UK: European Tax Bulletin For Real Estate Funds

Last Updated: 8 May 2007
Article by Deloitte Audit Group

Most Read Contributor in UK, August 2017

This bulletin aims to highlight key tax issues which may be of importance to real estate funds and investors.

Denmark: Corporation tax rate reduction proposed in tandem with restriction on interest deductions
A draft bill was published by the Danish Minister of Taxation on 1 February 2007, proposing some significant changes to Danish corporate income tax, interest deductibility, tax depreciation and dividend payments. The main items of the proposed draft bill are:

a) The bill proposes to reduce the statutory corporate income tax rate from 28% to 22%, with effect from fiscal years commencing 1 January 2007. Further talks after the publication of the draft bill seem to suggest that the corporate income tax rate may be reduced only to 24% or 26%; and

b) The bill also includes a proposed restriction on interest deductions which will apply to both inter-company debt and third party debt. The rules contained within the bill provide that:

  • Only 55% of net interest expenses in excess of DKK 10m (approx.EUR 1.35m) will be permitted as a deduction in computing taxable income. This results in a deduction at an effective rate of 12.1% (22% of 55%) for expenditure which exceeds the DKK 10m threshold;
  • Net financing expenses will not be deductible to the extent they exceed a cap, calculated at a standard rate of return (presently 6.5%), on the tax base of the company’s assets (less certain financial assets). Interest expenses that are restricted as a result of the cap will not be eligible for carry forward or carry back for set-off in fiscal years where the cap does not apply; and
  • To the extent that they do not exceed DKK 10 million, net financing expenses should always be tax deductible. The proposed changes on interest deduction have encountered fierce opposition within government and industry representatives and there are now talks to replace the suggested rules by a stricter thin capitalisation regime (in principle, 2:1 debt/equity ratio) combined with some further restrictions on the amount of taxable income which could be sheltered by deduction of interest expenses.

It is envisaged that Danish property owning companies or Danish permanent establishments of foreign companies owning Danish properties will be negatively affected by the bill as they tend to be primarily debt financed and are normally structured in order to rely intensively on interest deductions. It is still unclear when the proposed changes will be implemented and become effective from.

Germany: Taxation changes expected to impact private equity houses
It is expected that the German authorities will propose taxation changes which will impact the availability of tax relief for interest payments. It is anticipated that, in order to obtain a deduction, it will be necessary to demonstrate that the debt/equity ratio at a German entity level does not exceed that which arises at a consolidated level. As such, a practical concern has arisen, that the German tax authorities will require consolidated accounts for tax filing purposes, thus significantly increasing the administrative burden as currently such accounts are often not produced by private equity houses at fund level or Luxembourg intermediate levels.

The preliminary draft states that in cases where consolidated accounts under IFRS are not produced, equivalent accounts under German GAAP or US GAAP would be sufficient, as audited for German tax purposes.

Germany: Preliminary draft of German tax reform plans for 2008
German tax reform plans for 2008 were released earlier this month and contain a number of proposals that, if enacted, will significantly affect businesses. It is expected that most of the changes would become effective from 1 January 2008. According to the current draft, the 2008 tax reform will include the following:

a) The combined effective tax rate for corporations would be reduced to 29.8% (although the trade tax element of the combined rate is variable depending on the location of the company). In addition, trade tax will no longer be treated as a deductible business expense for corporate income tax purposes; and

b) The transfer pricing rules will be amended, via proposed modifications to both the AO (General Tax Code) and the AStG (Foreign Tax Code):

  • Amendments to the AO include a tightening of the transfer pricing documentation requirements. In addition, the proposal allows the tax authorities to estimate a taxpayer’s income in certain cases, even if the taxpayer has produced documentation to support a filing position; and
  • Amendments to the AStG include provisions such that the terms "transfer prices" and "arm’s length" would be defined according to international standards. In addition, the proposal would also give rise to a priority of the ‘comparable uncontrolled price’ ("CUP") method over other transfer pricing methods.

Germany: Proposed changes to the German Investment Act (GIA)
The German Federal Ministry of Finance has recently published a preliminary draft version of the proposed amendments to the German Investment Act (GIA).

One of the main changes proposed is in respect of non-German funds qualifying as "investment funds" as defined in the GIA. Under the proposed rules, non-German funds will only be treated as "investment funds" if they offer a redemption right to their investors.

In case a foreign fund does not qualify as an "investment fund" under GIA, its tax treatment would be as follows:

  • Foreign closed-ended funds would no longer be subject to the German Investment Tax Act and would therefore not be subject to its reporting requirements; and
  • German investors would be taxed under the normal German tax rules. No lump sum taxation would therefore apply.

Poland: Tax free step-up in real estate base cost still available
Further to the information provided in the November Bulletin, due to the existence of transitional provisions, it is still possible to achieve a tax free step-up in the base cost of Polish real estate. The transitional provisions provide that taxpayers who carried out business activities in 2006, and applied an extended tax year (ending in 2007), may benefit from tax provisions in force in 2006. Provided the above applies, companies are still able to improve their tax position in Poland by increasing the tax base cost available for depreciation under the tax-free step up regime.

Hungary: Minimum tax abolished
The Hungarian Constitutional Court abolished the minimum tax on 27 February 2007. The minimum tax previously affected structures in which a Hungarian company received tax-free income. As a result of the abolition of the tax, Hungary has become a more attractive holding location as Hungarian holding companies can now receive tax-free income without attracting a charge under the minimum tax regime.

Romania: Real estate transfer taxes abolished with effect from 2007
Commencing 2007, stamp duty which was previously payable upon the transfer of real estate will no longer be charged. Notary fees, amounting to approximately 0.5% of the transfer value will still be levied.

Spain: Transfer tax anti avoidance measures announced
Amendments to article 108 of the Stock Market Act 1988 affect the application of transfer tax. Previously transfer tax applied only to the sale of shares in companies which own real estate representing more than 50% of the company’s total assets. Now the rules have been extended such that the transfer of shares in companies with shares in another company owning Spanish real estate, which exceeds 50% of the company’s assets, will also attract transfer tax.

The repercussions of the extension of the rules remain unclear; it appears that the Spanish tax authorities are seeking to clamp down on the use of foreign entities as a vehicle for the avoidance of transfer tax.

United Kingdom: Authorised Investment Funds on a similar "level playing field" to UK REITs
Following Government discussion on the taxation of Authorised Investment Funds (AIFs) which invest in property, it was announced on 21 March that the new regime effective for UK Real Estate Investment Trusts (UK REITs) from 1/1/07 is to be adapted to Property AIFs established as Open-Ended Investment Companies (OEICs), although Authorised Unit Trusts (AUTs) will not be eligible because of perceived double tax treaty complications. Existing Property AUTs will, however, be able to convert to OEICs and access the new regime.

Broadly, there will be no corporation tax cost in the AIF itself under the new regime. The point of taxation on income moves from the Property AIF to the investor, with the result that investors face broadly the same tax treatment had they owned real property or UK REIT shares directly.

Access to any new Property AIF will be available only to AIFs whose investment portfolio comprises predominantly real property or shares in UK REITs. Subject to further discussions with the industry, the property holding requirement will be similar to that of UK-REITs, (i.e. 75% of income and assets). AIFs meeting the property holding requirement would be able to elect into the new regime but it would not be mandatory.

The key features of Property AIFs announced on Budget Day are:

  • No entry or conversion charge for any new Property AIF.
  • Complex streaming of income: Ring-fencing of income into three separate pools: Property Income; Other Taxable Income (primarily interest and non-UK dividends); and UK Dividend income. The Other Taxable Income pool will operate in a similar way to a bond fund.
  • Withholding Tax (WHT) on distributions: Each of the distributions out of the above pools would be subject to UK tax rules applicable to that form of income in the hands of the recipient. Distributions of Property Income and Other Taxable Income would be subject to WHT at 22% (for now) and 20% respectively. This WHT would be available for credit or, for certain investors, repayment.
  • Requirement to be ‘widely held’: As for UK REITs the Government propose to introduce a 10% corporate ownership test which will take account of the openended structure of AIFs and their crosssection of institutional investors. Also they propose to introduce a diversity of ownership test to avoid closely-held Property AIFs. Developing these rules will be subject to further discussion with the industry working party.

The UK tax authorities will consult on the details during 2007 and resolution of the above issues is not expected much before the end of the year.

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

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

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.