Cayman Islands: German Funds - Using Offshore Real Estate To Invest In UK Real Estate

Last Updated: 19 September 2008

Recent changes to the German Investment Act (the "Act") have made it easier for German investment funds to incorporate offshore companies for use when acquiring UK or other real estate.

Ogier have recently completed several transactions for German fund clients acquiring UK real estate, have developed know how and precedents for use by German funds and with offices in offshore jurisdictions including Jersey, Guernsey, Cayman and BVI should be ideally placed to meet the particular needs of a client. In the past, for a German fund to be able to set up an offshore company, regulatory approval was required from the German Federal Financial Supervisory Authority (Bundesenstalt für Finanzdianstleistungsanfsicht, BaFin). This approval process took up to 3 months or longer. One of the recent changes to the Act is to abolish the requirement for prior regulatory approval to be obtained.

This has permitted offshore companies to be used where previously transaction timetables could not afford to wait three months for a regulatory approval.

The Act also now allows greater flexibility for real estate funds. Previously funds were not allowed to invest in real estate companies that held participations in other real estate companies. This restriction has now been removed, although an indirect participation must be a 100% holding.

Setting up Offshore Companies

Offshore companies can be incorporated quickly (within a day) and the company laws of offshore jurisdictions tend to be very flexible which is advantageous to the shareholder. For example, dividends can be paid out of capital as well as profits, subject to a solvency test being met.

Offshore Taxation

In general, offshore jurisdictions are tax neutral. Therefore, there will be no taxes to pay in the jurisdiction where the offshore company is incorporated. For example, there is no withholding tax, stamp duty on the transfer of shares or any income, corporate or capital gains tax.

However, in respect of UK real estate the rental income will be subject to UK income tax but the company, provided the property has been acquired for investment purposes (and not for development and onward sale), should not incur any capital gains tax on a sale.

Detailed tax advice should always be taken in the UK and Germany to ensure the appropriate structure is set up as there are other taxation matters which need to be addressed in both jurisdictions.

Management and Control

There are no rules under most company laws in offshore jurisdictions governing where directors must be resident although it is important when structuring the company to ensure that its management and control is not undertaken in the UK or in Germany. Therefore, all directors should only participate in board meetings outside Germany and the UK. Typically, the company will have offshore resident directors appointed to manage the company and the administrator, who will act as secretary and operate the company's bank accounts etc., will also be resident offshore.

Exiting the Investment

Investors around the world are familiar with Jersey, Guernsey, BVI and Cayman companies (which are all based upon English company law principles) and generally have no objection to owning them. Therefore, it is almost always the case that a sale of the company can be effected when selling the asset rather than the asset itself having to be sold. This is convenient and means that the fund in not left with a shell company to wind up once the asset is sold. It also means that the purchaser will avoid paying stamp duty on its acquisition of the asset and may enable the fund to benefit from this saving when the purchase price is agreed since it is common to see the saving split between the two parties.

Permanent Establishment

Although the company will not have its own exclusive office space at the offices of the administrator in the offshore jurisdiction, it is possible to manage the company to ensure that meetings are held offshore and the administration is conducted offshore. Provided that this is carried out in practice and little or no administrative or management actions or decisions are undertaken in the UK or Germany, the company should not be deemed to have a permanent establishment in Germany or be managed and controlled in the UK.

Other Requirements under the Act

The Act also imposes other requirements on the fund and the company. For example, that certain restrictions must be contained in the constitutional documents of the company relating to the number and type of assets the company may hold.

Those restrictions required between the company and the shareholder not suitable for inclusion in the constitutional documents are included in an investment agreement between the fund and the company which further regulates how the company will be operated. This may include reserving certain rights in favour of or on behalf of any custodian.

Debt Finance

Pursuant to the Act no fund can be more than 50% leveraged with third party debt finance. However, it is possible for a shareholder to loan the company up to 80% of the property value. It is consequently possible to negotiate a favourably light security package with the bank which is lending to the fund and / or the company in respect of the property acquisition.

Limited Liability

Under the Act it is also a requirement that the liability of a shareholder is limited to the amount paid up on the shares that have been issued to it. Once the shares of a company have been issued and are credited as fully paid there is no further liability on the shareholder to contribute to the company.

Auditors, Accounts and Currency

As a general guideline, a company may adopt whatever generally accepted accounting principles it wishes. The company may also produce its accounts in pounds Sterling, Euros or such other currency as it wishes. Typically, there is also no requirement that the auditor actually be in the jurisdiction of incorporation and, subject to other qualification requirements, it ought to be possible for the fund's auditor to be appointed as auditor to the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions