
Please also note that interest derived from Profit Participating Loans granted as from 20 June 2014 by companies which belong to the same corporate group (regardless of their tax residence) are not deductible for CIT purposes.
Companies are incorporated through deeds granted before a Notary Public, including the company by-laws. In general, such incorporation requires: (i) evidence via a bank certificate of the share capital being paid up, (ii) an attorney with sufficient powers to appear before a Notary Public to incorporate the company, and (iii) a certificate showing that the corporate name of the company has been reserved.
Period before the company may operate
The company acquires a legal identity pursuant to its registration at the corresponding Commercial Registry. The period for such registration varies from province to province, but tends to be approximately one month as from its filing at such Registry. The acquisition of a property by a company which has been incorporated but which is pending entry in the Commercial Registry is possible, although problems would arise, such as acquiring the potential personal liabilities of the parties which granted the sale and purchase, or the non-registration of the sale and purchase of the property in the Land Registry until the registration of the company at the Commercial Registry has been confirmed.
Directors and company representation
A company is represented by Administrators or by a Board of Directors. The Administrators or Directors may be entities or individuals, of any nationality and do not need to reside in Spain. Please note that if the Administrator or Director is a foreign person, he/she will have to obtain a Spanish tax identification number (known as "NIE"). Certain formalities have to be fulfilled in order to obtain a NIE. Should the Administrator or Director be an entity, it will have to appoint an individual as representative.
The post of Administrator or Director may be remunerated or not, depending on the provisions of the company by-laws. The law establishes certain cases of incompatibility for the exercise of the post as Administrator or Director of a company, usually referring to persons in public office. Administrators and Directors are subject to liabilities as established by law, which may be covered by current insurance policies on the market.
Administrators or Directors may be joint or joint and several, and accordingly should act together or individually without distinction. When the company is represented by a Board of Directors, the post of member of the Board of Directors in itself does not imply any capacity to represent the Company, although a Managing Director may be appointed to perform the same duties as those of the Board, save those which may not be delegated by law.
The incorporation of a company, as well as any increase of its equity (i.e. share capital, share premium, other shareholder contributions to equity) are subject to but exempt from Capital Duty taxation ("Impuesto sobre Operaciones Societarias").
On the other hand, any decrease of share capital where previous contributions are reimbursed to the shareholders are subject to Capital Duty taxation at a 1% rate on the market value of the assets/rights reimbursed.
Under certain circumstances, some investors consider it appropriate to issue shares with a share premium, so as to reduce such Capital Duty on the return of funds to shareholders since the return of share premiums is not subject to such Capital Duty taxation.
Spanish Real Estate Investment Trusts (or the Spanish acronym SOCIMIs) are special legal and tax investment vehicles specifically devoted to real estate assets that generate rental income.
Spanish SOCIMIs will be subject to a 0% Corporate Income Tax (CIT) rate subject to a mandatory annual dividend distribution of profits. Accordingly, rental income and capital gains generated by SOCIMIs will be taxed at a 0% CIT rate, provided that the real estate assets are owned for a minimum of three (3) years as from the date of application to adhere to the SOCIMI regime.
The legal requirements of SOCIMIs are as follows:
Sociedad Anónima (S.A.)
Minimum share capital
EUR 5 M
Yes, also permitted in Alternative Markets within the EU (MAB, AIM, etc.)
Corporate object /
a) The acquisition and development (including refurbishment) of urban real estate for rental purposes
b) The holding of registered shares in the capital stock of Sub-SOCIMIs: non-listed companies – regardless of whether or not they are tax resident in Spain - whose primary corporate object is the acquisition of urban real estate for rental, and which are subject to equivalent investing, income distribution and leverage requirements.
(asset & income test)
At least 80% of the SOCIMI's assets shall consist of "Qualifying Assets":
a) Urban real estate for rental purposes.
b) Shares in similar entities (i.e. other SOCIMIs, SUB-SOCIMIs, international REITs or real estate collective investment schemes).
At least 80% of the SOCIMI's annual revenues must derive from the lease of Qualifying Assets, or from dividends distributed by qualifying subsidiaries (Sub-SOCIMIs, foreign REITs and real estate collective investment schemes).
Lease agreements between related entities would not be deemed a qualifying activity and therefore, the rent deriving from such agreements cannot exceed 20% of the SOCIMI's total revenue.
Capital gains derived from the sale of Qualifying Assets are in principle excluded from the 80/20 revenue test. However, if such Qualifying Asset is sold prior to the minimum three-year holding period, then (i) the capital gain would compute as non-qualifying revenue; and (ii) it would be taxed at the standard corporate income tax rate (25%). Furthermore, the entire rental income derived from this asset would also be subject to the standard CIT rate (25%).
Holding period of the assets
Qualifying Assets must be owned by the SOCIMI for a three-year period since (i) the acquisition of the asset by the SOCIMI, or (ii) the first day of the financial year that the company became a SOCIMI if the asset was owned by the company before becoming a SOCIMI. In the case of urban real estate, the holding period means that these assets should be rented; the period of time during which the asset is on the market for rent (even if vacant) will be taken into account, with a maximum of one (1) year. If the holding period is not maintained, the SOCIMI will be taxed at a 25% CIT rate for all type of income related to such asset, during its entire holding period, together with the accrued default interest.
Mandatory distribution of dividends
a. 80% as a general rule (rental income)
b. 50% of the profits derived from the sale of Qualifying Assets. Any excess amount must be reinvested within the following 3 years. If no reinvestment is made, 100% of the profits should be distributed.
c. 100% of dividends distributed by the SOCIMI’s subsidiaries
Common ownership structures for ownership of commercial real estate are:
- Direct ownership by one or more individuals/entities as owners / joint owners (with or without an express agreement between co-owners on the mode of utilization and devolution of the asset).
- Co-operative societies, in which allottees of plots/premises on the property held by the co-operative society are members. Here, title to the entire property including common areas like internal roads vests in the co-operative society, whereas members of the society are allottees of demarcated premises. The property or the building is managed by the society from contributions from members in accordance with its bye-laws.
- Limited liability companies, in which allottees of plots/premises on the property held by the limited company are shareholders. Here, title to the entire property including common areas vests in the company, whereas shareholders of the company are allottees of demarcated premises. The property or the building is managed by the limited company from contributions from shareholders in accordance with its Articles of Association.
- Association of Apartment Owners / Condominium, in which title to the entire property including common areas vests in the Association of Apartment Owners, whereas apartment owners are the owners of individual apartments. The property or the building is managed by the Association of Apartment Owners from contributions from apartment owners in accordance with its bye-laws.
- LLPs are also used for real estate investments, since the profits and losses of the LLP are assessed in the hands of the LLP itself and there is exemption from tax in the hands of its partners. Since November 2015, the government permitted FDI under the automatic route into LLPs operating in sectors where 100% FDI is allowed through the automatic route (including Construction-development projects, as explained in the response to question 3. But note that LLPs with FDI will not be allowed to operate agricultural/plantation activity or “real estate business” (as defined in the response to question 3).
A co-operative society is preferred as a common holding structure, as it promotes participation by the members in decisions regarding management of the common asset in a democratic manner with one member having one vote, though majority rule can sometimes be a disadvantage.
Ownership structures for commercial real estate in Ireland range from private individuals, corporate entities, co-ownership structures and limited partnerships.
The most popular structure for international investors in recent years is an Irish Collective Asset-management Vehicle (ICAV) – a vehicle designed for investment funds and attractive to investment managers seeking to market their funds in the U.S. The introduction of tax reforms in 2017 and 2018 which negatively impacted Irish regulated funds focused on Irish property (so called Irish Real Estate Funds or "IREFs") has led a decline in the popularity of such structures. International investors are increasingly using non-Irish resident structures, such as Luxembourg companies.
Irish resident investors will typically utilise Irish resident companies, or limited partnerships.
Real Estate Investment Trusts (REITS) were introduced in 2013 as a new vehicle for investment. Subject to meeting certain criteria, a REIT will not be liable to either Corporation/ Income Tax on its property rental income or property profits, or Capital Gains Tax on disposals of assets of its property rental business.
Commercial real estate is usually owned by companies established specifically for this purpose. This approach allows for efficient operation of the respective real estate asset, and facilitates its sale as a going concern through share deals. Until recently, foreign investors preferred to establish offshore companies to own real estate. However, due to tax changes concerning controlled foreign companies, this type of structure has largely lost its appeal. Now commercial real estate is usually owned by a Russian LLC.
Commercial real estate can be acquired and owned either by individuals or by legal entities. However, in practice, it is much more common to own commercial real estate through legal entities than directly by the ultimate individual owner.
There are many reasons for this, but the main one is obviously that commercial real estate is often acquired by companies to operate their own business activities. Furthermore, when commercial real estate is acquired by individuals for investment purposes, the choice for such individuals to acquire a commercial building through a real estate company is justified for practical and tax reasons, as well as to act as a protective shield against potential liabilities.
Commercial buildings are often leased to several different owners and require contracts with many different suppliers for administration, maintenance, security and other services. Therefore, in view of dealing with all aspects of a commercial building, it is easier from a practical point of view to have it owned and managed through a legal entity rather than directly by the individual who ultimately owns it. The legal entity also provides the ultimate individual owner(s) with a protective shield against the tenants and potential litigation.
Finally, the use of a legal entity for the acquisition and holding of commercial real estate can also have some tax benefits if it is properly structured.
The most common legal entities used for the acquisition of commercial real estate are companies limited by shares (public limited companies called Société anonyme) and limited liability companies (private limited companies called Société à responsbilité limitee). Both types of companies limit the liability of its shareholder(s)/partner(s) to the amount of the subscribed share capital.
Commercial real estate can be held directly by individuals or through entities, although it is more common for high value commercial asset to be held through specifically created structures, often formed outside of England and Wales.
Common ownership structures include:
- limited liability companies;
- offshore property unit trusts; and
- limited partnerships.
Limited liability companies: Limited liability companies, formed specifically for the purpose of holding the real estate in question, are a common holding structure and are often based offshore. Corporate vehicles offer limited liability, which allows investors to ringfence assets and liabilities, and they can also provide tax advantages for some classes of investors (for instance, offshore entities holding commercial investment properties are typically outside of the UK capital gains regime, and selling the shares in a corporate vehicle means that a purchaser should not have to pay stamp duty land tax on the transfer of the property). Corporate vehicles are also used in order to provide privacy and anonymity for investors, although UK corporates are subject to disclosure of certain beneficial owners under the "People with Significant Control" regime and there are proposals to introduce a similar regime for offshore holders of UK real estate.
Offshore property unit trusts: Under these structures, the property is held by trustees (usually two to allow a purchaser to have the comfort of "overreaching" the trust on a sale see Q13) on behalf of investors who hold units in the unit trust. Property unit trusts are a commonly formed in Jersey (JPUTs) or Guernsey (GPUTs).
Property unit trusts have a number of key tax advantages – if drafted properly they can be tax transparent for UK income tax purposes whilst also benefitting from being outside the capital gains regime in a similar way to offshore companies. Transfers of units in a property unit trust do not give rise to stamp duty land tax and typically do not give rise to local stamp duty. Property unit trusts were historically very popular as they previously also benefitted from seeding relief under which property could be transferred into the property unit trust free from stamp duty land tax, creating a very tax efficient method of transferring property. Although seeding relief for offshore property unit trusts has been withdrawn, they still remain a popular and tax efficient way of holding property.
Limited partnerships: Limited partnerships are a common holding structure for English and Welsh property, with English, Jersey and Guernsey limited partnerships commonly used. The exact nature of the limited partnerships varies with some having legal personality whilst others (including English limited partnerships) do not. Limited partnerships are typically transparent for most tax purposes (including income and capital regimes) and they are therefore a popular structure for tax-exempt investors (although the transparent nature means that transferring interests in a partnership that holds property is normally subject to stamp duty land tax). Limited partnerships are a very flexible structure, without many of the rules and restrictions that apply to corporate vehicles.
Commercial real estate is typically owned by corporations, trusts, partnerships, limited liability companies, or limited partnerships. Tax concerns, personal liability of the investors, management concerns, and transferability of ownership interests are all factors to be considered in selecting the appropriate entity through which to own the property.
A corporation is (i) managed by its board of directors, (ii) continues in existence regardless of the death, bankruptcy or sale of interests of any shareholder, with few exceptions for certain tax reasons, and (iii) generally protects shareholders from personal liability for the corporation's obligations. By default, a corporation is treated as a "C" corporation for U.S. federal income tax purposes. Profits of a "C" corporation are taxed at the corporation level and, if dividends are distributed to shareholders, also taxed at the shareholder level, thus limiting its attractiveness to investors. Under certain circumstances, a "C" corporation can elect to convert to an "S" corporation. An "S" corporation is only subject to one level of tax. Among other limitations, however, a shareholder of an "S" corporation may only be an individual who is a U.S. citizen or resident alien, estate or certain types of trusts.
The primary goals shared by investors when selecting a vehicle to own commercial real estate – avoiding double taxation and limiting liability to the amount invested – can be achieved in many cases through the use of a limited partnership or limited liability company, and in certain jurisdictions, a business trust. In most cases, a Delaware limited liability company is used mainly because such an entity achieves both of these objectives, is easy to form and operate, and Delaware's laws are well developed and provide for a lot of flexibility. Another entity that achieves the goal of avoiding double taxation and limitation of liability is a real estate investment trust (a "REIT"). If the proper election is made, a REIT can be in the form of a limited liability company, a partnership, a corporation or a trust. Provided an entity qualifies as a REIT, it generally is not taxed on its otherwise taxable net income and gains to the extent that it distributes such income and gains to its shareholders. Rather, shareholders of a REIT are generally subject to tax on such distributions so that an investment through a REIT is typically subject to a single level of tax and not the double level of tax that generally applies to "C" corporations. In order to qualify as a REIT, an entity must satisfy certain requirements with respect to its ownership, operations, income, and assets. If an entity's status as a REIT is terminated because it fails to meet the applicable REIT requirements and does not satisfy certain relief provisions, the terminated REIT will be taxed in the same manner as a "C" corporation.
The current commercial trend runs counter to the fragmentation of property. It is now usual for a person to retain title to a property while granting different rights over the commercial units to the direct user and dealing with the administration of the commercial complex, without prejudice to the possibility of detaching the commercial units located in a shopping center or office building. In the past, it was common for commercial units to be transferred, leaving the management of the commercial complex in the hands of the co-op board.
The most commonly used ownership structures for commercial real estate are:
- Direct ownership by individuals (least common structure due to increased liability exposure).
- Direct ownership through companies.
- Trusts, including specific real estate trusts which rights are publicly traded (e.g. FIBRAs and CKDs).
FIBRAs (fideicomisos de inversión en bienes raíces). Mexican equivalent of REITs (real estate investment trusts) that have become one of the most attractive mechanisms for real estate developers for its tax benefits. Real property owners create a FIBRA by conveying title to a Mexican trust, which, in turn, issues real estate trust certificates in a registered stock exchange providing that the resources obtained from such allocation are used to acquire and develop real estate intended for leasing, based on certain eligibility criteria established under the FIBRA governing documents.
CKDs (certificados de capital de desarrollo). Development capital certificates (known as CKDs) are investment vehicles structured through a Mexican trust which receive resources from the public offering of trust certificates (mainly from pension funds), to finance national infrastructure and real estate projects, as well as to perform investments of private capital in promoted companies.
Sometimes, real estate is transferred indirectly to a buyer through the acquisition of (i) shares or equity interests in the specific vehicle or entity holding title to real property, or (ii) beneficial interests in the corresponding real estate trust.
Real estate trusts became popular in Mexico mainly because of its flexibility as investment vehicles. For instance, by implementing a real estate trust structure, owners and private investors could transfer title to real property and funds, respectively, to develop a specific project, providing for different rights and obligations each of them would assume through their beneficial interests under the trust agreement.
There are no specific limitations on ownership structures under Italian law. Commercial real estate assets are usually owned through SPVs—mainly Italian limited liability companies (società a responsabilità limitata)—or real estate investment funds. Decision on the investment structure is normally taken in light of existing ownership structure, tax efficiency, governance, operational needs or regulatory requirements.
There are no statistical studies indicating the percentage related to the type of the ownership but both there are some tax advantages for the companies.
In case the company (except the companies having real estate trade as its main activity) owns the real estate, it is exempt from VAT and %75 of the corporate tax by transferring it on the condition that the real estate properties are held for over two years.
It is common for both individuals and legal entities to own immovable property. Also, partnerships and joint ventures are made for the purpose of owning and or developing immovable property.
Usually, limited companies are used for the purchase of immovable property when such property is being purchased to be re-sold or to be developed. A company that is a dealer of land or a developer pays tax at 12.5% when selling an immovable property at a profit. When an individual who is not a dealer of land sells immovable property at a profit, 20% capital gains tax is charged. Whether it is beneficial for an entity to purchase the immovable property instead of an individual depends on several factors like the value of the property, the intended future use of the property, the prospect of selling the property, the number of persons involved the purchase etc. Each case depends on its own facts.
Furthermore, trust structures may be used for the purchase of property. This is usually the case when there is a reason to keep the legal title separate from the beneficial title. Such trusts are registered at the land registry.
A new trend in Cyprus is the investment in immovable property through funds.
Although it is possible for foreign entities to directly own land and buildings in Japan, it is rather common to own real property through a Japanese entity such as a kabushiki-kaisha (“KK”) or a godo-kaisha (“GK”) incorporated under the Companies Act.
In the real estate financial market, it is common to use (i) a GK together with a tokumei-kumiai agreement (“TK”), which is one type of partnership agreement under the Commercial Code or (ii) a tokutei-mokuteki-kaisha (TMK) incorporated under the Act on the Securitization of Assets in order to reduce applicable taxes.
There are some factors to determine which structure is appropriate, for instance (i) regulations (different types of regulation would apply to the scheme depending on the type of SPC and the type of asset the SPC is holding), (ii) the need for a clear tax opinion (under the GK-TK structure, it is generally difficult to obtain an unqualified tax opinion regarding the avoidance of double taxation), and (iii) managing cost (the cost using the TMK structure is typically higher).
(1) GK-TK structure
One important aspect of the GK-TK structure is that the TK agreement allows avoidance of double taxation. However, the requirement for the avoidance is not clearly prescribed by the laws of Japan, and a legal and tax opinion with respect to that point is difficult to provide.
A GK is rather more simple and flexible than a KK in terms of governance. It is possible for a GK to be established solely with one entity as a member appointing one individual as a managing officer (shokumu-shikkousha). An ippan shadan hojin (“ISH”) is commonly used as a member of a GK to achieve governance neutrality and bankruptcy remoteness. This is because the officers of an ISH cannot change or be appointed by the contributors of ISH once the individuals are appointed under the articles of association. This means that the ISH can be free from the funder (sponsor)’s control.
(2) TMK structure
Unlike the GK-TK structure, the requirements for special tax treatment of a TMK are clearly prescribed by the tax laws of Japan; therefore, by fulfilling those requirements, an investor can avoid double taxation. A TMK can issue two types of equity: specified shares which are similar to ordinary shares in a KK; and preferred shares. The voting rights of a preferred shareholder are limited under the Act on the Securitization of Assets.
On the other hand, the Act requires (i) one director and statutory auditor from a governance view point, and (ii) preparation of a specific asset liquidation plan, which must be submitted to the authority.
The choice of ownership structure depends on the commercial purposes and therefore is determined on a case-by-case basis.
However, the common ownership structures are:
- Owned by a corporate
Corporate-owned real estate is basically for operating a business, including intra-group restructuring, e.g., line of business grouping.
Another familiar purpose is wealth management for families. There were tax incentives made available in certain years in a form of enacted royal decree, omitting transfer-related taxes and income tax for the transfer to land from a natural person to a company.
- REIT (Real Estate Investment Trust)
A REIT allows the owner to generate more revenue and expand investment from the real estate through fundraising from the public. There are currently various types of REITs: offices, warehouses and department stores. All units of a REIT will be listed on the Stock Exchange of Thailand, and the relevant regulators have placed qualifications and conditions for REIT establishments.
Both individuals and legal entities may hold and exercise rights over commercial real estate. Foreign ownership is generally permitted.
A common entity form that is used to invest in real estate and manage income deriving from real property assets is the Real Estate Investment Company. These entities benefit from a special tax framework, including exemptions from property transfer tax on acquisition, capital gains tax on the sale of property, tax on dividends, etc.
Usually the ownership over commercial real estate is allocated to legal entities (i.e. оn rare occasions it is a direct ownership by natural persons). The reasons for that are:
- the limited liability of the legal entities (i.e. the limited liability company or joint stock company);
- the publicity, surrounding the legal entities (e.g. the annual financial statements, pledges and insolvency requests are all published in the Commercial register);
- the transfer of land with buildings on it is subject to VAT taxation (thus, a legal entity being the acquirer will be able to make use of the VAT tax deduction rules)
Commercial real estate is commonly owned by individuals and legal entities (direct ownership) or by means of indirect interest through equity/securities of legal entities or investment funds.
Since 2003 the typical structure of a real estate transaction is through a sale and purchase of the shares in a limited liability special purpose vehicle (SPV) holding the real estate or property in question. In Sweden there are, as of now, no ‘thin capitalisation’ or similar rules, meaning that a dormant limited liability company with only SEK 50,000 in share capital may purchase real estate worth SEK 100 million (or more, with no limitation based on legal requirements), establishing an SPV structure for sale of the property (known as ‘packaging’). The background behind this structuring is that since 2003, such share transfers are, as a general rule, tax exempt, meaning that there will be zero income tax on the profits made on the sale of the shares. Applicable taxes will then be stamp duty and income tax on the property transfer into the SPV holding. However, the property transfer into the SPV will normally be made on a price or value equal to the tax residual value involving zero income tax also in this step of the structuring.
Direct real estate transfers carry a stamp duty of (currently) 4.25 percent for legal persons (less for physical or private persons and some other legal entities) based on the higher of the purchase price and the tax value of the property the year before the transfer. If there is no tax value on the property – because it involves a property category that under law is exempt from property tax (such as certain public service properties, for instance schools or care properties) or involves a newly established property through land parcelling measures – there will be a need for a valuation report. Currently, there is no stamp duty on the transfer of shares of real estate companies. This means that most transactions, from a processing and documentation standpoint, are made as indirect share transfer deals, rather than direct property transfers.
In recent years there have been discussions and proposals regarding tax legislation changes for ‘packaging’ of real estate into SPVs, involving inter alia proposed income taxation on the sale of shares and changes of applicable rates of stamp duty, possibly also extending stamp duty charges to property amalgamation measures and to the sale of shares. Following the general elections in 2018 and uncertainties regarding the formation of government, it is unclear to what extent such legislative changes will be implemented in the near future. The uncertainty following the proposals may already have affected market interest in investing in Sweden, specifically among international private equity investors. Changes in tax legislation would most likely lead to variations in the structuring of real estate deals and the market closely follows the legislative process.
Commercial real estate is typically owned and managed through one or several limited liability corporations, but ownership under other forms of association also exists. Direct ownership of commercial real estate by individuals/natural persons is relatively unusual. The main driving factors behind the ownership structures currently in use are, naturally, tax optimization and limitation of owner liability.