The following article discusses session three in the IR Global Virtual Series on ' Investment Incentives – Assessing international real estate programmes'

U.S – California – JO In evaluating available
investment structures for an international investor, important considerations
typically include tax consequences, privacy concerns, liability protection, and
US filing requirements.

As a general rule, international investors are subject to a
flat 30 per cent withholding tax on United States source fixed or determinable,
annual or periodical (FDAP) income that is not effectively connected to a
United States trade or business. FDAP income includes rental income from real
property. The FDAP tax rate may be reduced by an applicable treaty for
investors from certain countries.

If the income is effectively connected to a US trade or
business, foreign investors are taxed under the same rules as US taxpayers,
paying income tax at graduated rates up to a maximum of 37 per cent. In
addition, under the Foreign Investment in Real Property Tax Act (FIRTPA), a
foreign investor selling US real estate is required to withhold a tax on the
amount realised, generally at a rate of 15 per cent. US estate and gift tax is
also imposed on any US situs property included in a non-resident alien’s gross
estate at the time of death.

Investment directly through a US corporation or other entity
is still subject to FIRPTA and will subject the investor to US estate and gift
tax. As a result, a better option is to hold the real estate through a
“’blocker’ structure in which the investor invests through a foreign entity
which owns the US entity holding the real estate. This provides the benefits of
owning the property through a US entity, while preventing application of US
estate and gift tax and potentially mitigating FIRPTA.

Investors generally use a two-tier corporate structure, but
in some circumstances, a partnership structure may also be appropriate. Under
the Tax Cuts and Jobs Act, the corporate income tax rate was reduced to a flat
rate of 21 per cent, which provides a significant benefit to corporations.
Investing through a corporation, generally subjects the investor to double
taxation, however, proper structuring using qualified debt instruments can
entirely or substantially eliminate double taxation.

Finally, international investors may also consider investing
in US real estate through a domestically-controlled Real Estate Investment
Trust (REIT). A REIT is an entity otherwise taxable as a US corporation that
elects REIT status and is permitted a tax deduction for dividends paid to its
shareholders. A REIT is ‘domestically controlled’ if more than 50 per cent of
the stock is owned by US persons.

A major advantage to investing through a
domestically-controlled REIT is that the investor can sell the stock in the
REIT without incurring federal income tax under the FIRPTA. In addition,
because the REIT is eligible for a deduction for dividends paid, it will
generally have little or no US federal income tax liability. However, REITS are
designed for passive investors and thus provide investors with significantly
less control over their investments.

Luxembourg – MT Private, professional and
institutional investments can be made in a wide range of investment vehicles in
Luxembourg. Most of these can be used to establish a real estate portfolio.

Such a corporate structure may be incorporated in the form
of a non-regulated or a regulated entity.

Depending on the size of the acquisition project, this will
be via a corporate form such as a Public Limited Company (SA), Private Limited
Company by Shares (SARL); a corporate partnership limited by shares (Société en
Commandite par actions) or the special limited partnership (Société en
Commandite Spéciale, SCSp.

The common limited partnership (Société en Commandite
Simple, SCS) or non-trading company (Société Civile) are also commonly chosen
for companies investing in real estate.

A real estate investment fund, such as the Specialised
Investment Fund ‘FIS’, Risk Capital Investment Company (SICAR), Alternative
Fund-AIF ‘Fonds Alternatifs’ (RAIF) can also be used. Such vehicles present the
private, professional and institutional investor with many advantages, inter
alia tax optimisation including arrangements within the framework of estate
planning.

Germany – PD From a German tax perspective, offshore
structures are basically not beneficial for German real estate investments as
the profits are subject to German income tax anyway.

The investment as an individual can be disadvantageous with
regard to the income tax rate on a nameable current rental income, as the tax
rate is linear-progressive and may increase up to more than 47 per cent for
very high income. On the other hand, an individual may sell his German property
income tax-free after more than 10 years, if it is owned as a private asset.

In contrast, investment via a corporation may be
advantageous with regard to current rental income, as a flat rate of 15.825 per
cent corporate income tax is applicable, even for very high incomes. This tax
burden may further be reduced by interest on (shareholder) loans. In extreme
cases, taxable profits in Germany may be neutralised, provided the loans were
granted under arm´s length conditions and the interest payable is not subject
to the Earning Stripping Rule.

On the other side, a sale profit will always be subject to
corporate income tax as the property of a corporation is considered as a
commercial asset. When investing via a special purpose vehicle (SPV), we
recommend the use of a foreign SPV, without a permanent establishment in
Germany, in order to avoid German trade tax as well as withholding tax on
dividends.

Trade tax is an additional municipal tax with varying rates,
depending on the municipality of the permanent establishment. It is only triggered
on commercial income, i. e. derived from a commercial activity, or on certain
legal forms of the property-owning company (e.g. corporation or commercially
infected partnership).

Alternatively, the investment may be made with a
non-commercial partnership. Such a partnership is considered as transparent for
income tax purposes. Any profits are directly attributed to and taxed at its
partners, so that no withholding tax is triggered by profit distributions.

U.S – New York – ML There is a substantial benefit to
foreign investors having their structures as debt structures versus equity
structures, because you can avoid having to pay income taxes based on the
interest earned. This structures the US income tax into a debt vehicle versus
an equity vehicle. There are certain cases in which the purchaser of a property
in New York and the US is required to withhold taxes where the seller is not a
US taxpayer, but it really depends on the situation.

CONTRIBUTORS

Michael E. Lefkowitz (ML) Rosenberg & Estis, P.C. – U.S
– New York www.irglobal.com/advisor/michael-e-lefkowitz

Marc Theisen (MT) Theisen & Marques Advocats a la Cour –
Luxembourg www.irglobal.com/advisor/marc-theisen

Jo Farr (JF) Barlow Robbins – England www.barlowrobbins.com/people/jo-farr

Richard Sussman (RS) Rosenberg & Estis, P.C. – U.S – New
York www.irglobal.com/advisor/richard-l-sussman

Dr. Peter Diedrich (PD) DSC LEGAL Rechtsanwaltsgesellschaft
mbH – Germany www.irglobal.com/advisor/dr-peter-diedrich

Jordan Ondatje (JO) Blanchard, Krasner & French – U.S –
California www.irglobal.com/advisor/jordan-e-ondatje

Robert Blanchard Blanchard, Krasner & French – U.S –
California www.irglobal.com/advisor/robert-blanchard

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