What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
The main taxes associated with commercial real estate ownership and transfer are as follows.
Tax associate with Ownership of Properties:
Annual Fixed Asset Tax and City Planning Tax are levied on owners of fixed assets (regardless of resident or non-resident) (land, buildings, depreciable assets) typically on the first of January each year by the relevant municipality. The owner as of January 1st is responsible for these taxes, even if ownership of the property changes on the 2nd of January or a subsequent date. Typically, when the sale of property occurs, seller and purchaser agree to pro-rate those taxes.
Tax associated with Proceeds of Rent and Sale of Properties:
While a resident (to Japan, for tax purposes) company who receives rents or proceeds from the sale of real estate properties is not subject to withholding tax (but subject to corporate income tax), a foreign company which makes direct investment into real estate properties in Japan is subject to withholding tax for rent proceeds and for proceeds arising from a sale of properties, regardless of if such company has permanent establishment in Japan or not. Note that in order to avoid imposing on tenants an obligation to pay to authority the amount of withholding tax, transaction are typically structured with a master lessor company (a resident company) between tenants and the asset holding foreign company.
Instead of making a direct investment, a resident company or a foreign investor often makes an investment through a so-called TK investment (i.e. quasi equity investment) to an asset holding SPC, because a TK investment can avoid double taxation and is subject only to taxes on investors’ level if certain requirements are met. In such case, the TK investor’s (foreign investor’s) right to receive profit is subject to withholding tax for the proceeds arising from asset TK business conducted by holding SPC. If the investor does not have permanent establishment in Japan, then there is no further taxation on such proceeds, but if there is a permanent establishment, the investor is subject to corporate income tax as well.
The permanent establishment would likely be established if there is a branch or office of such investor in Japan or if there is an agent which is authorized to enter into agreement on behalf of investors in Japan. TK investment is a passive investment, therefore, as long as investment is categorized as a TK investment from legal and tax perspective, it is unlikely that TK investment would result the permanent establishment. (To avoid doubt, mere ownership of commercial real estate in Japan by a non-resident does not constitute a permanent establishment.)
Note that tax treaties applicable to parties may reduce the rate of or exempt the withholding tax.
Tax associated with acquisition of real estate properties:
A separate acquisition tax is imposed upon the acquisition of fee properties. Currently (as of 2017), as a general rule, acquisition tax is 3 to 4 % of the evaluated price of fixed assets, depending on the property. Moreover, consumption tax applies to the acquisition of real property other than land (8% of the purchase price as of 2017).
Also, a registration tax will apply when the purchaser registers the acquisition of fee properties.
The purchase of real estate is subject to stamp duty (“Imposto do Selo”) at a rate of 0,8% of the purchase price or the tax value (valor patrimonial) whichever is higher, which is payable by the buyer. Furthermore, the purchase of real estate is also subject to property transfer tax (“Imposto Municipal sobre as Transmissões Onerosas de Imóveis” or IMT) at the rate of 6,5% on the acquisition of commercial properties The IMT also applies to the sale and purchase price or tax value (valor patrimonial) whichever is higher.
The acquisition of property for rehabilitation purposes and the acquisition of property by real estate companies for the purpose of reselling may be exempted from IMT provided certain specific conditions are met.
The transfer of shares of a joint stock public company (“sociedade anónima”) who owns property is not subject to property transfer tax, while the transfer of a quota to a partner whose quota after the transfer will represent 75% or more of the capital stock of a limited-liability company (“sociedade por quotas”) is subject to property transfer tax. .
Municipal Property Tax (IMI) is paid annually on the tax value of property at a rate which may varies between 0,3% and 0,45%.. Property owned by individuals or legal persons resident in a tax haven is subject to an aggravated 7,5% tax rate. An additional tax (AIMI) was introduced by the State Budget Law for 2017, however the AIMI is not applicable to commercial property. Property owned by residents in a tax haven is subject to a 7,5% tax rate on this additional tax.
- Stamp Duty
The buyer of property is accountable for stamp duty within 30 days of the date of transfer. The stamp duty rate for commercial property increased in 2017 from 2% to 6%.
- Capital Gains Tax
The seller of property is accountable for tax on any gain arising on the disposal of property (other than a principal private residence) irrespective of tax domicile. The standard rate of tax is currently 33%. Purchasers can be held liable for unpaid CGT
As a general rule most disposals of land developed or re-developed within the last 10 years will attract VAT at a current rate of 13.5% and short term leases (less than 35 years) of such land will be liable to VAT at a current rate of 23% on the rents. Detailed analysis is required to determine the correct VAT treatment and reliefs on the disposal of property.
Rates levied by local authorities are payable in respect of commercial premises. The level of rates is set by local authorities annually.
- Vacant Site levy
This is a levy on sites zoned as residential land or regeneration land which are vacant or idle and which have been placed on registers maintained by local authorities. The levy is 3% per annum of the market value in 2018 rising to 7% per annum of market value in 2019 and in subsequent years.
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.
Taxes on real estate and real estate transactions include VAT, transfer tax, corporate income tax and personal income tax.
The transfer of a building (and the related land) is usually exempt from VAT. If, however, a building and the land are transferred within two years after the building was first put to use or in the case of a building site, the transfer is subject to VAT at a rate of 21%. It is also possible to opt for transfer subject to VAT if the relevant conditions are met.
Real estate transfer tax
Transfer tax is imposed on the acquisition of real estate located in the Netherlands or rights to commercial real estate at a rate of 6%. The rate is based on the purchase price or on the fair market value, if that value is higher. In specific cases the transfer of real estate may be exempt from transfer tax. An important exemption is the concurrence exemption, which prevents accumulation of (non‐deductible) VAT and transfer tax. Transfer tax may also be due if an interest of more than 1/3 is acquired in a company whose assets largely (>50%) consist of real estate if at least 30% of those assets are real estate located in the Netherlands. Moreover, the company must hold that real estate with a view to its sale, acquisition or operation (e.g. lease). The depreciation of real estate is limited to the 'WOZ waarde' (value for the purposes of the Valuation of Immovable Property Act) in the case of investment real estate and to 50% of that value for buildings used by the owner itself. Profit generated from real estate is subject to personal or corporate income tax, unless a fiscal investment institution is involved. The owner and/or user of Dutch real estate may furthermore be confronted with local taxes, sewerage levies, district waterboard tax and tax on encroachments.
Upon direct sale of real estate, the seller will be taxable for any gain on the real estate. Any gain will be taxable with 24%, while any loss will be deductible in the 24% tax base. The taxation gains may be deferred and taken as income with 20% per year on a declining balance method, while a loss must be deferred and may only be deducted with up to 20% per year on a declining balance method.
If the transaction is structured as a share deal, an individual shareholder will be taxable with 29.76% on any gains arising from the sale of shares. Any loss will be deductible in the 29.76% tax base. However, if the shares are held by a corporate shareholder, Norwegian tax law has a preferential participation exemption method. Corporate shareholders will not be taxable for gains on sale of shares of Norwegian resident companies (nor EEA-companies or other qualifying companies).
In an asset deal structure, it is customary to register the purchaser as the new owner of the real estate in the Norwegian Land Registry. The registration itself triggers a small fee of NOK 525. In addition, there is a stamp duty of 2.5 % of the real estate’s sales value. As a main rule, the Norwegian Land Registry calculates the stamp duty from the purchase price, but if the purchase price differs from market value, the market value will form the basis for calculating the duty. It is notable that it is the marked value at the actual time of the registration, and not the purchase, that forms the basis for the calculation. There is no stamp duty for share deals.
The local municipal authorities are entitled to levy property tax on commercial (and residential) property. The rates vary from 0,2 to 0,7 % of the taxable value of the property (which is normally lower than the market value).
For 2018, the tax rate on ordinary income for corporations and individuals will be reduced from 24 to 23 %.
On-going real estate ownership is subject to local taxes that vary depending on surface and zoning.
Aside from income tax related to gains from sale of real estate, asset sales are subject to notary taxes and tariffs, which are usually calculated as a percentage of the actual sale value of the transferred real estate. Such sale value cannot be smaller than that indicated in a notary table of real estate value for different real estate categories.
In addition, land book registration of real estate transfers is subject to a tariff of 0.5% of the asset’s value for companies and 0.15% for individuals.
Depending on the status of the seller and the history of prior transactions, VAT may be applicable to certain real estate transactions.
Buildings and premises are subject to corporate property tax. Tax rates are established by regions, so vary between them.
Land plots are subject to land tax. Tax rates are established by municipalities, so vary from municipality to municipality. Even so, the land tax rate may not exceed 1.5% of the land plot's cadastral value, which, in turn, is established by the regional authorities.
Transfer of corporate real estate is generally subject to VAT at a rate of 18%. VAT and the purchase price are payable by the buyer to the seller, who transfers the VAT to the Federal Treasury. Sale of land plots is exempt from VAT.
There is no stamp duty or transfer tax in Russia.
- Capital gains tax: capital gains are generally taxed at a rate of about 30 percent, levied on both direct and indirect real estate sales. As noted above, share transfers are generally tax exempt meaning such tax will not 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 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.
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.
Both the seller and buyer have to pay real estate transfer tax, which is currently set at %4 (as of 2017) 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. The seller also has to pay TRY 120- (as of 2017) as a fixed fee.
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
In case there is a preliminary contract for sale, the notary fee (%0,683 of the contract value as for 2017) and stamp tax (%0,948 of the contract value as for 2017) 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.
The main taxes are:
- IPTU (Urban Real Estate Tax) – tax charged from owners of urban properties (residential or commercial). The amount is annually paid to the Local Government of the Municipality where the real property is located;
- ITBI (Real Estate Conveyance Tax) – tax levied on the sale of real properties. It is a local tax and, therefore, its rate, tax base and payment date are defined by the law of the Municipality in which the real property is located. This tax is not levied on the transfer of real properties to legal entities by its shareholders, provided that the core activities of such legal entities are not real estate businesses, that is, only in case of legal entities whose revenues from real estate activities are not in excess of 50% of the total revenues.
- ITCMD (Estate and Gift Tax) – tax levied on the conveyance of a real property by reason of death of the property’s owner or in case of property’s donation. It is a State tax, and its rate, tax base and payment date are defined by the State law where the real property is located.
- IR (Income Tax) tax levied on the lease of real properties – federal tax levied on the amounts received as rent revenues. The rate may vary according to the value of the rent and, as informed above, according to type of the lease entered into - whether by a legal entity or by an individual.
- IR (Income Tax) levied on capital gain – federal tax levied on the contingent profit obtained with the sale of a real property (difference between the value of the sale of the real property and its acquisition cost). The tax value varies according to the value of the capital gain ascertained (progressive rate according to the tax base increase); our law further provides several variables for the application of discounts (progressively applied according to the time said property has belonged to that owner) and even events where payment exemption occurs (e.g., when the profit with the sale is used for the acquisition of another real property within a 6-month period - such benefit may only be used once every 5 years).
Despite the fact that they do not have the legal nature of taxes, in addition to the abovementioned taxes, two different revenues referred to as “estate revenues” may be charged from owners of properties under the emphiteusis regime (in this specific case, the holder of the right to use and enjoy the property, mainly in cases in which the legal title of properties belong to any Federated Entity – Union, States or Municipalities). The first revenue is the “emphyteutic rent”, which corresponds to the annual remuneration due to the owner of the legal title by the holder of the right to use and enjoy the property. The second is referred to as “laudemium”, which, in its turn, is due to the owner of the legal title only when the transfer of the right to use and enjoy the property occurs.
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.
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.
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 usually agree to share the costs for notary official’s fee (determined in accordance with the state tariff) and fees for entry of the notary deed into the Land register (amounting to 0.1 % of the transaction value).
In case of indirect acquisition of real estate (executed through the sale of shares or of the commercial enterprise), no obligation for payment of stamp duty land tax arises.
Besides individual or corporate income tax on the rents received from commercial real estate or capital gain realised upon the sale of the asset, the main taxes associated with the ownership and the transfer of commercial real estate are the following:
- Individuals owning real estate assets which are not allocated to the taxpayer’s professional activity can be subject to wealth tax if the taxable assets exceed the threshold of 1.300.000 EUR. The maximum rate is 1.50% for the portion of assets exceeding 10.000.000 EUR;
- Entities owning directly or indirectly real estate in France are subject to an annual tax of 3% assessed on the fair market value as at 1 January (‘French 3% tax’) if such entities cannot rely on an available exemption. Are exempted from French 3% tax in particular: (i) entities whose French assets are not predominantly composed of real estate assets, (ii) international organisations, sovereign States and public institutions, (iii) listed entity, and French entities or entities established in the EU or in a country with which France has concluded an income tax treaty containing either a mutual assistance clause or a non-discrimination clause, or a tax information exchange agreement provided certain filing and disclosure requirements;
- A real estate tax (‘taxe foncière’) is due each year by the owner of real estate, assessed on a ‘rental cadastral value’;
- An annual tax on offices, commercial premises and warehouses areas located in Ile-de-France (‘taxe annuelle sur les bureaux et locaux assimilés en Ile-de-France’) applies to buildings or part of a building that are intended to be used as offices, or for the exercise of a professional, commercial or warehousing activity located in Ile-de-France.
Sale of commercial real estates are subject to transfer duties (i) at a rate of 5.81% (6.41% if located in Ile-de-France) if the real estates are completed for more than five years, (ii) 0.71498 % if the real estates are completed for less than five years or if a commitment to sale the real estates within five years as from the acquisition date is taken, (iii) 125 EUR if a commitment to perform certain refurbishment works yielding to a new building within four years as from the acquisition date is taken. Land registrar fee (0.1%) and notary fees (circa 0.85%) are also applicable in every case.
Ownership: Land tax is payable to the local authority. Taxes vary depending on where the property is situated as land tax is a communal 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. The tax rates vary between 3.5% and 6.5% dependent on where the property is located Stamp Duty Land Tax (SDLT): Under German sale and purchase agreements RETT usually burdens the buyer of the real property.
Value Added Tax (VAT): at 19%; however, sale of commercial real estate is in general exempt from VAT or may 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): 15.825% corporate income tax 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%.
The current tax 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. If the property is sold via a share transfer, 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 comparison, residential properties in Hong Kong are further subject to a buyer stamp duty of 15% on the stated consideration or market value of the property (whichever is higher) payable by the purchaser and a special stamp duty jointly payable by the seller and purchaser at a rate ranging from 5% to 15% of the stated consideration or market value of the property.
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.
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:
- sale of new constructions;
- sale of plots which may be built on; and
- 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.
The main taxes associated with commercial real estate transactions are:
- Consent fee: This is administrative fee for the grant of the Governor’s consent to the assignment, sublease or mortgage of property.
- capital gains tax: This tax is charged on the gains obtained from the disposal of an asset.
- stamp duty: this tax is payable to the tax authority for stamping of the transfer document(s). Qualifying documents can be stamped at either a flat rate or ad valorem rate.
- registration fee: this is payable for registration of a transfer document at the relevant Lands Registry.