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The following article discusses session one in the IR Global Virtual Series on 'Preferential Portfolios: Tax efficiency in international real estate investments'
Canada – Jayson Schwarz (JS) When a non-resident of Canada (NRC) receives rental income from real property in Canada, there are a number of tax regulations that apply.
Perhaps most important, is the requirement to withhold non-resident tax at the rate of 25 per cent on the gross rental income
paid or credited to the NRC. As an alternative, the NRC can file a separate Canadian income tax return to report the net rental income, after deducting applicable expenses. This would be done when net Canadian-source rental income is less than the withholding tax.
An NRC corporation (NRCC) that invests in Canadian real estate will pay corporate tax on profits at a rate of 15 per cent federally, plus applicable provincial tax. On a sale of Canadian real estate, again that is treated as a capital gain will be 50 per cent taxable as a capital gain at the rate mentioned above. The other half of a capital gain is tax-free.
Withholding tax rates can be reduced under most of Canada’s treaties, and, in the case of Canada’s US tax treaty, the withholding rate is zero.
There is also a Canadian withholding tax on dividends paid to NRC shareholders of 25 per cent. Under the Canada / US tax treaty, dividends paid to individuals are subject to a reduced withholding of 15 per cent, and dividends paid to corporate shareholders that own at least 10 per cent of the voting stock of the company are subject to a reduced withholding rate of 5 per cent.
Canadian real estate is considered ‘Taxable Canadian Property’ (TCP), and income from the sale of TCP is taxable in Canada. Most tax treaties do not override the ability of Canada to tax this gain. When an NRC disposes of TCP, the purchaser is required to withhold 25 per cent of the gross proceeds for non-depreciable capital property (50 per cent of gross proceeds for inventory and depreciable property) unless the NRC has paid the tax or provided security for the tax.
NRC’s in the Greater Toronto Area (GTA) are subject to a recently instituted non-resident speculation tax (NRST). The tax applies to the purchase of up to six residential properties and is in addition to land transfer tax. In effect, it represents a 15 per cent speculation tax for NRC’s on the purchase price. It does not, however, apply to commercial properties or to a purchase of six or more units.
The answer to tax efficiency is to consult with your local council to determine if your country of residence has a beneficial treaty. Estate matters concerning real estate appear to be neglected in almost all treaties and individuals should be aware of the possibility of double if not triple taxation in some circumstances.
New Zealand – Richard Ashby (RA) All of New Zealand’s (NZ) tax treaties contain an article dealing with income from real property, permitting NZ to tax any income derived from land situated in the country.
Unlike most jurisdictions, NZ does still not have a comprehensive capital gains tax in place, although the prospect of introducing one, is being debated by our political parties.
With no capital gains tax, investing in NZ land has for some time been an attraction for non-resident investors.
Presently land in NZ can, therefore, be acquired and resold, without becoming subject to any NZ taxation, unless caught by one of the specific land taxing provisions. These taxes mainly deal with land acquired for the intention of resale, those involved in land-related businesses (dealers/developers/builders) and those non-business persons who undertake land development projects like one-off subdivisions.
In recent years, the Auckland residential property market has seen significant price growth, predominantly fuelled by supply versus demand.
The initial government reaction was the removal of the ability of investors to claim depreciation on residential buildings, as an expense against the rental income derived from the residential tenant, thereby increasing the net rental income subject to taxation.
Next came the introduction of a bright-line rule. Under this rule, the disposal of residential land within two years of its acquisition date where the land was not being used as the owner’s main home, attracted a tax (so a quasi-capital gains tax). Earlier this year we saw an increase in the bright-line period from two to five years.
Finally, there are proposals presently under consideration and likely to be law by early 2019, which will in essence ring-fence any tax loss incurred with respect to a residential property investment, requiring the loss to be carried forward to the following income year, only available for offset against residential property income or any other income under the specific land taxing provisions.
Until recently, there were essentially no restriction on non-residents acquiring NZ land, unless that land was defined as ‘sensitive land’ in the Overseas Investment Act 2005 (OIA), in which case, the overseas person (a defined term in that same Act) had to apply for approval for the acquisition from the Overseas Investment Office, prior to the transaction proceeding.
Germany – Dirk Lehmann (DL) In Germany, there is a difference between corporate and individual investors. There is also a difference in taxation depending on how long a real estate asset is held for.
The corporate tax rate is 15 per cent, plus a solidarity surcharge of 5.5 per cent. Added to this is a trade tax of 15 per cent, making a total tax burden of around 30 per cent. An exemption from trade tax is possible though, allowing the tax burden to be reduced to around 15 per cent. Foreign individuals holding property are taxed with a progressive rate up to 45 per cent, with a surcharge of 5.5 per cent, although those holding the property for more than 10 years can gain a tax exemption on its sale.
Germany has a new government since last year, but there are no important tax issues under discussion, related to real estate investments. We expect to see a further tightening of rent controls for rental properties (Mietpreisbremse), but only in areas of high demand in larger cities. The rents will be capped at 10 per cent above the average rent for the local market.
Property tax is also under review since the calculation is based on adjusted values from 1964 in western Germany and 1934 in eastern Germany. The real market value is usually much higher than the estimated value by law. As a result of this, properties in the same city (e.g. Berlin) are valued differently, depending on whether the property is located in the eastern or western part of the city.
The adjusted value applied to the property tax also depends on the municipality in which the property is located. High differences are usual, with Berlin applying a tax factor of 810 per cent, while the lowest factors in Germany are less than 400 per cent.
For investors, property tax is usually not an issue because the tax is charged to tenants as operating expenses. It can, however, be an issue for landlords, because tenants factor this in when deciding where to rent a property.
With regard to inheritance and gift tax, there is a limited tax liability for properties located in Germany and owned by a foreigner. There are only a few double taxation treaties that allow foreigners to avoid a double taxation risk with inheritance and gift tax in Germany and country of fiscal residence.
To take the US and Canada for example, if a German resident with property in the US dies, inheritance tax is triggered in both the US and Germany. Germany has a double tax treaty with the US for inheritance tax and gift tax, so inheritance tax in Germany would not apply. This is not the case with many other countries though, including Canada.
We also have tax exemption thresholds, i.e. 400,000 euros per child, but that’s only applicable to German residents. It also applies to beneficiaries who live elsewhere in the EU, because EU law says we can’t differentiate, but it wouldn’t apply in Canada or the US.
Spain – Gustavo Yanes Hernández (GYH) In Spain, there are several regulations that apply to the acquisition and sale of real estate. The main differences between Barcelona and Madrid are in transfer tax and stamp duty for mortgages and acquisition of real estate because these taxes are regional, not federal in nature. In general, Madrid has more tax advantages than any other region in Spain.
Some major taxes to consider at the time of acquiring real estate are VAT and transfer tax. As a general rule, if an entrepreneur sells a property to a foreign investor, the transaction will be subject to VAT. However, if the seller is an individual, the acquirer pays the transfer tax. A higher transfer tax means a higher price because the acquirer cannot deduct this, while VAT can be deducted.
For this reason, foreign investors usually try to negotiate transfers of real estate properties that are subject to VAT in Spain, rather than transfer tax. There are some special rules that may apply for VAT/Transfer Tax, so it is mandatory to analyse the transaction before making a binding offer for real estate in Spain.
This can be a deal breaker because the acquisition cost is much higher with the transfer tax.
With regard to the sale of real estate located in Spain by non-residents, the main difference is in the tax rates. For EU residents there is a tax rate of 19 per cent and for residents in third countries outside the European Union, the tax rate is 24 per cent. It is important also to mention that the sellers may have to pay the ‘Tax on the Increase of Urban Land Value’, a local tax that may be relevant depending on how many years the owner has held the property.
U.S – Robert Blanchard (RB) Taxation in the United States must be analysed at both the federal level and individual state level. Taxation relating to real property investment can be divided into four parts.
First, there is a general income tax on net income from a property, whether that income is from rents or gains on sale, and is imposed at both the federal and state level. Taxation rates vary depending on the type of taxpayer.
Second, there is a withholding tax applied to foreign investors that are generally calculated on the gross sales proceeds if the foreign person sells the property. The withholding tax is also applied to rents received. Withholding tax is imposed at the federal level and sometimes at the state level.
Third, there is an inheritance tax if a foreign individual dies while holding US property. Real estate and interests in US entities holding real property are considered as part of the US tax estate of a foreign individual, which is taxed at a rate of 40 per cent of the value over USD60,000.
The fourth tax is an annual property tax applied on the state and local level, not the federal level. In California, this is this is approximately 1 per cent of the assessed value based on the value at the date the property was acquired or improved. In other states, the assessed value is often adjusted annually. Typically, this tax is passed on to the tenants as a component of rent.
Contributors
Robert W. Blanchard (RB) Blanchard, Krasner & French – U.S – California www.Irglobal.com/advisor/robert-blanchard
Gustavo Yanes Hernández (GYH) Monereo Meyer Abogados – Spain www.lawyers-spain/lawyer-spain-gustavo-yanes-madrid
Jayson Schwarz (JS) Schwarz Law – Canada www.irglobal.com/advisor/jayson-schwarz
Richard Ashby (RA) Gilligan Sheppard – New Zealand www.irglobal.com/advisor/richard-ashby
Dirk Lehmann (DL) Wagemann + Partner PartG mbB – Germany www.irglobal.com/advisor/dirk-lehmann