What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
Real Estate (2nd edition)
14.1 Subject to limited exemptions (some of which are at the discretion of the Minister of Finance), ad valorem stamp duty is payable on:
(a) the conveyance or transfer of any immovable property (freehold or leasehold):
(i) 7.5% of the higher of purchase price and market value, although concessions may be available in certain circumstances; and
(ii) usually paid by the purchaser;
(b) the grant of a lease of any immovable property:
(i) if the term exceeds thirty years, the same duty as on a sale based on the full market value of the leasehold interest in the real property; or
(ii) if the term is thirty years or less:
(A) where any premium or other valuable consideration other than or in addition to rent is provided, the same duty as on a sale based on the amount of the premium; and
(B) where the consideration or any part of the consideration is rent:
(I) if the term is less than one year, 5% of the aggregate rent;
(II) if the term is one year or more, but does not exceed five years, 5% of the higher of average annual rent or market rent;
(III) if the term exceeds five years, but does not exceed ten years, 10% of the higher of average annual rent or market rent; or
(IV) if the term exceeds ten years, 20% of the higher of average annual rent or market rent; and
(iii) usually paid by the tenant;
(c) debentures and legal or equitable mortgages or charges of immovable or movable property within the Cayman Islands:
(i) in the case of a debenture or a legal or equitable mortgage or charge of immovable property within the Cayman Islands:
(A) where the sum secured does not exceed KYD300,000, 1% of the sum secured; or
(B) where the sum secured is more than KYD300,000 (whether initially or after a further advance), 1.5% of the sum secured;
(ii) in the case of a legal or equitable mortgage or charge of movable property within the Cayman Islands, 1.5% of the sum secured (subject a maximum charge of KYD500 where the security instrument is granted by a Cayman Islands exempted company, a Cayman Islands ordinary non-resident company, a Cayman Islands exempted trust or a body corporate incorporated outside of the Cayman Islands or the security is over shares in a Cayman Islands exempted company or a Cayman Islands ordinary non-resident company); and
(iii) usually paid by the borrower; and
(d) policies of insurance for property within the Cayman Islands:
(i) 2% of the cost of the new or renewed property insurance premiums; and
(ii) usually added to insurance premiums.
14.2 Subject to limited exemptions (some of which are at the discretion of the Minister of Finance), ad valorem share transfer tax is payable on the transfer or issue of equity capital in a land holding corporation at the rate of 7.5% of the proportionate value the entire land holding. A land holding corporation includes any partnership, foreign corporation, chartered corporation, mutual fund or incorporated company (but not a corporation sole or charitable corporation) holding any legal or beneficial interest (excluding interests created pursuant to bona fide security instruments) in landed property in the Cayman Islands (or interest in another land holding corporation). Landed property would include freehold interests in Cayman Islands real property and any leasehold interest where the original term exceeded thirty years.
14.3 In addition, most financial instruments and documents will attract a fixed rate of stamp duty in comparatively nominal amounts. Registrable instruments also attract relatively immaterial registration fees.
14.4 Subject to limited exceptions, real estate used for paid tourist accommodation attracts tax at 13% of the amount charged to each tourist.
14.5 There are no other domestic taxes or municipal rates currently payable on the occupation, acquisition, ownership or disposal of Cayman Islands real property or income deriving therefrom.
Main taxes associated with ownership are:
- Real estate taxes: Owners of real estate are liable for land taxes (assessed by the tax authorities) and, in the Paris region, for tax on office and retail premises and parking areas. These taxes are, usually, re-invoiced to tenants.
- Direct taxes: landlords are entitled to elect for VAT on leasing of commercial real estate. Corporate income tax applies to profits and gains derived by companies from the real estate at a maximum effective rate of 32% in 2019, decreasing to 25.83% by 2022. A contribution on added value at a rate of up to 1.5% also applies.
- Other taxes: an annual 3% tax on the value of the real estate may require disclosing the chain of ownership of the real estate to the French tax authorities.
Main taxes on asset sales are:
- Registration duties: standard rate of 5.81% or 6.41% (office properties in the Paris region) of the purchase price. Reduced rates are available for (i) acquisitions of building land and properties completed for less than five years, (ii) acquisitions with a commitment to resale within five years, and (iii) acquisitions with a commitment to carry our works resulting in the real estate being considered new. A real estate security contribution of 0.1% and notary's fees also apply to all transfers.
- Value added tax (VAT): at 20% on transfers of building, land and real estate assets completed for less than five years. The sale of leased commercial real estate may in certain cases be treated as a VAT-free transfer of a going concern (fonds de commerce) (i.e. the leasing business). If this regime does not apply, the seller may elect for VAT on the transfer or re-invoice the partial refund of VAT triggered by a VAT-exempt transfer to the purchaser.
- Capital gains tax (CGT): standard rate of corporate income tax if the seller is a company, i.e. maximum effective rate of 32% in 2019, decreasing to 25.83% by 2022. Certain regulated vehicles (including the listed société d'investissement immobilier cotée (SIIC) and the real estate collective investment vehicle organisme de placement professionnel collectif immobilier (OPPCI) benefit from a corporate income tax exemption subject to distribution requirements.
Ownership: Land tax is payable to the local authority. Taxes vary depending on where the property is situated as land tax is a local tax.
Direct taxes: In general, letting and leasing of real estate is VAT exempt. However, the lessor is entitled to opt for the application of VAT with respect to a lease agreement if the property is used by the tenant for services and supply's which are subject to VAT.
Corporate income tax and trade tax (if the income is derived through a German permanent establishment) apply to income, profits and gains arising from the real estate. These will vary depending on whether the real estate is owned by an individual or entity, the nature of the entity and if they are resident in Germany.
Taxes on asset sales are:
Real Estate Transfer Tax (RETT): RETT is based on the purchase price for the property, and typically born by the buyer. The tax rates vary between 3.5% and 6.5% depending on the state where the property is located. In share deal transactions it may under certain conditions be possible to structure an acquisition RETT exempt. However, the German RETT rules for share deals are currently under discussion and will presumably be tightened in the near future.
Value Added Tax (VAT): At (currently) 19%. However, sale of real estate is in general exempt from VAT or may qualify as a VAT-free transfer of a going concern (i.e. a business that is operating and making a profit), depending on the facts. The seller can make an election to charge VAT (which invariably it would do to enable it to recover VAT it incurs in relation to services and supplies received with regard to the real estate).
Capital Gains Tax (CGT): (Currently) 15.825% corporate income tax (combined rate including solidarity surcharge) if the seller is a corporation. In addition, German trade tax may apply if the income is derived through a German permanent establishment; trade tax rates vary regionally, the effective trade tax rates presently range between 7% and approx. 17%. In case of individuals as sellers a progressive income tax rate is applied; the top rate amounts to 45% (plus solidarity surcharge and church tax (if applicable).
The current ad valorem stamp duty ("AVD") imposed on the transfer of commercial real estate, ranges from 1.5% to 8.5% of the purchase price or market value of the property, whichever is higher, if the sale is effected as an asset transfer. HK$100 is also payable on the assignment of the property.
In comparison, the AVD for residential properties in Hong Kong, unless specifically exempted or otherwise provided, is payable at a flat rate of 15% of the stated consideration or market value of the property (whichever is higher). However, the said flat rate of 15% does not apply to an agreement /conveyance for a residential property where the purchaser/transferee is a Hong Kong permanent resident acting on his own behalf and he does not own any other residential property in Hong Kong at the time of acquisition of the subject property. In that case only the lower rates ranges from HK$100 to 4.25% of the purchase price or market value of the property (whichever is higher) will apply to such agreement/conveyance.
In addition to AVD, unless specifically exempted or otherwise provided, a buyer stamp duty of 15% on the stated consideration or market value of the property (whichever is higher) will be payable by the purchaser of a residential property and a special stamp duty jointly liable by the seller and purchaser at a rate based on the holding period of the property ranging from 5% to 20% of the stated consideration or market value of the property (whichever is higher).
If a purchaser acquires a property (including both commercial or residential property) via a share transfer of a company limited, then the current stamp duty payable on each bought and sold note will be 0.1% of the higher of the purchase price or the net asset value of the shares. HK$5 is also payable on the instrument of transfer.
In Hong Kong, property ownership is subject to the payment of government rent, rates and property tax which, as of November 2017, is determined at 3%, 5% and 15% of the rateable value of the property (determined as the rental income (and any other consideration) which is generated by the property), respectively.
Starting from 1 July 2018, a levy in the amount of HK$350 on each leviable instrument, regardless of the stated consideration or value of the immovable property under the conveyance on sale, is also collectable from the purchaser by the Stamp Office of the Inland Revenue Department on behalf of the Property Management Services Authority.
As a general rule, the buyer of the real estate shall pay transfer tax on the acquisition of real estate for consideration. The general tax rate is 4% up to HUF 1 billion (EUR approx. 3.1 million) of the market value of the real estate and 2% on the excess, however, the total payable transfer tax shall not exceed HUF 200 million (approx. EUR 625,000) per real estate (i.e. per topographical plot number).
Transfer tax shall also be payable for the acquisition of shares in a real estate holding company if the ownership ratio of the buyer reaches 75% of the company’s total shares. Shares of related parties and close relatives shall also be calculated for this threshold. The amount of transfer tax liability shall be calculated in respect of each real estate held by the company separately under the above rules. Real estate holding company is a company (i) in the balance sheet of which Hungarian real estate make up more than 75% of the value of total assets; or (ii) which owns more than 75% participation, directly or indirectly, in a company fulfilling the condition under (i).
Discounted transfer tax rate (flat 2%) may be applied for acquisition of real estate by real estate funds, credit institutions, real estate traders or REITs. The HUF 200 million cap of transfer tax liability does not apply in these cases.
Various exemptions from transfer tax are also available; for example, no transfer tax is payable if the transfer takes place between related parties, or by a preferred transformation, exchange of shares or transfer of business; in all cases subject to further conditions.
In general, the sale of real estate is exempt from VAT under the Hungarian VAT Act. However, the seller can opt for taxation, where such sales will be subject to reverse charge, i.e. the buyer shall assess and pay the VAT to the tax authority, the general VAT rate being 27%.
New real property (i.e. which has not been occupied or less than 2 years have been passed since its occupancy or development) and building plot is excluded from this exemption and the reverse charge regime, therefore their sale is subject to VAT at the rate of 27% which shall be charged by the seller to the buyer.
A preferential 5% VAT rate shall be applied until 31 December 2019 for the sale of (i) residential units in a multi-unit residential building having a total net floor space not exceeding 150 square meters and (ii) single-unit residential units having a total net floor space not exceeding 300 square meters. The preferential VAT rate is prolonged until 31 December 2023 provided that building permit had been obtained until 1 November 2018.
Personal income tax
If a private individual sells real estate, his/her income (the revenue less deductible costs, e.g. acquisition costs) is taxable at 15% personal income tax rate. The taxable income is gradually decreasing by each year from the acquisition, becoming tax exempt by the fifth year. If the private individual sells the real estate in the scope of its business activities, the tax liability shall be assessed under different rules, depending on the form in which the private individual pursues its business activity.
Local real property taxes
Real property tax on buildings and building plots can be imposed by the local municipalities within the confines of the act on local taxes. The tax is payable on a semi-annual basis by the person registered as owner on the first day of the tax year.
The maximum rates local municipalities can impose in 2018 are (i) in case of buildings, HUF 1,854 (approx. EUR 6) per sqm or 3.6% of the adjusted market value of the building and (ii) in case of building plots, HUF 337 (approx. EUR 1) per sqm or 3% of the adjusted market value of the building plot.
Real estate activities in Spain are subject to direct taxation on profits obtained, and to indirect taxation on the possession of real estate assets and transactions related thereto.
Corporate Income Tax ("CIT")
Spanish Corporate Income Tax ("CIT") is a tax on profits earned by:
- companies resident in Spain on all income earned from their operations whether arising inside or outside Spain, at a rate of 25%; and
- non-Spanish tax residents acting through a Spanish permanent establishment, at a rate of 25%.
Non-Spanish tax residents acting without a Spanish permanent establishment: Non-Residents Income Tax rate of 19% which can be reduced by virtue of Double Tax Treaties / EU Directives.
Existence of “participation exemption” provisions for Spanish tax-resident companies on dividends received and gains on sales of subsidiaries (Spanish or non-Spanish), but subject to certain conditions.
Existence of Corporate Income Tax consolidation regime (a minimum participation of 75% is required).
Tax deductibility of 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.
Individuals' Income Tax
Generally tax-resident individuals are taxed on worldwide income and gains.
Non-Spanish tax residents are taxed on activities of Spanish permanent establishments or Spanish-source income.
Spanish tax-resident individual investors: Dividends and capital gains tax rates range between 19% (up to EUR 6,000), 21% (EUR 6,000 to EUR 50,000) and 23% (above EUR 50,000) in year 2017.
Value Added Tax ("VAT")
Transfer of Properties
Any transfer of real estate assets is always subject to either Value Added Tax ("VAT") or Real Estate Transfer Tax ("RETT"), the application of one excluding the other. The basic difference lies in the fact that, whereas the VAT borne by a company in a transaction may be deducted from the VAT incurred or to be incurred by such company in its other business activities, the RETT is not directly tax-deductible, although in accordance with the increase in price of the asset acquired, it may be considered an expense via the amortisation of the aforementioned asset.
The following real estate transactions are subject to VAT:
(a) sale of new constructions;
(b) sale of plots which may be built on; and
(c) sale of properties to be refurbished or demolished. In the former case, the buyer must invest in the refurbishment an amount exceeding 25% of the purchase price of the building.
In the remaining cases, the purchase is always subject to RETT instead of VAT; in this way, the second and subsequent handovers of any property are in principle exempt from VAT and, therefore, subject to RETT. However, this exemption may be waived, the transaction thus being subject to VAT (hence excluding the RETT) when the buyer is a taxpayer performing a business or professional activity and is entitled to the total deduction of the VAT borne in the transaction.
The general VAT rate is 21%.
It is worth pointing out that when a transaction is subject to VAT, it shall also be subject to Stamp Duty (hereinafter, "SD"), providing the transaction is formalised through a public deed and may be registered at the Land Registry, as is usually the case. The general rate of Stamp Duty is between 0.5% and 2%, depending on the Autonomous Community where the asset is located. Finally, it should be mentioned that if the VAT exemption mentioned above is waived, a higher rate of SD is applicable which, depending on the corresponding Autonomous Community, may vary between 0.5% and 2.5%.
Lease of Properties
In general, the lease of properties is subject to Value Added Tax at the rate of 21%.
However, leases whose object consists of buildings or parts thereof exclusively devoted to housing, including accessory garages and annexes and furnishings leased jointly with such buildings, are exempt from Value Added Tax.
In both cases, such exemption is not applicable to leases with a purchase option.
Real Estate Transfer Tax ("RETT")
RETT is applied to real estate transactions other than those mentioned in the foregoing section, and in particular to (i) second and subsequent transfers of properties once their construction has concluded (unless there is a waiver of the VAT exemption, as mentioned above), (ii) the sale of land not classified as plots for construction pursuant to urban development regulations and (iii) the transfer of real estate assets within the framework of the transfer of a going concern ("unidad económica autónoma") for VAT purposes.
The RETT general rate is 7% but it may range between 6% and 11% depending on the Autonomous Community where the real estate asset is located.
Transfer of Shares
On a general basis, the sale of shares will be exempt from RETT / VAT if the asset is devoted to an economic activity.
Property Tax ("PT")
PT ("Impuesto sobre Bienes Inmuebles") encumbers the ownership of properties of a rustic or urban nature, the ownership of an in rem usufruct or ground lease over such properties or the ownership of an administrative concession over such assets or over the public services to which they are subject. The taxpayer is the owner of the property or the holder of such rights or administrative concessions. The taxable basis of the PT, which falls due annually, is determined by the cadastral value, which includes the land value plus that of the constructions thereon. Applied to such a basis are the taxation rates of 0.4% for urban land and 0.3% for rustic land, although these rates may be increased by each City Council depending on the population and other specific circumstances of the municipality.
Tax on the Increase in the Value of Land of an Urban Nature
This tax is collected as the result of the transfer of the ownership of urban land by any title and the granting or transfer of any in rem right of enjoyment, restricting ownership, over such land. The party obliged to pay such tax is the transferor of the land or the person granting and transferring the in rem right of enjoyment, when the transfer is for value.
In fact, the tax does not encumber the capital gains earned by the seller, but rather is calculated on the increase of the cadastral value, applying thereto at the time the tax falls due a certain percentage established by the City Council depending on the number of years elapsed since the previous transfer (which cannot be more than 20 or less than 1).
This local tax is currently under significant dispute within the Spanish tax system, as the Spanish Constitutional Court (Tribunal Constitucional) has recently declared unconstitutional part of the regulation of this local tax referring to the determination of the tax base (based on the land's cadastral value during the year of sale and the holding period), irrespective of the fact that there is no real gain (or even a loss) on the assets. This decision may have an impact on future proceedings in which the non-application of the tax or a refund based on the lack of increase in value of the transferred land is requested.
Other local taxes
City Councils may also subject acts regarding the use and exploitation of the property to taxation, amongst which it is worth mentioning the Tax on Constructions, Installations and Works ("Impuesto sobre Construcciones, Instalaciones y Obras"), which encumbers the carrying out of any construction, installation or works for which urban development or works licences are required. Moreover, the granting of other licences might constitute a further taxable item, such as, for instance, the obtaining of the so-called opening licence.
Business Activity Tax ("Impuesto sobre Actividades Económicas") is another local tax on the mere performance of economic activities. As a general rule, the company may be obliged to register for the purposes of this Business Activity Tax and pay the relevant tax due, which would be determined according to the item corresponding to the relevant activity (i.e. item 833 if the company performs development works on the real estate assets and item 861 in the case of leasing activities). The local regulations of the City Council corresponding to the real estate assets' location will always have to be observed.
Stamp duty must be paid upon a transfer of immovable property and the rate depends upon the nature, usage, location and valuation of the property. Registration fees must also be paid. The market value of land is determined by Government authorities and declared each year (ready reckoner rates).
Capital gains tax liability may arise for the transferor upon a transfer of real estate if the asset was a long-term capital asset of the transferor. Alternatively, the profit upon transfer of real estate may be taxed in the hands of the transferor as income if the asset was held as a trading asset or short-term asset of the transferor.
The recently introduced Goods and Services Tax (“GST”) may be payable upon a transfer of development and other rights in the real estate if the transaction is considered as supply of goods or services or both. Note that:
- GST is not applicable on a sale of land and is also not applicable on the sale of units/apartments/flats in a building after issuance of a “completion certificate” by the government authorities.
- “Supply” has been given a wide definition in relation to the construction or real estate sector, and a range of transactions may be treated as supply of goods or services.
Other taxes may be payable to municipal authorities and corporations depending upon where the property is located.
The sale of Irish real estate, or of unquoted shares in companies deriving the greater part of their value from Irish real estate, will be subject to Irish capital gains tax. The current rate is 33%. The gain is calculated on the proceeds of sale less acquisition and enhancement costs, and less the incidental costs of acquisition and the incidental costs of disposal.
Irish capital gains tax is subject to a withholding procedure. The buyer must generally withhold 15% of the consideration and pay this amount to Revenue unless the seller provides a tax clearance certificate from Revenue. A clearance certificate is automatically available on application to Revenue if the seller is resident in Ireland for tax purposes. A non-resident seller will need to agree and discharge its capital gains tax liability in order to obtain a clearance certificate. This withholding procedure only applies to a buyer where the consideration payable to the seller exceeds the relevant threshold current at the date of the transfer agreement (currently €500,000 or €1,000,000 if the asset disposed of is a house).
A capital gains tax exemption applies to disposals of land acquired between 7 December 2011 and 31 December 2014 (inclusive), provided the land was held for four years. The relief applies to residential and non-residential real estate located within any EEA state acquired by an Irish resident during the period set out above.
Real estate owners are liable to pay property tax for buildings and structures, and land tax for land plots.
The tax rate varies depending on the specific region, but in any case cannot exceed 2.2% of the cadastral or the accounting value of the real estate.
Land tax rates depend on the municipality where the land is located. The rates cannot exceed:
- 0.3% of the cadastral value for agricultural, residential and farming land.
- 1.5% of the cadastral value for other land (primarily commercial land).
In many cases, a building is owned by a private entity, but the land is leased from a public authority. In this case only property tax is paid. Further, certain entities are exempted from property tax and land tax, such as residents of certain special economic zones.
As for the taxes associated with the sale of real estate, VAT 18% is generally payable on the sale of real estate by the seller. However, VAT does not apply to the sale of residential real estate, land, and purchase of real estate through share deals. Further, in certain cases the taxpayer can be exempted from VAT. For example, a party may qualify for a VAT exemption if its average profits in the last three months did not exceed about EUR 27,000.
The sale and transfer of real estate is subject to a transfer tax paid by the buyer. As the transfer tax is a Cantonal tax, its rate varies from one Canton to another between 1% and 3.3% of the sale price. A privileged rate may apply in case of a gift, a succession or an exchange of plots between two owners.
Furthermore, the sale of real estate is subject to a real estate capital gain tax which is due by the seller. If the seller is an individual, the capital gain is defined as the difference between the cost of acquisition and improvement of the real estate and the net sale price. The rate of the real estate capital gain tax for individuals also varies from one Canton to another. Generally, the rate decreases from 50% to 0% depending on the holding period of the real estate by the seller. If the seller is a legal entity or an individual considered as a real estate professional, the capital gain is defined as the difference between the value of the real estate in the books of the seller, taking into consideration the annual amortizations and the sale price. Furthermore, in case of a legal entity or real estate professional, the capital gain will be taxed at the ordinary profit, respectively revenue, tax rate applying to the seller.
Real estate is also subject to a local annual real estate tax at a rate that varies between 0.02% and 0.2%. The real estate tax is levied on the value of the real estate as estimated by the local authority for tax purposes, the value of which is generally below the market value.
Moreover, real estate is subject to wealth tax, for individuals, and to capital tax, for legal entities, if applicable at the place of the location of the real estate. The revenues from the leasing of the real estate, or the deemed revenues in case of own use of the real estate by the owner, is subject to profit or revenue tax, as the case may be, at the place of the location of the real estate.
Finally, VAT may also apply to the sale and leasing of real estate but is mostly optional.
Ownership: business rates, which are payable to the local authority. The rates are calculated by multiplying the property's 'rateable value' by a multiplier set by central government. The rateable value is the property's open market rental value on 1 April 2015, based on an estimate by the Valuation Office Agency. The multiplier for 2017/2018 is 47.9. Where a property is let, the tenant will be liable to pay the business rates. Business rates can be significant sums if a property is situated in an expensive area e.g. central London.
Direct taxes: corporate and income taxes and VAT apply to income, profits and gains arising from the ownership of commercial real estate. These will vary depending on whether the real estate is owned by an individual or entity, the nature of the entity and if they are resident in the UK.
Taxes on asset sales are:
Stamp Duty Land Tax (SDLT): this is calculated on the basis of a slice rate system on the purchase price (plus any VAT payable) or lease premium starting at 2% on £150,001-£250,000 and 5% on £250,001 and above.
On the grant of a lease, SDLT is also payable on the net present value of the rents (plus VAT if any) payable during the term of the lease on a slice system at the rates of 1% on £150,000-£5,000,000 and 2% on £500,001 and above. This is in addition to SDLT on any lease premium paid.
Value Added Tax (VAT): at 20%; however, sale of commercial real estate can be exempt from VAT or be treated as a VAT-free transfer of a going concern (i.e. a business that is operating and making a profit), depending on the facts. The seller normally must make an election to charge VAT (which invariably it would do to enable it to recover VAT it incurs in relation to the real estate).
Capital Gains Tax (CGT): 19% for UK corporates otherwise zero where the owner is a non-resident/offshore entity. Strict rules must be complied with in practice to ensure non-residence and thus benefit from the CGT exemption.
As mentioned above at Q6, most valuable commercial real estate is owned by offshore entities. We have therefore not summarised the taxes on share sales of an English and Welsh company. The taxes payable on the transfer of an offshore vehicle will vary from jurisdiction to jurisdiction depending on where the vehicle and vendor is located.
Taxes imposed on ownership of commercial real estate are:
Income taxes: U.S. federal income taxes, as well as state and local income taxes in certain states and localities, apply to income arising from the ownership of commercial real estate by both U.S. and non-U.S. tax residents. The rates will vary depending on a number of factors, including the structure through which the real estate is owned (e.g., whether the real estate is owned through a flow-through entity, a "C" corporation or a REIT), whether the direct and indirect owners of the commercial real estate are U.S. tax residents and, if not, the applicability of an income tax treaty with the U.S.
Property taxes (or real estate taxes): In the U.S., the real property tax scheme varies by state and sometimes by local jurisdiction, but generally, local governmental entities are required to comply with the state's tax laws to assess and collect an annual tax (with the rate varying by locality) on the value of land, structures, and improvements. Usually, the tax imposed is calculated by reference to a stated percentage of the fair market value of the real estate. Certain types of property are exempt from real property tax, including properties owned by a not-for-profit organization and properties in specified economic development zones. In addition to real property tax, most state tax schemes provide for the taxation of tangible personal property owned by business entities.
Other taxes: Certain jurisdictions impose a commercial rent tax on tenants of commercial real estate.
Taxes commonly imposed on the transfer of commercial real estate located in the U.S. are:
Income Tax: U.S. and non-U.S. tax residents are generally subject to U.S. federal income tax, as well as state and local income tax in certain states and localities, on capital gains recognized on the disposition of U.S. real estate. The rates vary depending on a number of factors, including the structure through which the real estate is owned. In addition, non-U.S. tax residents disposing of U.S. commercial real estate are generally subject to a withholding tax equal to 15% of the purchase price (including any debt assumed or treated as assumed in connection with the disposition).
Real Estate Transfer Tax: Many U.S. states (and a number of counties and cities) impose a transfer tax on the sale of a property (or the granting of a long term lease) based on the purchase price of the property as finally reflected in the deed and/or accompanying tax forms or affidavits. In addition to direct transfers of property, some states impose a tax on transfers of a controlling interest in an entity that owns property located within the state. Each state and local government sets its own rate of tax and the basis to which that rate is applied.
Mortgage Recording Tax: A number of states and municipalities impose a mortgage recording tax, calculated as a percentage of the face amount of the mortgage (and occasionally varying with the length of the term of the mortgage loan). Mortgage recording tax is typically due at the time the mortgage is recorded and paid by the borrower although the process for the payment of mortgage recording tax and the party responsible for the payment of the same can vary depending on the custom of the applicable state and/or municipality. Some states permit a borrower seeking to refinance a mortgage loan to have the mortgage encumbering its property assigned to its new lender and thus avoid paying mortgage recording tax on the principal then outstanding.
The property tax and municipal taxes levy the ownership and possession of real estate. The property tax is calculated on the value annually reported to the appropriate Municipality by the owner itself, whereas municipal taxes are calculated by the Municipality. The property tax is paid on an annual basis, while municipal taxes are monthly levies charged in relation to public services.
Furthermore, property transfers are subject to a municipal transfer tax known as alcabala that must be paid by the buyer. A 3% tax rate calculated on the sale price is applied, unless the value of the property reported to the appropriate Municipality (Property Tax Appraisal) is greater. The first 10 Tax Reference Units are not assessed (the value of the Tax Unit for 2018 is equivalent to approximately USD 1,250).
The first sale of properties by construction companies is not subject to the alcabala tax, except for the value of the land according to the tariff value. The Municipal Tax Act establishes other exceptions to the payment of the alcabala tax, such as:
- Transfers resulting from an inheritance or from an early termination of the contract prior to the payment of the price; and
- Acquisitions by certain entities, such as the central government, foreign governments, international organizations and religious entities.
Taxes payable with respect to a commercial real estate transaction include the following:
- Real Estate Acquisition Tax (impuesto sobre adquisición de inmuebles). Any irrevocable conveyance of title over real estate is subject to this tax and the rate varies depending on the State, usually between 2% to 3% of the highest between the appraised cadastral value and the purchase price.
- Value Added Tax. This tax has a rate of 16% and applies to the acquisition of buildings, constructions and improvements over commercial real property.
- Income Tax. Seller is responsible for the payment of the corresponding income tax derived from the real estate sale. Base and rates for the payment of income tax will depend whether the seller is an individual or entity, as well as on the seller’s place of residence.
- Real Estate Tax (impuesto predial). This tax is payed each year (periodically) by owners of real estate, depending on the value of the property.
- Recording Duties. Public Registry duties depend on the value of the transaction and the place where the real estate is located, although some states have caps to these duties.
- Appraisal Fees. In commercial real estate transactions, an appraisal has to be made for tax purposes and generally a broker or certified appraiser charges between 1% and 2% of the transaction value as appraisal fee.
- Notarial, Brokerage and Legal Fees. These additional fees vary widely depending on the characteristics of a particular transaction.
The main taxes associated with the ownership and the transfer of commercial real estate are the following:
Law 27 December 2013, no. 147 introduced a new real estate properties tax called “IUC” (imposta unica comunale) which is split into two real estate taxes described below.
The municipal tax (“Imposta municipale propria” so called “IMU”) applies on the possession of the real estate.
Companies and individuals are subject to IMU in respect of their real estate properties (buildings, land suitable for building, rural land) located in Italy. The taxable base is the income as entered into the cadastral register (“catasto”) on January 1 of the relevant year, increase of five percent and multiplied by a coefficient ranging from 55 to 160, depending on the cadastral classification of the property. The cadastral classifications depends on the nature of the real estate, and commercial real estate properties are classified under the “D” categories or C/1 category for the shops and C/2 category for the warehouse or A/10 category for the offices.
The general tax rate is 0.76 percent, but each municipality in which the real estate property is located may increase or decrease the rate by a coefficient. The municipalities may decrease the rate to 0.4 percent in the case of real estate assets held by companies or other entities liable for corporate income tax.
The companies and other entities subject to corporate income tax (IRES) can deduct the 20 percent of IMU from the taxable base. Conversely IMU cannot be deducted from taxable base for Regional tax on productive activities (IRAP).
The tax on the common indivisible services provided by the municipality (“tassa sui servizi indivisibili” so called “TASI”) applies to the real estate.
The taxable base of TASI is the same taxable base of IMU.
The general tax rate is 0.1 percent, but each municipality in which the real estate property is located may increase or decrease the rate by a coefficient. In case of lease agreement, the TASI is split between the landlord and the tenant in a percentage established by the municipalities.
In addition to the corporate income taxes applicable to the capital gains realized from the sale of the real estate and to the rental income deriving from the lease of the said real estate, the main transfer taxes associated to the transfer of real estate are VAT, Registration tax, Mortgage and Cadastral taxes. The application of the said transfer taxes depends on the features of the transaction (i.e. nature of real estate, nature of the seller or purchaser).
The sale of commercial real estate is subject to VAT if the seller is a construction company (VAT entity) and the sale takes place within the period of five years from the construction or the renovation works. The ordinary VAT rate is 22 percent (in certain cases the 10 percent VAT rate applies), and the taxable base is the sale-price.
The sale of commercial real estate is exempt from VAT, if the seller is a VAT entity, other than a construction company or a construction company if the sale takes place after five years from the completion of the construction or renovation works. However the seller has the faculty to opt for the application of VAT in the deed of sale, and VAT applies through the reverse charge mechanism.
The lease of commercial real estate is exempt from VAT, but the landlord has the faculty to opt for the application of VAT at the ordinary rate on the rent.
In case of sale of commercial real estate by a seller that is not a VAT person, the sale of commercial real estate is out of scope.
The Registration tax applies to the transfer of commercial real estate at the lump sum of €200. In case of sale of commercial real estate by a seller that is not a VAT person, the sale of commercial real estate is subject to a Registration tax at 9 percent rate on the sale-price or the higher fair market value of the real estate.
The Registration tax applies at the 1 percent rate to the lease agreement.
Mortgage and cadastral taxes
The Mortgage and Cadastral taxes respectively apply at 3 percent rate and 1 percent rate on the sale-price or the higher fair market value. However, if an Italian real investment fund is part of the transfer (as seller or purchaser), the Mortgage and Cadastral taxes apply at 1.5 percent rate and 0.5 percent.
In case of sale of commercial real estate by a seller which do not qualifies as a VAT person, the sale of commercial real estate is subject to Mortgage and Cadastral taxes at the lump sum of €50 for each tax.
Both the seller and buyer have to pay real estate transfer tax, which is normally set at %4 of the declared value of the real estate. In theory, this is shared equally between the buyer and seller, so each party shall pay %2, however in practice it is mostly borne by the buyer. There is a service fee of TRY 117,50- as a fixed fee.
However, the government has temporarily reduced real estate transfer tax to 3% until 31.12.2018 to support the real estate market due to decreasing sales numbers.
VAT is payable on the sale of real estate if the seller is a legal entity. The VAT regime may sound complicated because VAT rate is based on the type of the property, square meter of the property, price per square metre of the land as determined by the local municipalities, when the construction permit is obtained. Basically;
- Commercial property sales are subject to 18% VAT
- Residential property sales are subject to 1%, 8% or 18% depending on above criteria such as whether the property is smaller or larger than 150 m2
As the government lowered the real estate transfer tax temporarily to 3% to support he real estate market, the VAT of 18% above has also been temporarily decreased to 8% until 31.12.2018.
In case there is a preliminary contract for sale, the notary fee (%0,683 of the contract value as for 2018) and stamp tax (%0,948 of the contract value as for 2018) will also have to be paid.
On the other hand, there are some taxes arisen from the ownership of the real estate. The real estate tax rate varies between 0.1% and 0.6% depending on the type of real estate (land, household or business premises).
Environmental Cleaning tax is collected by the relevant municipality. The rates of this tax vary depending on the type, size and location of the real estate.
Electricity and gas consumption tax. The rate for this tax varies between 1% to 5% of the price of electricity and gas consumed. Electricity and gas generation and distribution companies are exempt from this tax. Electricity and gas distribution companies collect the tax and transfer the money to the relevant tax office.
When the agreement of sale of immovable property is signed the agreement is stamped at the tax Authorities. It is usually the purchaser’s obligation to pay the stamp duty. The stamp duty is calculated as follows: when the purchase price is less than Euro5.000,00 no duty is paid. Duty of Euro1,5 for every 1000 euro on the first 170.000,00 euro is charged and for any amount above €170.000, the duty raises to Euro2 for every thousand euro. The stamp duty does not exceed the amount of Euro20.000,00.
Upon tranfer and registration of the title into the name of the purchaser, the latter pays tranfer fees at the land registry. These fees are calculated on the value of the immovable property on the date of signing of the contract of sale. The value is determined by the valuation department of the land registry. The method of estimation is 3% on the first Euro85.000,00, 5% on any amount between Euro85.0001,00 to Euro 170.000.00 and 8% for any amount above Euro170.000,00.
Up to the end of 2016 an annual tax referred to as immovable property tax was payable on properties. This tax was being estimated on the 1980 value of the property. There is no such tax after 1/1/2017. Furthermore council tax or Municipality tax in accordance with the location of the property is charged by the local Authority. Furthermore, the sewerage board charges an annual charge on immovable properties. Usually, the Vendor pays these taxes and charges up to the completion date and from completion onwards they are paid by the purchaser.
If the Vendor sells the immovable property with a profit, capital gains tax is imposed. The capital gains tax is calculated by deducting from the selling price the cost of acquiring the property when the Vendor acquired it. Inflation is taken into consideration. The balance is the profit and is taxed at 20%. If the Vendor is a physical person, the first Euro25.629,00 of profit is exempted from tax in case of agricultural land and for other immovable property the first Euro17.086,00 of profit is exempted from tax. Euro85.430,00 of the profit is exempted from tax, when the private residence of the Vendor is sold. If the vendor is a dealer of land (developer, estate agent etc) income tax or corporation tax is charged instead of capital gains tax.
Value added tax is charged when the immovable property, which includes the land and the building, is sold before its first habitation. Vat is also charged on non-developed land when the sale transaction is considered as a financial activity. When the purchaser intents to use the property a main permanent residence in Cyprus, the Vat rate can be reduced to 5%.
(1) Fixed Asset Tax, City Planning Tax
A fixed asset tax, and city planning tax are imposed each year on January 1st on a person who is registered in the tax registration as the owner of the land, building and depreciable assets. Upon a transfer of real estate, the seller and purchaser usually agree on an adjustment clause for the purchase price pursuant to which the seller bears these taxes for the period up until the day preceding the closing date, and the purchaser bears these taxes for the period from the closing date.
(2) Real Estate Acquisition Tax, Registration and License Tax
When real estate is transferred, a transferee is charged a real estate acquisition tax. Also, a registration and license tax is also charged when registration for transfer of purchased real estate is made. The tax rate for these taxes is decided depending on the assessed value of the real estate transferred.
In the case of a transfer of a beneficial interest in a trust, taxation for the real estate acquisition tax will not occur as a trust beneficiary interest is not real estate. In addition, the amount of registration and license tax in connection with the change of trust beneficiary upon the transfer of the trust beneficiary interest is JPY1,000, which is much lower than such tax imposed in the case of real estate.
(3) Consumption Tax
The seller of the building is charged with consumption tax and local consumption tax when the building is transferred. These taxes do not apply to the transfer of land. Although the tax is imposed on the seller, the purchaser usually pays the amount of the tax on top of the purchase price.
(4) Income Tax
Rent and sale proceeds from properties constitute taxable income. For foreign investors who are treated as non-residents for tax purposes, this income is subject to withholding tax if they directly invest in the properties without a local entity (a resident). Such withholding tax does not apply to a resident who receives rent and sale proceeds from properties.
- Under the Building and Land Tax Act B.E. 2475, the owner of the real estate property is liable for building and land tax at a rate of 12.5% of the annual assessed rental value.
- The transfer of real estate property is subject to a transfer fee at the rate of 2% of the assessed land value. This amount can either be borne by one party to the transaction or shared between the transferor or transferee.
- The transferor of real estate property is subject to specific-business tax at a rate of 3.3% of the transfer value or market value, whichever is higher.
- The transferee of real estate property is subject to withholding tax at a rate of 1% of the transfer value or market value, whichever is higher.
Real estate transfer tax
The transfer of the real estate title against consideration is subject to real estate transfer tax borne by the buyer at the rate of 3%. Municipal levies, at the rate of 3%, are calculated on the amount of the real estate transfer tax due.
The tax is assessed on the higher value between the agreed value and the “objective” value. The objective value is based on the zone values according to the formula provided by the Ministry of Finance. Upon fulfilment of certain conditions, the said tax can be reduced or not even be due.
VAT currently at 24%, instead of 3% transfer tax, is due on the transfer of “new buildings”, whose building permit is issued or renewed after 1.1.2006. Any building that has not been used is considered new. If the complete file for construction works was submitted to the City Plan Agency and a preliminary agreement and a contractor’s agreement were signed before 25.11.2005, VAT exemption may be granted, following a specific request to the tax authorities.
Airbnb properties rented to individuals for the short-term, are exempt from VAT provided that during the period of stay, the host (owner) does not provide additional services to guests similar to those offered in hotels.
Income tax on individuals
The gains arising from real estate transfer by individuals not engaged in business is subject to income tax according to an income or tax rates scale, which provides that income up to €12,000 is subject to tax at the rate of 15%, income between €12,001 and €35,000 is subject to tax at the rate of 35%, while income exceeding €35,000 is subject to tax at the rate of 45%.
Income tax on Greek legal entities
The Income Tax Law provides that Greek legal entities keeping double-entry accounting books are annually subject to corporate tax at the flat rate of 29% on their taxable income. Taxable income includes employment income, business income, income from capital and capital gains from the alienation of real estate and securities. Each category of income is taxed separately.
The distribution of dividends is subject to 15% withholding income tax. Specific rules provide for exemptions to dividend withholding. Capital gains tax upon the sale of real estate has been suspended until 31.12.2018.
Owners and persons, having limited in rem rights over real estate have to pay an annual real estate municipal tax, the amount of which is determined by the municipality based on the size, location and the tax assessment of the property.
Owners and users of real estate also owe a waste tax, the amount of which is determined by the municipality based on the number of people using the real estate or the quantity of the waste produced (the choice is left to the municipality).
In case of direct acquisition of real estate, the acquirer shall pay stamp duty land tax, amounting to up to 3.5 % (determined by each municipality) from the value of the transaction or the tax assessment of the property – whichever value is higher. The parties should also pay a notary fee determined in accordance with the state tariff as well as a fee for entry into the Property register (0.1 % of the transaction value).
- Real Estate Transfer Tax (ITBI):
ITBI is a municipal tax levied on the transfer of real estate for consideration or related rights (except guarantee) at a rate that varies in accordance to the municipality where the real estate is located (usually 2% or 3%). The tax shall be calculated on the real estate market value, which shall be the higher between (i) the transaction declared value or (ii) the value of the property defined by the municipality.
The Federal Tax Code and Federal Constitution establish that ITBI is not levied on the transfer of real estate or related rights (i) to pay up capital; or (ii) as a result of a merger, spin-off or termination of a company, except if one of the main activities of the buyer/new company is the acquisition and sale and/or lease of real estate.
The tax must be paid by the acquirer of the property before the execution of the purchase and sale deed. In case of assignment of rights, the assignor is liable for the payment.
- Inheritance and Donation Tax (ITD)
ITD is a state tax applicable to the transfer of properties by inheritance or donation, whether urban or rural, which rate shall vary in accordance to the state where the real estate is located (usually between 4% and 8%). The tax shall be calculated on the real estate market value, which may be revised by the state tax authority, and paid before the execution of the transfer deed.
- Urban (IPTU) and Rural (ITR) Property Taxes
IPTU and ITR are, respectively, local and federal taxes levied annually on urban and rural properties.
The basis for IPTU is the real estate market value and the rate at which the tax is collected depends on the municipality. A tax payment slip with the amount due is annually issued by the Municipality.
The basis for the ITR is the value of the rural land at rates that vary from 0.03% to 20% depending on the number of hectares and the level of use of the area. ITR requires the filing of an annual ITR tax return to the Brazilian Tax Authority in order to establish the amount due.
Articles 130 and 131 I of the Brazilian National Tax Code, the purchaser is liable for past IPTU and ITR charges regarding the period of ownership of previous owners. It is, therefore, crucial to ascertain whether all previous charges of those taxes have been duly paid by the previous owners.
Similarly to IPTU and ITR, other charges such as utilities and fire brigade tax are also frequently charged from the current owner, regardless if related to a period prior to the real estate acquisition.
- Taxation of gains on Real Estate
Brazilian individuals and non-residents (including foreign legal entities) are taxed by the capital gain tax (rates between 15% and 22.5%, based on the gain, with 25% for parties located in tax havens), which is due when a good or right is transferred with profit, that is, when the sale price exceeds the price of the acquisition. There are some tax incentives for individuals who are tax residents in Brazil.
For acquisitions since 1997, the tax base of capital gains of rural properties is subject to a different regime based on the market value indicated in the annual ITR tax return, which may be revised by the Brazilian Tax Authority.
From a Brazilian legal entity perspective, the taxation is based on its tax regime (actual or deemed profit regime) and if the acquisition and sale of real estate transactions is part of its business purpose (taxed as ordinary income instead of capital gains). Corporate Income Taxes (IRPJ/CSLL) up to 34% and taxes on gross revenues (Pis/Cofins) up to 9.25% may apply, although the deemed profit method and tax planning are also available to reduce such tax impact.
- IOF-exchange (transactions with foreign parties)
Due to state monopoly regarding foreign currencies sale and acquisition, where an exchange agreement closed by a financial institution is mandatory, IOF-Exchange (the taxable event is the exchange of currencies) is a stamp alike tax used by Brazilian Government for non-tax purposes, i.e. to try to regulate the inflow and outflow of financial resources in Brazil. The Executive Power may change its tax rates by Decree (without Congress approval) with immediate effect after publishing it.
Current standard tax rate is of 0.38%, except a zero tax rate or tax exemption is applicable.
- Following recent legislative changes that entered into force on 1 January 2019, Swedish corporations will generally be charged corporate tax at a flat rate of 21.4 percent on their net profits (previously 22 percent). The corporate income tax will be further reduced to 20.6 percent in 2021.
- As noted above, share transfers are generally tax exempt meaning no capital gains tax will apply when transferring an SPV holding real property. However, the tax residual value of the target property will be of importance to the buyer (increasingly so in the current state of uncertainty relating to the government inquiry on potential changes of the tax legislation), seeing as any transfer of the property from the SPV will trigger any deferred taxes. Market standard practice indicates a price deduction of part of the deferred taxes, ranging between zero and 50 percent, but sometimes up to 100 percent.
- A state property tax is levied on owners of commercial properties, ranging from about 0.2 up to about 3 percent of the tax value of the property depending on its fiscal classification.
- Both real estate and share transfers are exempt from VAT. As a general rule, income from property leasing is also exempt from tax, meaning that no VAT deductions are allowed on expenses related to the property owner’s rental business. A landlord may however choose to become voluntarily registered for VAT liability for commercial leasing, allowing the landlord to charge and deduct VAT (25 percent) on income and expenses related to such leases.
- Direct real estate transfers carry a stamp duty of (currently) 4.25 percent for legal entities, based on the higher of the purchase price and the tax value of the property the year before the transfer. No such tax is imposed on indirect transfers however, an additional factor behind the popular use of transaction structures involving indirect real estate transfers through share sales.
- Registrations of new mortgages carry a stamp duty of 2 percent of the total mortgage amount, increasing costs of financing when purchasing a property with no or low existing mortgages.
Land and Building Tax
Land and Building Tax (Pajak Bumi Bangunan – “PBB”) is a property tax chargeable on all land and buildings. An individual or entity that holds the right to a parcel of land and/or takes benefit therefrom, and/or owns, controls or takes benefit from a building, can be regarded as a PBB taxpayer for that land and/or buildings.
PBB must be paid to the local government on an annual basis in an amount of up to 0.3% of the NJOP, depending on the regional regulation.
Tax on Land Transfer
In general, in a sale of property, the buyer must pay tax on the acquisition of land and buildings (Bea Perolehan Hak Atas Tanah dan Bangunan –“BPHTB”), while the seller must pay transfer tax (Pajak Penghasilan Atas Penghasilan Dari Pengalihan Hak Atas Tanah – “PPh”), using the following formulae:
(a) for the seller (PPh): 2.5% x sale value or NJOP (whichever is higher); and
(b) for the buyer (BPHTB): 5% x (sale value or Tax Object Acquisition Value (Nilai Perolehan Objek Pajak or “NPOP”, whichever is higher) – Non-Taxable Sale Value (Nilai Jual Objek Pajak Tidak Kena Pajak or “NJOPTKP”).
The NJOPTKP is effectively a non-taxable portion, which is a fixed value set for each area by the tax office. Note that the application of tax may differ in certain circumstances, including in relation to inheritance.
Fees for Land Deed officials
Aside from taxes, a fee is typically payable to the PPAT in a real estate transfer. This fee is negotiable and is usually a certain percentage of the purchase price or transaction value.