Taxation and acquisition vehicles
Typical tax issues and structuring
What are some of the typical tax issues involved in real-estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?
Real-estate transactions typically involve payments of stamp duty, registration charges, and a goods and services tax (depending on the nature of the transaction). For a sale of immovable property that is held as an investment, the profits or gains arising from transfer or disposal of real estate will likely be subject to capital gains tax in the hands of the transferor (unless a specific exemption applies). Similarly, in the event of a share transfer arrangement wherein the seller sells shares (which are held as investment) of a land-holding company to a purchaser, the profits or gains arising from such transfer will likely be subject to capital gains tax in the hands of the seller (unless a specific exemption applies). Additionally any development rights arrangement, joint development arrangement or any other revenue-sharing arrangement will involve a levy of goods and services tax.
Mitigating tax risk
What measures are normally taken to mitigate typical tax risks in a real-estate business combination?
As stated above, tax issues depend on various parameters and are highly critical when evaluating a real-estate structure. The acquisition of the business or assets of a company could give rise to transaction costs in the form of stamp duty, capital gains tax, goods and service tax etc, and transactions will have to be examined on a case-by-case basis for the evaluation of tax efficiencies.
Types of acquisition vehicle
What form of acquisition vehicle is typically used in connection with a real-estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?
Acquisition vehicles in real-estate transactions until recently were private limited companies. However, now (depending on the nature of investment, investor and the transaction) limited liability partnerships (LLPs), are frequently being considered as acquisition vehicles.
Parties to a real-estate transaction will finalise the choice of the acquisition vehicle based on the type of transaction. Examples include:
- sale-purchase of immovable property;
- sale-purchase of shares;
- lease of immovable property;
- joint venture;
- subscription to shares of a company or capital of an LLP;
- tax treatment of such vehicle;
- nature of the investor (especially where the investor is a non-resident, " there are certain restrictions in terms of investing in vehicles other than companies); and
- liability arising from utilising such vehicle.
Published In: Lexology
Date: November 21, 2019
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