Are there government grants and incentives in your jurisdiction that encourage investment in specifi
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The following article discusses session one in the IR Global Virtual Series on ' Investment Incentives – Assessing international real estate
programmes'
Michael Lefkowitz – U.S – New York (ML) Opportunity
Zones are a new community development programme established by Congress in the
Tax Cuts and Jobs Act of 2017, to encourage long-term investments in low-income
urban and rural communities throughout the USA.
The Opportunity Zones programme provides a tax incentive for
investors to re-invest their unrealized capital gains into Opportunity Funds
that are dedicated to investing into Opportunity Zones designated by the chief
executives of every U.S. state and territory. By law, governors can nominate up
to 25 per cent of their state’s qualified census tracts for inclusion. Up to 5
per cent of the state’s 25 per cent can be non-low-income tracts.
It's very lucrative to people who have had substantial
gains, let's say in the stock market selling their Google stock, taking the
gains and then investing into real estate. Investors can defer tax on any prior
gains until the asset is sold or exchanged, as long as the gain is reinvested
in a Qualifying Opportunity Fund.
An Opportunity Fund can be any investment vehicle organised
as a corporation or partnership, for the purpose of investing in Qualified
Opportunity Zone Property. Opportunity Zones are the talk of the town in the
US, as every real estate developer is looking to raise funds for the
investments in these designated areas throughout the United States.
Richard Sussman – U.S – New York (RS) Just to expand
upon that a little bit, the investments are not restricted to real estate, so
it applies to other sorts of business opportunities conducted within the
Opportunity Zone as well. It's a fairly expansive programme which is intended
to promote development and economic growth within these areas.
Jordan Ondatje – U.S – California (JO) Some more
detail on Opportunity Zones from our perspective. The Tax Cuts and Jobs Act
(the Act) provides a new tax incentive for investments in Qualified Opportunity
Zones. A Qualified Opportunity Zone (QO Zone) is a low-income area that has
been designated by the State and approved by the Secretary of the Treasury (the
Secretary). The Secretary has approved QO Zones in all states and each of the
US territories. Those investing in QO Zones can receive significant tax
benefits, including tax deferral for capital gains reinvested in QO Zones,
elimination of up to 15 per cent of the tax on the gain reinvested, and
elimination of the tax on any additional gain from the investment in the QO
Zones.
To benefit from investment in a QO Zone, the taxpayer must
reinvest gain in a Qualified Opportunity Fund (QO Fund). A QO Fund is a
corporation or a partnership that is organised for the purpose of investing in
Qualified Opportunity Zone Property (QOZ Property) and that holds at least 90
per cent of its assets in Qualified Opportunity Zone Property purchased after
December 31, 2017. A QO Fund must self-certify by attaching a certification
form to its federal income tax return.
QOZ Property includes Qualified Opportunity Zone Stock (QOZ
Stock), Qualified Opportunity Zone Partnership Interests (QOZ Partnership
Interests), and Qualified Opportunity Zone Business Property (QOZ Business
Property). QOZ Stock and QOZ Partnership Interests are stock and interests
issued by a corporation or partnership which is a Qualified Opportunity Zone
Business and acquired by the QO Fund solely in exchange for cash.
A Qualified Opportunity Zone Business (QOZ Business) is a
trade or business that meets certain parameters, including that it cannot be a
golf course, country club, massage parlour, hot tub facility, suntan facility,
racetrack or facility used for gambling, or any store which has the principal
business of selling alcoholic beverages for consumption off premises. A QOZ
Business may consist of improving, leasing, and managing commercial and
residential real property.
The tax benefits of making a Qualified Opportunity Fund investment
can be illustrated as follows.
Assume Taxpayer A invested a USD1,000,000 gain in a QO Fund
in 2018 and sells the investment in 2028 for USD2,000,000.
Taxpayer A may only defer the capital gains tax on the
original investment until December 31, 2026. Because Taxpayer A will have held
the investment for more than seven years at this point, Taxpayer A’s basis in
the deferred gain will be increased to USD150,000 (15 per cent of the deferred
amount). Accordingly, Taxpayer A must only recognise a gain of USD850,000
(USD1,000,000 deferred gain – USD150,000 step up in basis). Even though
Taxpayer A must recognise this gain by December 31, 2026, Taxpayer A can
continue to hold the investment in the QO Fund beyond that date. When Taxpayer
A sells the investment for USD2,000,000 in 2028, the additional gain from the
investment in the QO Fund will not be recognised because Taxpayer A held it for
ten years.
Accordingly, Taxpayer A will only pay taxes on USD 850,000
of the total USD 2,000,000 gain. The result is Taxpayer A pays only USD170,000
of tax in 2026 on a total gain of USD2,000,000 over ten years, which provides
an effective tax rate of 8.5 per cent on the total gain.
Peter Diedrich – Germany (PD) Incentive programmes in
Germany are available through different public funding instruments and for
different funding purposes. The individual funding requirements may, for example,
result from investment projects, research and development activities, personnel
recruitment, working capital needs or other specific purposes. The different
incentives instruments including grants, loans and guarantees are generally
available for all funding purposes and can ordinarily be combined; thus,
matching the different business activity needs at different development stages
of the company.
Non-repayable grants are an effective means of significantly
reducing production or service facility set-up costs. Germany offers one major
programme directing the allocation of these investment grants throughout
Germany: The Gemeinschaftsaufgabe ‘Verbesserung der regionalen
Wirtschaftsstruktur’ (GRW – Joint Task for the Improvement of Regional Economic
Structures).
The GRW is a national incentives programme that steers the
distribution of direct subsidies for different investment projects across
Germany in specified areas. Its main objectives are job creation and promoting
regional economic development. Eligible costs include capital expenditures or
personnel costs during the establishment phase.
The European Commission defines the regions and the maximum
funding rates across the entire EU, conducting audits at regular intervals. A
new GRW regional aid map came into effect in Germany in July 2014, and is valid
through 2020. The region’s previous economic outputs are used to define
so-called C and D areas with different maximum funding rates.
The whole of eastern Germany (excluding Berlin) is
classified as a C region. A special set of circumstances apply to eastern
German municipalities, administrative regions, and unincorporated areas along
the Polish border. Here, companies are eligible to apply for a compensatory
differential to the Polish assisted region until the end of the present funding
period (December 31, 2020). These regions have the highest funding rates in
Germany.
Investments are also funded in certain regions of western
Germany, where D regions dominate.
The maximum level of support that is permitted varies across
the country. At its simplest, it depends on two factors: the size of the
requesting company (classification as a small, medium-sized, or large
enterprise) as well as its investment location within Germany. In the
maximum-support areas in Germany, large companies can receive up to 20 per cent
of eligible investment costs reimbursed; medium-sized companies up to 30 per
cent; and small companies up to 40 per cent. These maximum-support areas are
located in eastern Germany.
The GRW programme defines industries as well as forms of
investment (e.g. greenfield projects or expansions) eligible for funding.
International investors are subject to exactly the same conditions available to
German investors. A set of criteria (including company size, planned investment
project location et al.) determines individual investment project incentive
levels.
Who and what can be funded with GRW grants is determined at
the federal level by the GRW coordination framework. The GRW programme is
focused on manufacturing and service industries. Pure sales or marketing
activities are not covered by the programme.
Project costs form the calculation basis for determining the
possible amount of cash incentives. Eligible costs are either project related
capital expenditures (e.g. for new buildings, equipment, machinery) occurring
in the first three years after project start or the personnel costs of the
newly created jobs in the first two years. Investors are free to determine
whether to take capital expenditures or personnel costs as calculation basis
for determining the possible amount of cash incentives. In the case of the wage
cost option, lower and upper wage limits apply subject to federal state GRW
regulations.
Luxembourg – MT Over recent years the Luxembourg real
estate market has experienced rapid development, which continues today, in both
office and residential property, with growth of 50 per cent and 60 per cent
respectively.
This has been helped, partly by accommodative government
policy, and also by a severe imbalance between supply (4,500 units per annum)
and demand (6,000 units per annum). As a consequence, there are potential gains
to be made on resale, providing an interesting investment opportunity for
private, professional and institutional investors alike.
There are few speculative projects and the risk of not
finding lessees is limited, considering the strong demand, with promising rates
of return.
Offices attract a yield of around 5 per cent, while
residential blocks can provide yields up to 8 per cent.
In 2020, total residential real estate transactions will
reach a volume of EUR158 billion, reflecting an increase of approximately 30
per cent from today. For offices that number is EUR 32 billion, meaning an
increase of 40 per cent from today.
With a view to financing, the banks generally require a
personal contribution in the order of 20 -25 per cent to 30 per cent. Depending
on the specific case, it is possible to opt for fixed or variable interest
rates or a mix, and even the possibility of repaying interest only with a
deferred repayment of the principal amount.
For several years the Luxembourg market has seen extremely
strong interest on the part of private, professional and institutional
investors. This is a phenomenon that was rare previously, but has been fostered
by government policy, political stability, sound economic prospects, resistance
to the financial crisis, still attractive taxation and, above all, high
returns. This makes Luxembourg a most interesting platform on which to purchase
or to invest in real estate.
Interest paid to finance the property and the maintenance
and management costs can be deducted. Then there is the deduction within the
framework of the depreciation schedule of 6 per cent of the price of
construction. By way of example, with an investment of EUR 375,000, and a
consequential depreciation of EUR 19,500 to be deducted, the owner would not be
taxed for six years on rents of up to EUR18,000.
England – JF For decades, the UK housing market has
proven to be a sure-fire success for UK and overseas investors. Property
prices, in particular residential property, have enjoyed a significant upward
trend despite a number of recessions where dips have only been transient. This
reliable increase has been particularly bullish since the 1970s.
However, with limited space and an ever-increasing
population, the UK has suffered a housing shortage for many years and the UK
government is still to get on top of the problem.
Limited supply has, as you would expect, driven prices up,
however, recent tax and lending rules and of course the interminable
uncertainty of Brexit has significantly impacted on investment potential.
Opportunities therefore for overseas investors are
increasingly limited, particularly in the buy-to-let market with no notable few
tax shelters or opportunity zones.
Stamp Duty Land Tax rates for buy-to-let or second homes
rises to 15 per cent for every pound spent over GBP 1.5 million which has
proven to be a disincentive for both UK and overseas investors.
However, there are other factors which also impact more
favourably.
The success of regional cities such as Manchester and
Liverpool are proving popular with Asian investors looking outside of London
for more affordable prices with better yields also boosted by the HS2 project
and rising local employment.
Liverpool has become one of the UK’s leading business
destinations with its far-reaching generation project and again has been very
popular with Asian Investors.
Also, relevant of course is the weakening of the pound and
if Brexit does negatively impact on the property market, as it is expected to
do so (should it happen!) then property prices may well drop by a significant
percentage. Ultimately therefore this may encourage investment despite the lack
of targeted incentives and the significant chunk of Stamp Duty Land Tax
payable.
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