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Investments in Real Estate Co-chairs: Marion Sangen-Emden - HEUKING KÜHN LÜER WOJTEK (Germany) Peter Ni – Zhong Lun Law Firm (China) Panelists: Demetri Rackos - LaSalle Investment Management (US) Eric N. Roose - Morrison & Foerster (Japan) Leon Kwong Wing – KhattarWong (Singapore) Antonio Barba - CUATRECASAS, GONÇALVES PEREIRA (Spain) Kristin Konschnik – Withers LLP (US)
Current Tax Developments in Cross-Border Real Estate
Demetri Rackos Managing Director of Tax LaSalle Investment Management
October 2014
Agenda for Discussion
Fund structures illustrated
Common techniques or approaches to reducing tax burdens
Global challenges
Underwriting policies
Investor Feeder Vehicle
General Partner
SPV SPV SPV
Fund Vehicle
2 3
1
6 7 7
Fund Investment Structure Illustrated
Offshore
Onshore
Advisor
4
Local Advisor Affiliate
7
Holding Company
5
Other Limited Partners
Equity
Debt
Advisory
1. The Fund vehicle is usually fiscally transparent and exempt from income taxation
2. On occasion, feeder vehicle house specific investors for regulatory or tax requirements
3. The Fund usually has a general partner or fund manager which manages the day to day affairs of the funds
4. The Fund advisor is usually the fund sponsor or an affiliate
5. In most instances, an intermediate holding company is formed to hold interests in special purpose vehicles (“SPVs”)
6. Local affiliates (typically corporations and limited liability companies) provide tailored services to local SPVs
7. Special Purpose Vehicles (typically corporations and limited liability companies) generally own the assets and are organized in the jurisdiction in which the asset is located. They are financed with debt and equity from the intermediate holding company
Notes to Fund Investment Structure
Inbound Capital into Asia
China SPV
Japan TMK
Australian SPV
Cayman L.P.
Offshore
Onshore
Advisor
Local Advisor Affiliate
Singapore Company
Equity
Debt
Advisory
Hong Kong or
Singapore
Japan GK
Singapore
Inbound Capital into Europe
French OPCI
Cayman L.P.
Offshore
Onshore
Advisor
Local Advisor Affiliate
Luxembourg Company
Equity
Debt
Advisory
Lux SPV
Jersey or non UK Company
UK L.P (optional).
German Real Estate
U.K. Real Estate
French Estate
Inbound Capital into U.S.
U.S. JV
Partner
Cayman L.P.
Offshore
Onshore
Advisor
Local Advisor Affiliate
Equity
Debt
Advisory
U.S. REIT
Limited Liability
Co.
Common techniques for reducing tax burdens
Maximizing deductible advisory fees at the SPV level
Financing a SPVs acquisition with shareholder loans - Interest deduction at the local level only partially offset by withholding taxes - Subject to “thin-capitalization” and earnings stripping limitations
From the buyer’s perspective - Always buy assets - No need to worry about actual or contingent liabilities from a share deal
From the seller’s perspective - Always sell shares – potential to capture treaty benefits - Ease of exit might result in a price discount
Statutory Incentives - Investing in blighted areas - Special exemptions for exempt pension funds - Regulated vehicles to hold real estate assets (e.g., REITS)
- Must meet asset, income and organizational tests
Global challenges – has your job gotten tougher?
Impatient with core based returns? There is lower tolerance for tax leakage within the structure
Narrowing and reconciling the complex web of - Regulatory (AIFMD, Dodd Frank) - Tax - Commercial objectives
Substance - Where are you? - Are you really there? Who is there? - Investors are expecting more
Tax Residency – - Who are you? - Who is making decisions?
The Paradox of Control and non-discretionary arrangements
Taking profits off the table – are you a trader?
Global challenges (continued)
Aggressiveness of the tax authorities in collecting revenues - Greater communication between tax authorities - Local statutory benefits are now narrowly defined - Tried and true investment structures are now being challenged - What are the boundaries in interpreting treaty benefits – each country has an evolving view
- Transfer pricing, transfer pricing, transfer pricing - Are you a tax resident – do you have a permanent establishment
Are you ready for BEPS? - Tax authorities are having a head start - Aligning people, activities, decisions and revenues - Rationalizing structures - Treaty benefits – pick one – primary purpose or limitation of benefits?
Politics of taxation
Underwriting policies
Disclose, disclose, disclose!
Always disclose to senior management - The impact (basis point drag) of potential adverse legislation - The cost of implementing a tax advantaged structure
- Does you structure have a shelf life? - Risk premiums - Is your after-tax IRR still acceptable on a full taxable deal
Questions?
This presentation is for discussion purposes only and is not intended to be legal or tax advice. This presentation cannot be relied upon for the avoidance of the imposition of penalties under the Internal Revenue Code or any other taxing jurisdiction. All information obtained from third party sources is believed to be reliable and current, but accuracy cannot be guaranteed and we do not undertake to update any information contained in this document.
• Current market conditions • PRC taxation of real estate investment • Typical investment structure • Structuring issues for foreign investment
Current market conditions
• China arguably has the biggest real estate bubble in the world
• Price to income ratio is very high - 8-10 to 1 on average and 30 to 1 in Shanghai and Beijing
• The residential home buying restrictions are gradually being lifted but the market response is not as strong as expected, because the price has not gone down significantly
• Real estate accounts for 20% of the total GDP in China so the common wisdom is that the central government simply would not let the bubble burst
• Foreign investment in real estate has slowed down
PRC taxation of real estate investment
• Main taxes – Land VAT – Business tax – Enterprise income tax – Deed tax – Real estate tax – Stamp duty
• Sale of equity/share is much more tax efficient than sale of property
Typical Investment Structure
Fund (Cayman)
Fund IM Co (Singapore or HK)
Investment Committee
Fund GP Limited (Cayman)
GP
Asset
Offshore
Onshore
Cayman
HK
PRC
Structuring issues for foreign investment
• Regulatory restrictions on investment – Overall, foreign investment in real estate has been
heavily restricted and controlled since 2006 – Direct ownership by a foreign entity or individual is
not allowed unless the property is for self-use – An onshore project company is needed and the
establishment of which is subject to strict control – Debt to equity ratio is limited to 1:1 – Only onshore borrowing is allowed and foreign debt
financing is prohibited – Offshore share acquisition between two foreign
parties is generally not within the control scope
Structuring issues for foreign investment
• Cash repatriation restrictions – The repatriation choices are extremely limited mainly
because foreign debt financing is currently not allowed
– Return of capital is allowed in exceptional cases – Dividend payments are subject to company law
restrictions – Offshore share transfer is still the common exit
strategy
Structuring issues for foreign investment
• Anti-tax avoidance restrictions – Offshore exit now taxable under Circular 698 – Extremely strict beneficial ownership requirement for
treaty benefit claim under Circular 601 and Circular 124
– HK holding company does not enjoy any special treatment
– A typical offshore holding company without enough substance is generally disregarded
• The PE issue commonly seen in other countries has not become an issue in China
Tokyo, October 22, 2014
HEUKING KÜHN LÜER WOJTEK Marion Sangen-Emden
REAL ESTATE INVESTMENTS INTO GERMANY
Relatively stable market conditions; not yet over-heated
Long term investments preferred (+/- 10 years)
External debt financing prevailing; current loan to value ratio +/- 60%
Concrete investment site analysis required
Typical portfolio size < € 500 mio.
Market Environment
Investments via Dutch BV / Lux SARL
Debt financing into acquisition vehicle; interest > € 3 mio. deductible up to 30% of tax EBITDA
Property / asset management through separate entities (external / affiliates); PE risks to be avoided
Main taxes Corporate income tax (15.8%) trade income tax (ca. 15% can be avoided) Real estate transfer tax (3.5% - 6.5%) VAT (usually exempt)
Typical Investment Structures
Berlin Unter den Linden 10 · 10117 Berlin T +49 30 88 00 97-0 · F +49 30 88 00 97-99 [email protected]
Brüssel Rue Froissart 95 · 1040 Brüssel · Belgien T +32 2 646 20-00 · F +32 2 646 20-40 [email protected]
Chemnitz Weststraße 16 · 09112 Chemnitz T +49 371 382 03-0 · F +49 371 382 03-100 [email protected]
Düsseldorf Georg-Glock-Straße 4 · 40474 Düsseldorf T +49 211 600 55-00 · F +49 211 600 55-050 [email protected]
Frankfurt Goetheplatz 5-7 · 60313 Frankfurt am Main T +49 69 975 61-0 · F +49 69 975 61-200 [email protected]
International Bar Association Conference - Tokyo October 22, 2014
Presented By ERIC N. ROOSE
This is MoFo.
TOPICS
JAPAN REAL ESTATE MARKET THE ALTERNATIVE STRUCTURES KEY TAX STRUCTURES J-REITS
This is MoFo.
JAPAN REAL ESTATE MARKET HOT …. AND MOVING UPWARDS Kanto – Deals Harder to Find Quickly Moving to Outer Areas Implications – Creative and Fast Movers Rewarded
SURGE IN INBOUND INVESTMENT ACTIVITY Funds – Japan is the Global RE Fund Flavor of the Year Private investment – SEA Strong Interest Foreign HNW activity – PB Products
This is MoFo.
STRUCTURES: PRIVATE FOREIGN “DIRECT” INVESTMENT IN JAPAN REAL ESTATE
FCCo (Country X)
Real Estate
Subsidiary (Japan)
Japan 100%
FCCo (Country X)
Real Estate
Country X
BRANCH DIRECT
SUBSIDIARY
Kumiai In (Country X)
Real Estate
Eigyosha (Japan)
TK
Real Estate
TMK (Japan)
Onshore (Japan)
FCCo (Country X)
≥50% Common & Preferred
<50% Common & Preferred
TMK
This is MoFo.
JAPANESE SUBSIDIARY
Business Operations
Subsidiary: Net Income ¥100 Less: Corporation Tax (@40%) (40)
Income ¥100 Less: TK Distribution (50) Less: Corporation Tax (@40%) (20)
Net Income ¥ 30
Effective Tax on TK Income 40%
If the Kumiai in is an affiliate or otherwise related to the Eigyosha, then the TK arrangement may instead be treated as an NK between the Kumiai in and Eigyosha, in which case, the Kumiai in is deemed to have a PE in Japan.
This is MoFo.
TMK
FCCo: TMK Distribution ¥ 49.0 Less: Withholding Tax (20%) (9.8)
Net Income ¥ 39.2
Effective Tax on TMK Income: 20% (Sing Treaty - 5%)
Japan
Country X
Onshore: Income ¥ 51.0 Less: Corporation Tax (@40%) (20.4)
Net Income ¥ 30.6
Effective Tax on TMK Income 40.5%
Asset
TMK (Japan)
Onshore (Japan)
FCCo (Country X)
≥50% Common & Preferred
<50% Common & Preferred TMK:
Income ¥ 100 Less: TMK Distribution - Onshore (51) TMK Distribution – FCCo (49) Less: Corporation Tax (@40%) (0)
Net Income ¥ 0
Effective Tax on TMK Income 0%
ETR 27.5% on CGs Sing Treaty: 7.5% - 14.5%
This is MoFo.
Cayman Fund – Singapore Treaty – Japan TMK Structure
B Co (Singapore)
A Co (Singapore)
TMK
GK
Offshore
100%
Assets
Common 100% (No Economics) Preferred 49% Preferred 51%
TK (or Loan) IM Co
Asset Management Agreements
Effective Tax Rate: 12.7%
ISH (Representative
Member)
Voting
Fund (Cayman)
Investor
Fund IM Co (Singapore)
Investment Advisory Agreement
Japan Withholding Tax on Dividends - 5%
Japan Effective Tax to Equity ≅ 38%
Japan Withholding Tax on TK Distribution – 20.42% or on Interest -20%)
No Singapore Withholding Tax on Dividends
No Singapore Tax on TK Distributions (but Interest taxed (with FTC)) No Singapore Tax
On Dividends
Investment Committee
Investment Advisory Agreement
Fund GP Limited (Cayman)
GP
Japan
100%
Investor Investor Investor
This is MoFo.
Singapore – Japan TMK Tax Structure Japan Tax Consequences - Dividends to Singapore B Co : 5% Withholding Tax (assuming Singapore treaty benefit
respected) - TK Distributions to Singapore A Co : 20.42% Withholding Tax - Interest on Loans to GK – 20% withholding tax (deductions are subject to thin cap and
base erosion local tax rules) Singapore Tax Consequences - Dividends to Singapore B Co : No Singapore Tax (under special foreign dividends exemption) - TK Distributions to Singapore A Co : No Singapore Tax (if structured properly – e.g. remitted to offshore bank
account) - Interest Income to Singapore A Co: Subject to Singapore taxation (remittance clause in tax treaty) - Dividends to Fund from Singapore A Co and B Co : No Singapore Tax
Singapore B Co’s Tax Substance and Business Purpose VERY Important
This is MoFo.
JREIT Two Types: corporate type or trust type. Most are corporate listed on TSE. Limitation on JREIT shares held by lead investors (75% or less) under the TSE
rules. Taxation. Same as a corporation except it can deduct dividends distributed to its
shareholders, subject to certain requirements. Withholding tax to corporations – 15.315% withholding tax (may be reduced under
a tax treaty). Major Requirements for Distribution Deduction. JREIT offers JPY100M or more through public offering, or JREIT shares are
held by only by QIIs or 50 or more investors. Limitation on JREIT held by nonresidents (offshore). At least 50% shares must
be offered and held by residents (onshore). JREIT is not a “family corporation”.
This is MoFo.
JREIT
FCCo: JREIT Distribution ¥ 49.0 Less: Withholding Tax (15%) (7.4)
Net Income ¥ 41.6
Effective Tax on JREIT Income: 15% (Sing Treaty - 5%)
Japan
Country X
Asset
JREIT (Japan)
Onshore Investors
FCCo (Country X)
JREIT: Income ¥ 100 Less: Distribution (100)
Less: Corporation Tax (@40%) (0)
Net Income ¥ 0
Effective Tax on JREIT Income 0%
<50% >50%
This is MoFo.
CLASSIC PITFALLS UNDERESTIMATING THE JAPAN NTA – Sophisticated and Aggressive
PE RISK for the FUND INVESTORS and for the FUND SPONSORS Set the carry program for your key Japan execs Up-Front (don’t rely on bonus
schemes alone if the dollars are big) TREATY SHOPPERS BEWARE – Substance PLUS Business Purpose LACKADAISICAL and OVER AGGRESSIVE TAX STRUCTURING RISKY
This is MoFo.
TAX TRENDS CORPORATE TAX REDUCTIONS (HOPEFULLY) ON THE WAY
BEPS – SUBSTANCE - SUBSTANCE - SUBSTANCE
Investments in Real Estate In and Through Singapore Leon Kwong Wing IBA Tokyo Oct 2014
1. Singapore Real Estate Investment Trusts
2. European Investment: Spanish Case Study
3. Substance
4. Case Study: Qualifying Debt Securities
Contents
Quality tax advice, globally
Singapore Real Estate Investment Trusts
What is an S-REIT? Trust
Collective investment scheme regulated by the Monetary Authority of Singapore under the Securities and Futures Act
Listed on the SGX
Investing in property and property-related assets
Distributes not less than 90% of taxable income
Facts and figures First S-REIT (Capitamall Trust) listed in July 2002
Presently 23 S-REITs
Properties in Singapore, Japan, China, Indonesia, Europe, Hong Kong, Malaysia, Australia Lippo Malls Indonesia Retail Trust—Indonesia
CapitaRetail China Trust—China
Starhill Global REIT—Singapore, Malaysia, Australia, China and Japan
Spanish real estate investments were traditionally based in over-leveraged schemes since:
− Thin capitalization rules only applied to non- EU related lenders
− Interest paid to EU lenders are tax exempt in Spain
− Interest payments are generally deductible for tax purposes
Traditionally, foreign investors have invested in Spain through entities located in The Netherlands (NL) because of the favorable Spain – NL tax treaty and the application of the Parent-Subsidiary Directive on the distribution of dividends.
However, when repatriation of income from NL to the UBO jurisdictions could be somehow complicated, it was not strange to see on top of the Dutch entities, entities located in Luxembourg or Dutch partnerships.
As from fiscal year 2012, the Spanish government introduced a German type “earnings stripping rule”, by which the deductibility of net financial expenses is 30% of the entities' EBITDA with an exception for interest expenses not exceeding EUR 1 million which are fully deductible.
The offset of tax losses carried forward has been restricted temporarily from 2011 to 2015:
− offset is limited to 50% of the tax base for entities whose turnover is between €20m and €60m
− for entities with a turnover >€60m, the offset is restricted to 25% of the tax base.
Expense for assets depreciation deducible for tax purposes has been limited temporarily (2013 – 2014) to 70% of the total expense.