REALWorld Law

Taxes

Taxation of income

How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?

Angola

Angola

In Angola, the income arising from a property lease (rents) is not subject to corporate or personal income tax. Rents are subject to property tax. Property tax is levied on the income from properties (ie rental income) situated in Angola at a rate of 25 percent (tax payable may not be lower than 1 percent of the value of the property that generates the rent). The taxable amount of the property tax is the annual rent minus 40 percent of expenses related to the property.

Australia

Australia

If the investor directly holds real estate, the investor will be taxed at their marginal tax rate in respect of the income received. The rate applicable (maximum 51 percent, including the Medicare levy surcharge, for Australian resident investors and 47 percent for non-Australian investors) depends on the type of investor and the amount of taxable income derived during the income year.

Income received by a company is taxed at the corporate tax rate of 30 percent after allowing for deductions.

Australian resident investors are taxed at their marginal tax rates on distributions (dividends) received from a company and offsets (referred to as ‘franking credits’) may be available to Australian resident investors for the tax already paid by the company on the profits from which the distributions are paid. Due to the availability of the offsets, effectively, Australian resident investors pay tax in respect of the distributions on the difference between their marginal tax rate and the 30 percent tax already paid by the company.

Payments of fully franked dividends (that is, dividends fully paid out of profits which have already been subject to taxation in Australia) from a company to non-Australian resident investors are not subject to further Australian income or withholding tax. Payments of unfranked dividends (that is, dividends which have not been subject to taxation in Australia) from a company to non-Australian resident investors are generally subject to Australian withholding tax of 30 percent. This withholding tax rate may decrease (to between 0 percent and 15 percent) where the non-resident investor resides in a country with which Australia has a double tax agreement.

For flow through or tax-transparent entities (such as certain trusts and partnerships), Australian resident investors are taxed at their marginal tax rates in respect of their share of the income derived by the entity. Non-Australian resident investors are subject to Australian withholding taxes in respect of certain distributions (such as, dividends and interest) and are generally taxed at their own marginal tax rates (up to 47 percent) in respect of other taxable distributions. For trusts, the Australian trustee generally withholds the tax payable from distributions made to non-resident investors. As discussed above in respect of dividends, the rate of Australian withholding tax may be lowered in respect of distributions of dividends where the non-Australian resident investor resides in a country with which Australia has a double tax agreement. Certain concessions allow distributions from qualifying withholding managed investment trusts (MIT) to non-Australian resident investors who reside in an effective tax information exchange country (such as the US, UK etc) of rental income and capital gains to be taxed at 15 percent or 10 percent if the MIT owns newly constructed energy efficient/environmentally sustainable commercial buildings. Otherwise, a 30 percent tax rate applies for distributions by qualifying MITs.

The flow through entity itself is generally not subject to taxation.

The owner of real estate may reduce or offset the taxes payable by claiming deductions for capital allowances (effectively a depreciation allowance) or interest or other related expenditure. The amount of capital allowance able to be claimed depends on the type of asset and its estimated effective life. However, the cost of land cannot be depreciated. Interest costs may also be deductible subject to the restrictions imposed by the thin capitalization rules and certain other integrity provisions (eg transfer pricing).

Further, the owner of real estate may realize losses which may be carried forward in certain circumstances, if certain tests are satisfied, to offset future income.

Rent received is generally subject to Goods and Services Tax (GST) (the equivalent of VAT). However, residential rent (as opposed to commercial rent) is input taxed. Dividends and distributions do not attract GST.

Belgium

Belgium

The taxes relating to income derived from real estate located in Belgium are as follows:

Immovable withholding tax (précompte immobilier/onroerende voorheffing)

Immovable withholding tax on real estate amounts to 1.25 percent (in Brussels or Wallonia) or 3.97 percent (in Flanders) of the deemed rental income (revenu cadastral/kadastraal inkomen) as indexed on 1 January of the relevant tax assessment year.

Additional provincial and municipal surcharges are levied on top of the (regional) immovable withholding tax, which may increase the effective tax rate to around 30 percent to 50 percent of the cadastral income, depending on the province and municipality where the real estate is located.

Belgian immovable 'withholding' tax is not refundable and cannot be credited against corporate tax. However, it is fully deductible from a company's taxable profit.

Corporate income tax

For companies using or exploiting real estate, taxable income is determined from the annual accounts and the amount of profit or loss realized.

Profit can be reduced by deducting the expenses associated with the real estate, such as the depreciation of buildings (depreciation of land is not possible), repairs, maintenance, renovation and similar costs, and interest on loans taken out to finance the acquisition of the real estate (with some exceptions).

Corporate income tax and the connected 'additional crisis tax', advance payments and withholding tax on income included in the tax base are not deductible. This is also the case with interest on late payments, fines and any associated prosecution expenses.

Generally, taxes, fees and public service charges payable to the regions, as well as surcharges, penalties and other similar charges, are not deductible, but immovable withholding tax, registration duties on the transfer of the real estate and mortgage duties are tax deductible. 

Capital gains from the sale of property (buildings as well as land) are subject to normal corporation tax. However, a system of deferred and spread taxation applies where the proceeds are entirely reinvested within three to five years in depreciable intangible or tangible fixed assets used for business purposes in Belgium or in any other member state of the European Economic Area (EEA). Losses related to real estate can be offset against other income. Tax losses may be carried forward indefinitely, but their use in a given tax year is limited to €1 million plus 70 percent of the taxable basis in excess of €1 million. Any carried-forward tax losses that cannot be used due to this limitation may be further carried forward indefinitely.

Resident companies are subject to a standard corporate income tax rate of 29.58 percent. This rate will be reduced to 25 percent as from 2020. The first income band of €100,000 of small companies (see below) is subject to a lower rate of 20.40 percent (20 percent as from 2020).

Bosnia-Herzegovina

Bosnia-Herzegovina

The company is subject to corporate income tax at the rate of 10%. Under corporate income tax law, non-residents are also liable to pay income tax on capital gains from the sale of property in the Federation of Bosnia and Herzegovina.

Both limited and unlimited partnerships are subject to corporate income tax at the rate of 10%.

Canada

Canada

China

China

The following taxes are payable by the owner on income from real estate:

Business Tax

Business Tax (BT) is payable on lease income at 5% of gross rental.

Enterprise Income Tax

Since 1 January 2008, foreign invested enterprises (FIEs) and domestic enterprises have been subject to a new enterprise income tax (EIT). EIT laws govern the taxation of FIEs that directly own and realize rental income and gains from Chinese real estate. The rate is 25% as of 1 January 2008 (reduced from 33%) and no additional local income tax will be levied. Foreign enterprises not maintaining establishments in China are taxable on their income and gain on a gross withholding basis. The rate is 10% under the new EIT law.

Croatia

Croatia

In the case of companies, tax is payable at the rate of 18% (or 12%) of the rental income after the deduction of expenses (including interest, depreciation and administrative costs).

An individual's rental income from real estate in Croatia is subject to personal income tax at the rate of 25%. Tax is payable on rental income after deducting 50% to cover expenses. This deemed amount applies irrespective of the actual expenses incurred. If the individual is not a VAT payer (ie has no registered business that is subject to VAT), the income tax payable on rental income may be determined by the tax authority as a flat rate.

No other taxes apply to the ownership of real estate.

Czech Republic

Czech Republic

In the case of taxation of income from the ownership of real estate via a corporate vehicle, one must differentiate between taxation of the income of a partnership and that of a corporation. When investing through a partnership (either a special limited partnership or an unlimited partnership) the partnership is considered to be a transparent entity and any income generated by the partnership (for example, profit or rental income) is divided between individual partners and treated as personal income.

If a natural person is a partner in a partnership, his/her share in rental income, less any tax deductible expenses (for example tax losses, expenses on research and development), is deemed to form part of his taxable income as a natural person. Such income is taxed at a rate of 15 percent.

If a legal entity is a partner in a partnership, its share in rental income, less any tax deductible expenses (for example tax losses, expenses on research and development), is deemed to be part of its taxable income and is taxed at a rate of 19 percent.

Investors may be interested in investing through special funds, known as Real Estate Funds or Funds for Qualified Investors. Both these types of fund give an investor an advantage in the form of a 5 percent income tax rate.

Denmark

Denmark

Income from the ownership of real estate in Denmark forms part of taxable income. For corporate owners such income is taxed at the corporate tax rate of 22 percent. Special rules apply to individuals carrying on business activities, as they may select to be taxed in a similar way to companies.

Income tax can sometimes be reduced but this depends on the specific circumstances and the nature of the property.

France

France

Current income

Direct investment through a permanent establishment

Owning a property in France does not itself constitute a permanent establishment. If a permanent establishment exists, current income is fully taxable in France at the rate of 31% on top of which miscellaneous contributions are added. The effective tax rate is 32.02% for corporate taxpayers whose turnover exceeds €7,630,000.

Direct investment without a permanent establishment

Foreign owners are generally subject to French tax on rental income (i) under the individual income tax regime at a progressive rate ranging from a minimum of 20% up to 45% (increased by additional contributions), or (ii) under the corporate income tax regime at the standard rate of 31% (increased by additional contribution) (the effective tax rate is 32.02% for corporate taxpayers whose turnover exceeds €7,630,000). The same applies to property owned by a transparent entity. Depending on the applicable tax treaty, tax paid in France may generate a tax credit or otherwise be taken into account in the owner’s country of residence.

Indirect investment through a corporate entity

If property is owned directly by a French corporation, income will be subject to corporate tax in France at the normal rate of 31% in the hands of the French corporation on top of which miscellaneous contributions are added. If the property is owned by a French transparent entity, the shareholders will be taxed on their personal income.

Indirect investment through a partnership

The individual shareholders will be taxed on their personal income.

Below is an overview of applicable rates of corporate income tax for the coming fiscal years as resulting from the French Finance Law for 2018.

Germany

Germany

The income tax regime applicable depends on the legal status of the investor, on whether he operates, or is deemed to operate, a trade or business and on whether he has a permanent establishment in Germany.

Income from lettings is, in principle, exempt from VAT, but an investor may opt to waive the VAT exemption in some circumstances. This is likely to be the case, for example, if input VAT has been paid on the cost of acquisition, or maintenance and repair costs, and the investor would otherwise be unable to recover it.

Direct investment through a permanent establishment

If an investor invests directly in German real estate, the applicable tax regime depends on whether the investor operates, or is deemed to operate, a trade or business. Only if the investor is deemed to operate a trade or business or actually operates a trade or business can he have a permanent establishment in Germany.

In the scenarios below the investor operates, or is deemed to operate, a trade or business:

  • Investment via a German corporate vehicle
  • Investment via a partnership if all the partners are corporations and the partnership is managed by its general partners and/or third parties only
  • Where the investor provides significant extra services in addition to the real estate, and
  • Where the investor sells more than three real estate assets (this may include interests in real estate holding partnerships and real estate funds) within a period of five years, or the sale of the real estate occurs within a short period of time following the construction of the building (ie approximately five years after the completion of construction)

Corporate investors

Corporate income tax

If the investor is a corporate entity with a permanent establishment in Germany, profits generated by the permanent establishment, including income from letting real estate located in Germany, are subject to corporate income tax at the rate of 15% plus 5.5% solidarity surcharge thereon, resulting in an effective tax rate of 15.825%. Expenses incurred from letting real estate are deductible and reduce the taxable income. This includes administration costs, maintenance costs, real estate tax and amortization. Amortization only applies to buildings, including the cost of acquisition and related expenses (such as notary's fees, legal fees, experts' fees etc), but not to the land itself. The annual amortization rate for buildings varies between 2% and 3% of the acquisition or construction costs. In certain cases higher amortization rates apply.

Deductions can be claimed for interest subject to the 'interest cap rule'. Under the interest cap rule all interest expenses are, in general, fully deductible as business expenses in an amount equal to the interest income of the 'business unit' (Betrieb). If interest expenses in excess of interest income (net interest expenses) exceed €3,000,000, the deductibility of interest paid on debt will be limited to 30% of EBITDA (earnings before interest, taxes, depreciation and amortization). Exemptions from this interest cap rule may apply.

Trade tax

Trade tax rates depend on the municipality where the permanent establishment is located and generally range between 7 percent and 19.25 percent. Trade tax is not deductible against taxable income. However, in certain circumstances there is a trade tax-exemption for investors carrying on asset management only, ie their activities are limited to letting and management of real estate. Allowable corporate income tax deductions generally apply for trade tax purposes.

In relation to trade tax, to the extent among other things that 100 percent of all interest on debt payments (as far as interest payments have previously been deducted from taxable income) and 25 percent of expenditure on temporary usage rights (for example licences and concessions) exceed a threshold of €100,000, 25 percent of such amount must be added back into taxable income.

Individual investors

If an individual investor operates, or is deemed to operate, a trade or business he can have a permanent establishment in Germany. If the investor generates income through a permanent establishment (as defined by the applicable double tax treaty) in Germany, including income from letting real estate located in Germany, this is subject to income tax at the individual tax rate of the investor.

Income tax

The income tax rate for individuals ranges from 14% to 42% with an additional solidarity surcharge of 5.5%. An additional tax bracket of 45% applies to taxable income in excess of around €265,000 for individuals and around €531,000 for married couples subject to joint taxation if the income qualifies as leasing income. For allowable deductions and trade tax, see above on corporate investors. Income tax relief is available to compensate for the additional trade tax exposure. Repatriation from the permanent establishment to a foreign investor is not subject to additional income tax.

Trade tax

Individual investors may become subject to German trade tax which can in some circumstances be credited against personal income tax liability. Repatriation from the permanent establishment to a foreign investor is not subject to additional trade tax.

Direct investment without a permanent establishment

Corporate investors

Corporate income tax

If the investor is a corporate entity generating income from letting real estate in Germany, this income is subject to corporate income tax at the rate of 15 percent (plus 5.5 percent solidarity surcharge thereon). Therefore, the rate of corporate income tax is effectively 15.825 percent of the taxable income.

Trade tax

German resident corporate investors are subject to trade tax but may qualify for a special tax exemption if they are exclusively engaged in long term letting and management of real estate. In the absence of a permanent establishment in Germany no trade tax is payable by foreign corporate investors.

Individual investors

If the investor is an individual generating income through letting real estate in Germany, this income is subject to German income tax at the individual tax rate. The income tax rate for German investors is determined by their worldwide income. No trade tax is payable.

Indirect investment through a corporate entity

All profits generated worldwide by a German corporate entity are subject to 15 percent corporate income tax (plus 5.5 percent solidarity surcharge thereon), resulting in an effective corporation tax rate of 15.825 percent, and to trade tax of generally between 7 percent and 19.25 percent. For potential deductions and trade tax exemptions see above.

Hong Kong

Hong Kong

If property is let in the course of business, then the rental income will be subject to profits tax.

If the property is let and rent is collected then property tax is payable. The exact amount payable is calculated at a percentage of the Net Assessable Value. This percentage has been set at 15% from 2008/09 onwards. The Net Assessable Value is calculated by taking the annual rental income less irrecoverable rent, rates and statutory allowance for repairs and outgoings.

However, if the rental income from property chargeable to property tax is included in the profits for profits tax purposes, or if the property owner occupies the property for producing chargeable profits, the amount of property tax paid will be set off against the amount of profits tax payable. This may result in greater deductions in the amounts payable as allowances with respect to repairs and maintenance to the property; interest paid in respect of the cost of acquiring the property (subject to anti-avoidance provisions) and the costs of maintaining the corporation are permitted. 

Hungary

Hungary

Income generated by a Hungarian company or by a limited or unlimited partnership from letting real estate is, in general, subject to tax at a rate of 9%. Corporate taxpayers are also subject to the local business tax of up to 2%, which is based on the net sales revenues after tax deductions (costs of goods sold, value of mediated services, sums paid to subcontractors, material costs, R&D costs) and adjustments have been made.

Real estate investment funds, however, are not subject to direct taxation. In general, the letting of Hungarian real estate by a non-resident company creates a permanent establishment in Hungary. Income generated by a permanent establishment is also subject to tax at the general rate of 9%. Local business tax at a rate of up to 2% also applies.

REITs and their wholly owned special purpose vehicles are, as a rule, exempt from corporate income tax and local business tax.

Ireland

Ireland

Rental income is taxable on the basis of when the income is earned, rather than when it is actually received.

Deductions allowed when calculating taxable net rental income include:

  • Repairs
  • Insurance
  • Management costs
  • The cost of services rendered or goods provided where legally bound under the lease to render or provide and no separate consideration received
  • Rent
  • Local authority taxes
  • Interest expenses incurred on the purchase, improvement or repair of the property

Previously deductions could not be made for expenditure incurred before the first letting of the property. However from 1 January 2018, a deduction for ‘pre-letting’ expenses of a revenue nature (for example, routine repairs and maintenance costs) is allowable when incurred on residential property which has been vacant for a period of 12 months or more (such expenses incurred before the first letting of the property would not currently be considered deductible). The relief will be subject to a cap of €5,000 per property and will be available for qualifying expenditure incurred up to the end of 2021. Deductions should be possible for expenditure incurred between lettings. Where interest costs are incurred by a company prior to the first letting these may be added to the base cost of the property in calculating a gain or loss on disposal where the costs have been capitalized by the company in its accounts.

From 1 January 2019, the deduction available for interest on borrowings used by a landlord to fund the purchase, improvement or repair of a residential property increased from 85% to 100%.

Depending on the use to which the property is put and the trade, if any, carried on in the property capital allowances in the form of industrial buildings allowances may be available. An "industrial building or structure" is broadly defined and includes buildings and structures used for a great variety of commercial purposes.

There have been many capital allowances schemes in existence in Ireland over the past 30 years, for example, hotel capital allowance schemes, schemes for the provision of student accommodation, urban renewal relief schemes, rural renewal relief schemes and rented residential accommodation schemes. Most of these schemes have now been abolished or are currently being phased out.

Capital allowances may continue to be available on expenditure incurred on the acquisition of a property on which capital allowances have been claimed where the tax life of the property has not yet expired. A full review of the capital allowances position of a property should be conducted prior to its acquisition.

If the property is let with fixtures and fittings and the landlord bears the burden of the wear and tear of such fixtures and fittings, capital allowances should be available.

Where deductible expenses exceed rental income, a rental loss results, which can be offset against net Irish rental profits for the same period. Any residual losses can be carried forward indefinitely and offset against future rental profits.

Direct investment through a permanent establishment (PE)

Where an Irish PE carrying on a trade in Ireland is in receipt of rental income in respect of a property used by, or held by or for, the branch, it will be subject to Irish tax on the net rental profits (ie rental income after the deduction of expenses and rental losses). The current rate of tax for a company is 25%. There may be double-taxation relief if a double-taxation treaty applies.

Depending on the use to which the property is put and the trade, if any, carried on in the property capital allowances in the form of industrial buildings allowances may be available. A full review of the capital allowances position of a property should be conducted prior to its acquisition.

If the property is let with fixtures and fittings and the landlord bears the burden of the wear and tear of such fixtures and fittings, capital allowances should be available.

Where an Irish PE is not carrying on a trade in Ireland and is in receipt of rental income it is the non‑resident company of which it is a PE that will be subject to income tax on the net rental profits at the standard rate of income tax (currently 20%). Rent payments may be subject to withholding tax at the rate of 20% unless the landlord has appointed an Irish collecting agent.

Direct investment without a permanent establishment

A non‑resident investor (whether a company or individual) is generally subject to Irish income tax on rental income from an Irish source (less deductible expenses) at the standard rate of income tax, currently 20%. The deductible expenses are the same as those which apply to Irish resident persons, ie:

  • Repairs
  • Insurance
  • Management costs
  • The cost of services rendered or goods provided where legally bound under the lease to render or provide and no separate consideration received
  • Rent
  • Local authority taxes
  • Interest expenses incurred on the purchase, improvement or repair of the property

Double-taxation relief may also be available.

Rent payments may be subject to withholding tax at the rate of 20% unless the landlord has appointed an Irish collecting agent.

A non‑resident investor (whether a company or individual) may incur a liability to capital gains tax, currently at the rate of 33%, if a gain arises on the sale of Irish investment property. However, there is a relief from capital gains tax for real estate purchased from 7 December 2011 to 31 December 2014 provided it is held for a specified period. The original holding period was seven years. There was proportionate relief where the property was held for any period longer than seven years, with the relief being lost in its entirety if the property was sold during the initial seven-year acquisition period.

The requisite holding period has been reduced from seven years to four years. The measure has created a three-year period (ie years 4 to 7) in which the property can be sold and benefit from a full exemption whereas if held longer than seven years, only proportionate relief is available.

In order for the relief to apply, the property must be acquired for a consideration equal to the market value of the property (or if acquired from a relative, not less than 75% of the market value on the date acquired). This exemption applies to all persons regardless of how the real estate is acquired, ie individual or corporate.

Indirect investment through a corporate entity

The net rental profit of an Irish resident company is subject to Irish corporation tax at the rate of 25%.

The remarks above in relation to capital allowances are also relevant for an indirect investment through a corporate entity.

Interest costs incurred on the acquisition of shares in an Irish property holding company may qualify for relief as a charge where certain conditions are met and anti‑avoidance rules do not apply. These conditions can broadly be summarized as follows:

  • The investor company is beneficially entitled to more than 5% of the ordinary share capital, profits available for distribution and assets on a winding up of the property holding company.
  • In the period from the application of the proceeds of the loan to the date of payment of the interest at least one director of the investor company was also a director of the property holding company.
  • The investor company has not recovered any capital from the property holding company or from a connected company.
  • Where there is a subscription for shares, the property holding company must use the capital received from the share subscription for the purchase, improvement or repair of premises.
  • The interest must be paid and not merely payable.
Italy

Italy

Investment via an Italian corporate vehicle

If the real estate is leased to tenants, any rental income generated is subject to corporate tax (IRES) at the rate of 24% (27.5% for fiscal years before 2017) and regional tax (IRAP) at the rate of 3.9%.

Taxable income for IRES purposes is the net revenue after the deduction of costs, as shown in the annual profit and loss account. With some minor exceptions, all costs relating to the activities of a company can be deducted, including interest (as long as this exceeds interest receivable), up to an amount equal to 30% of EBITDA (not including depreciation and financial lease payments).

Property tax (IMU) is deductible for the purposes of IRES up to an amount equal to 20% for commercial properties. 10% of IRAP and IRAP due on the cost of employees is deductible for IRES purposes. Depreciation of property is deductible to the extent allowed by law. In certain circumstances, taxable income can be mitigated for IRES purposes by using appropriate leverage. In particular, interest due on loans which are secured by mortgages over real estate for ’letting’ is not subject to the 30% threshold and is therefore fully deductible.

The income subject to IRAP is the amount of revenue after the deduction of costs, as shown in the annual profit and loss account. However, not all costs related to the company’s activities can be deducted, including interest payments, the cost of employees, IMU and IRES payments.

Investment via an Italian partnership

An Italian partnership is a transparent entity for tax purposes. Consequently, income deriving from investments is taxed at the level of individual partners, even if this is not distributed as dividends.

In the case of non-resident partners, the income is taxed as business income at the level of the partner at the rate of 24% (27.5% for fiscal years before 2017).

Regional tax (IRAP) at the rate of 3.9% applies at the level of the partnership. The income and allowable deductions for the purposes of IRAP are the same as for corporate vehicles.

Investment without a permanent establishment in Italy

In the case of investment without a permanent establishment in Italy (please note that, in contrast to the position in some countries, owning Italian real estate does not automatically give rise to a permanent establishment in Italy), the income derived from letting property is subject to corporation tax (IRES) payable at the rate of 24% (27.5% for fiscal years before 2017). 95% of the gross income derived from letting is taxable and no depreciation or other costs can be deducted.

Interest on loans secured on the property is not deductible for tax purposes.

Investment via a real estate investment fund

Real estate investment funds are not subject to IRES or IRAP.

Investment via a listed real estate investment company (SIIQ)

Listed real estate investment companies (SIIQs) are not subject to corporate income taxes (IRES and IRAP) on income from letting property, or on the dividends paid by another SIIQ, if those dividends are related to letting property.

Japan

Japan

Direct acquisition

When an offshore acquisition entity or investor receives rental income (except when the lessee is an individual and the property is used by the lessee or his/her relatives) or income from TBI, the income will be subject to withholding tax on payments in accordance with the applicable tax treaty between the offshore acquirer’s home jurisdiction and Japan.

Separately, the acquisition of property or TBI in property located in Japan by an offshore operator creates a potential risk of creating a permanent establishment (PE).  If the offshore investor creates a PE in Japan, it will be subject to ordinary corporate tax at an effective tax rate (ETR) of 30.62% on its net income.  While acquisition of real estate in and of itself does not necessarily create a PE since it is common to hire asset managers and the investor may be receiving ongoing payments from its holdings in Japan, the risk of creating a PE may be heightened.

GK

The income of a GK is subject to corporate tax at an ETR of 30.62%.  A GK does not enjoy preferential tax treatment on real estate investments available to GK-TKs and TMKs.

GK-TK

A GK is subject to corporate tax for taxable income.  However, under the GK-TK structure when a GK makes distributions to investors pursuant to a TK agreement, such distributions can be treated as deductions against the GK's income (as defined by the National Tax Agency’s published regulations) and could reduce taxable income (‘Pay-Through’).  To qualify for this treatment, the TK agreement should specify that the TK Partners’ role is limited to passive investment.  In practice, it is common for the management of the GK operator to be outsourced or handled by an affiliate of the TK Partners.

TMK

A TMK is also subject to corporate tax.  If a TMK is ‘tax qualifying’ it may take a deduction against taxable income for any dividends paid to its members (‘Pay-Through’).  This means that, in theory, if the TMK distributes all of its taxable income it will not have any income that would be subject to corporate tax.  A TMK must satisfy certain criteria to be considered a tax-qualifying TMK. 

Netherlands

Netherlands

Direct investment from abroad

Foreign company

The ownership of real estate by a foreign corporate investor is deemed to constitute a permanent establishment in the Netherlands. Dutch Corporate Income Tax (CIT) is payable on net income after the deduction of expenses. Any net income attributable to the deemed permanent establishment is subject to corporate income tax at the following rates:

  • 19% on the first €200,000 of taxable profits; and
  • 25% on the taxable profits in excess of €200,000.

On 18 December 2018, the Dutch Senate passed the 2019 Tax Plan, which provides for the gradual lowering of corporate income tax rates to 15% on the first €200,000 of taxable profits and 20.5% on the taxable profits in excess of €200,000 in 2021. However, please note that it likely that the 2020 Tax Plan (to be presented on 17 September 2020) will overturn the proposed reduction for 2020 and adjust the proposed reduction for 2021 to a higher rate.

Year

Tax rate applicable to first €200,000 of taxable profits

Tax rate applicable to profits in excess of €200,000

2019

19%

25%

2020

16.5%

22.55%

2021

15%

20.5%

Non-resident investors can generally deduct expenses attributable to the activities of their permanent establishment in the Netherlands. However, please note the following limitations.

Interest expenses are only deductible within the limits of the Dutch implementation of the European Anti-Tax Avoidance Directive's interest deductibility rule. As a result, net interest expense are deductible up to the highest of 30% of the Company's EBITDA or €1 million). Typically for intragroup loans, other interest non-deductibility rules may apply as well.

Real estate transfer tax is not deductible for CIT purposes. Annual depreciations with respect to real estate are limited until a certain floor value is reached (100% of the value for the purposes of the Value of Immovable Property Act).

Individuals

For foreign individuals acting as a passive investor in Dutch real estate, reference is made to Ongoing taxation above.

Indirect investment through a Dutch corporate entity

General rules on taxation for Dutch corporate entity.

The Dutch company's worldwide profits (including the profits realized on the Dutch real estate held) are subject to Dutch corporate income tax at:

  • 19% on the first €200,000 of taxable profits; and
  • 25% on the taxable profits in excess of €200,000.

As to the adjusted corporate income tax rates as per 2020, we refer to the above under ‘Direct investment from abroad’.

Dutch corporate entities can deduct expenses relating to the real estate held by such entity. However, please note the following limitations.

Interest expenses are only deductible within the limits of the Dutch implementation of the European Anti-Tax Avoidance Directive's interest deductibility rule. As a result, net interest expense are deductible up to the highest of 30% of the Company's EBITDA or €1 million). Typically for intragroup loans, other interest non-deductibility rules may apply as well.

Real estate transfer tax is not deductible for CIT purposes. Annual depreciations with respect to real estate are limited until a certain floor value is reached (typically 100% of the value for the purposes of the Value of Immovable Property Act for passive investors).

Taxpayers can opt to make use of the fiscal investment institution (FII) regime (fiscale beleggingsinstelling) for direct and indirect investments in (Dutch) real estate, when, inter alia, a number of shareholder, distribution and financing requirements are met. FIIs are subject to CIT at a rate of 0%.

Indirect investment through a partnership

In the case of a tax-transparent partnership (such as for example the commonly used closed mutual fund (fonds voor gemene rekening) or closed limited partnership (commanditaire vennootschap) , the (foreign) partners or participants are taxed in the Netherlands on their share of the participation as if they were directly investing in the real estate. Tax transparent partnerships are not taxed as corporate entities.

Nigeria

Nigeria

The income from real estate is subject to the applicable tax laws and rates in the country. A company that owns real estate pays income tax from the profits on the rent based on the applicable rates under the Companies Income Tax Act. The income of an individual owner of real estate is also taxed based on the Personal Income Tax Act. The income tax rates for companies are 30% and for individuals, between 7% and 24%.

The owner of a property on whose behalf withholding tax deductions were made from rental income and remitted to the appropriate tax authorities is entitled to utilize the tax credit note thereof to offset the income tax liabilities for the year.

Norway

Norway

The basis for calculating the annual taxable income is the gross (rental) income. As a general rule, all expenses connected to the business of the taxpayer are deductible, including financial and operating expenses, such as insurance, maintenance and repairs, heating, consultancy fees, employee costs, service costs and travel expenses. Certain exceptions apply:

  • Maintenance and repairs must be distinguished from repairs and additions that lead to an increase in the value of the property (upgrades). Upgrades are not deductible in the year the cost arise but must be accrued as a part of the cost of the property and may subsequently be depreciated.
  • Costs related to a decrease in property value due to wear and tear are governed by the depreciation rules.
  • On 1 January 2014, legislation to limit the deduction of interest on loans between closely related parties was introduced. The regulations apply to intra-group loans, where direct or indirect common ownership is 50% or more, or interest on loans issued by a third-party lender if a closely-related party has provided security for the loan. Special exemptions apply. The interest deductions are disallowed on the basis of a special calculation of earnings before interest, tax, depreciation and amortization (a tax EBITDA). Interest deductions on internal loans are disallowed if the total of external and internal net interest costs exceed 25% of the pre-tax profit EBITDA and exceeds the threshold of NOK 5 million. Disallowed interest deductions can be carried forward for 10 years.
  • From 2019 it is an interest limitation on a loan from external lenders (from banks etc) when the Norwegian company is part of an international concern. In these cases, both internal and external interest can be intercepted where equity in the Norwegian company is proportionally lower than equity in the foreign concern group leading company.

There are separate rules as to how equity shall be calculated. In such cases a threshold value of NOK 25 million will apply, but the limitations will come into effect for the entire interest deduction where the threshold amount is exceeded.

Poland

Poland

Any income generated from real estate is subject to general income tax rules in Poland:

  • Corporate income tax (CIT) in the case of companies and limited joint stock partnerships
  • Personal income tax (PIT) in the case of individuals

Taxable income is defined as the taxable revenue earned on the capital gains and earned from other revenue sources after the deduction of costs. Tax-deductible costs are any costs aimed at generating or securing taxable revenues.

The amendments of the CIT Act which have been in force since 1 January 2018 introduced a distribution of the earned revenue into two sources:

(i) earned on the capital gains; and

(ii) earned from other revenue sources. This also implemented a need to assign tax-deductible costs to one of the mentioned above revenue sources.

Tax law specifies over 60 categories of cost that cannot be deducted for tax purposes but the rules are complex and specialist advice should be sought on this matter.

The costs of acquiring real estate may be deducted for tax purposes only by way of depreciation write-offs. Depending on the type of real estate, the annual depreciation rate ranges from 1.5% to 10%. Land cannot be depreciated and the cost of land acquisition can only be deducted for tax purposes when it is sold.

CIT is payable at a flat rate of 19% on net income. Entities resident in Poland normally pay CIT in Poland on their worldwide income. In the case of foreign entities (including companies) all income generated in Poland is taxed in Poland. However, double-tax treaties may modify this.

Partnerships are treated as transparent for tax purposes so the partnership itself does not pay tax. Income is allocated directly to the partners who are taxed individually in accordance with the applicable rate of corporate income tax (for legal entities) or personal income tax (PIT) (for individuals). For income tax purposes, partners are treated as if they held the real estate themselves. Generally, PIT rates are progressive. The rates are 18% and 32%. However, individuals carrying out business activities may opt to pay income tax at a flat rate of 19%. As a rule, non-tax residents pay PIT on net income from real estate located in Poland. Double-tax treaties may apply.

On 1 January 2014, limited joint stock partnerships became liable to pay CIT in the same way as limited liability companies and joint stock companies.

The amendments of the CIT Act, which have been in force since 1 January 2018, introduced an additional income tax (an income tax on commercial properties) that is to be payable on certain commercial properties (fixed assets). The tax is applied in respect of office buildings, shopping malls, department stores, and other retail and service buildings with an initial value of more than PLN 10 million. The value of PLN 10 million regards all buildings of a given taxpayer or, under certain circumstances, all buildings owned by a certain taxpayer and its related parties. The tax is payable on a monthly basis and the rate is 0.035% of excess of the building's initial value over the amount of PLN 10 million. The tax so calculated will reduce the standard corporate income tax.

Moreover, the new provisions that has entered into force retroactively as from 1 January 2018 allows to apply for refund of the tax on commercial properties if it exceeds amount of standard corporate income tax.

Starting from 1 January 2019, a minimum tax applies to all buildings subject to lease regardless of their type except residential buildings put into use under government or local government social housing programs. The exemption threshold of PLN 10 million applies regardless of quantity or individual value of the buildings held by the taxpayer. The possibility to apply for a refund of the excess minimum tax on the condition that the tax authority does not find any irregularities in the amount of "regular" CIT liability was also introduced.

Portugal

Portugal

Rents from urban, rural or mixed properties are classified as taxable income for the purposes of Portuguese corporate income tax (IRC). If the investor is private, individual rents will be treated as taxable income for Personal Income Tax (IRS) purposes.

Please note that the taxation of profits from the sale of property is referred in Taxation of disposals.

Whether generated through a resident corporate entity, a permanent establishment in Portugal or without a permanent establishment, rents from real estate located in Portugal are always subject to income tax. However, there are some peculiarities:

Indirect investment through a corporate entity

The income of resident corporate taxpayers is subject to IRC at the general rate of 21% (on the Portuguese mainland). A reduced rate of 17% may be applicable to the first €15,000 of taxable income (if the company is recognized as a small or medium-sized company). To be recognized as such, the company must have fewer than 50 employees and its annual turnover or annual balance sheet total must not exceed €10 million).

The income of resident corporate taxpayers is also subject to a municipal surcharge of up to 1.5%, which is levied by many Portuguese municipalities, and a state surcharge of 3% applies to income varying between €1.5 million and €7.5 million. For income between €7.5 million and €35milliom the surcharge rises to 5%. Above €35 million the surcharge rises to 9%. Taxable income for IRC purposes is calculated on the basis of the net accounting profit as adjusted for tax purposes.

A corporate entity is entitled to deduct costs related to maintenance and repairs, as well as general costs and municipal property tax (IMI), and other specific costs such as those incurred in connection with the construction or acquisition of the property and depreciation (excluding land).

Direct investment through a permanent establishment

Income attributable to a permanent establishment (PE) in Portugal is liable to IRC in the same way as a Portuguese-resident company at the rate mentioned above for resident corporations.

Direct investment without a permanent establishment 

If the investor does not have a permanent establishment in Portugal, Income Tax (IRC or IRS) is only payable on income generated in Portugal.

Income derived from rents, is subject to Corporate Income Tax, at a rate of 25 percent for non-residents. As to the Personal Income Tax, the rate is of 28 percent. The only tax deductible costs allowed are those related to municipal property tax (IMI) and maintenance and repair expenses incurred in relation to the leased property.

A withholding tax of 25 percent or 28 percent may apply to non-resident individuals or corporations, if the lessee is an entity required to prepare and to maintain audited accounts in Portugal, as is typically the case with a commercial lease.

Foreign investors must file an annual tax return with The Portuguese Tax Authority (through an appointed tax representative if not EU resident) to report taxable income. 

Real estate investment fund (REIF)

Decree-Law No. 7/2015 of 13 January 2015, which came into force on 1 July 2015, introduced a new tax regime for undertakings for collective investment (UCI), applicable to following entities:

  • Securities Investment Funds (SIFs)
  • Real Estate Investment Funds (REIFs)
  • Securities Investment Companies (SICs)
  • Real Estate Investment Companies (REICs)

Following a major trend in the taxation of investment vehicles in Europe, this law adopts the “exit taxation method”, whereby the taxation of income in the main is applied to the investors rather than the fund.

In respect of income derived from REIFs, Non-resident Investors without a local PE will be subject to a withholding tax in Portugal at a rate of 10 percent.

Income deriving from units in real estate investment funds and from shares in real estate investment companies are classified as income deriving from property for the purpose of this regime.

The fiscal regime governing REIFs can be summarized as follows:

Taxation of REIFs

  • REIFs will be subject to IRC at a single general tax rate currently set at 21 percent, with only the net income subject to taxation
  • REIFs tax losses may in future be carried forward for a period of 5 years
  • REIFs are now exempt from the municipal surcharge (derrama municipal) and state surcharge (derrama estadual)
  • Mergers, demergers or subscriptions in kind between UCIs may benefit from the IRC code’s tax neutrality regime, allowing for more efficient restructuring operations or the transfer of assets between investment vehicles
  • REIF income may not be subject to withholding tax
  • REIFs will be subject to the obligations set out in the IRC code, namely to maintain proper accounting systems and tax documentation procedures
  • Stamp Duty will apply to the fund’s global net asset value, and is due on a quarterly basis. The tax rate is 0.0125 percent for real estate funds

Taxation of Investors:

  • Resident investors:
    • Individuals – are subject to IRS at a withholding tax rate of 28%. This is a final withholding tax, which settles the investor’s tax obligation, provided that the income in question is obtained outside the scope of a commercial, industrial, or agricultural activity, unless the investor chooses to aggregate his or her income, in which case the general progressive tax rates (from 14.5% to 48%) apply
    • Corporate investors – are subject to IRC at a provisional withholding tax rate of 25 percent (unless the relevant beneficiaries are exempt from withholding tax, eg credit institutions, venture capital funds or pensions funds established in Portugal)
  • Non-resident investors who receive income distributed by real estate investment funds or by real estate investment companies, are subject to withholding tax at the rate of 10 percent
  • Non-resident investors who:
    • do not present proof of non-residence in Portugal;
    • are established in a country, territory or region whose tax regime is deemed to be clearly more beneficial than Portugal’s; or
    • are entities directly or indirectly held to an extent greater than 25% by Portuguese residents,

  • are subject to withholding tax at definitive rates of 25%, 28% or 35% – being the rates prescribed for the regime applicable to resident investors.

Certain reductions in the rates of Municipal Property Transfer Tax (IMT) and Municipal Property Tax (IMI) may also apply.

Romania

Romania

As a general rule, the taxable income of a company is subject to the standard tax on profits at a rate of 16%. The taxable profit is the difference between income from any source and expenses incurred for the purpose of obtaining income, from which non-taxable income is deducted and to which non-deductible expenses are added.

The Romanian legislation also contains provisions covering a tax system for micro-companies which are taxed on their income derived from any source (to which certain adjustments are made). The tax rate for this regime is between 1–3% (depending on the company's number of employees) and applies until the level of the turnover reaches the threshold of EUR 1,000,000 (RON equivalent). After reaching this level, the company becomes subject to corporate income tax.

Also, Romanian tax legislation specifically mentions that all revenues derived by non-residents from real estate located in Romania (including from the sale of real estate or from the right to use such properties) are subject to tax in Romania at the general rate of 16% for corporate entities and 10% for natural persons. This includes the sale of shares held in local entities whose assets mainly consist of real estate.

The Romanian tax legislation provides a tax exemption for capital gains derived from the sale of shares held in a Romanian legal entity by a Romanian corporate entity or a non-resident corporate entity which is resident in a double- tax treaty jurisdiction, provided a minimum holding criteria is met (ie 10% for at least one year of holding).

Provided that the conditions mentioned by the Romanian legislation are not met (i.e. the minimum holding criteria), the taxation of capital gains derived by non-residents can also be reduced in accordance with the provisions of the relevant double-tax treaty between Romania and the country of residence of the beneficiary of the income, provided that a valid fiscal residence certificate is made available.

Russia

Russia

Profits tax (at a rate of 20 percent) is payable on taxable profits received by a taxpayer (ie Russian legal entities and foreign legal entities with permanent establishments in Russia) from rental operations or the disposal of real estate.

Withholding tax of 20 percent may be levied on some types of income earned in Russia by foreign legal entities (rental, capital gains from disposal of real estate or shares in a 'property-rich' company). However a relevant double tax treaty may provide for a reduction in or exemption from withholding tax on capital gains subject to the treaty clearance procedure.

Individuals are subject to personal income tax on rental income and the disposal of real estate at the relevant tax rate (13 percent for Russian tax residents and 30 percent for non-residents) via the withholding mechanism or a declaration submitted personally.

Slovak Republic

Slovak Republic

Investment through a partnership (a transparent entity)

Since a partnership is considered to be transparent for income tax purposes, any profits generated by the partnership are deemed to be the profits of each individual partner and are therefore treated as personal income.

Tax is payable on rental income, less any tax-deductible expenses (for example depreciation, administrative costs and financial charges).

The tax rate is 19 percent (but 25 percent on that part of the income which exceeds 176.8 times the current subsistence level as prescribed by the government). Where the partner is a legal entity, a tax rate of 21 percent applies.

Indirect investment through a corporation (a non-transparent entity)

Tax is payable on rental income, less tax deductible expenses (for example depreciation, administrative costs and financial charges).

The corporate income tax rate is 21 percent.

These taxes can be reduced by what is known as “book depreciation”.

With the exception of land, most tangible assets are depreciable. The basis for depreciation is generally the original acquisition cost, and the depreciation rate is usually based on the normal useful life of the asset.

Slovak tax legislation also allows for “interruption” of tax depreciation.

Spain

Spain

Income generated from the ownership of real estate in Spain is taxed as follows:

Direct investment through a permanent establishment

Business profits generated by a permanent establishment in Spain are subject to Spanish non-resident income tax (Impuesto sobre la Renta de No Residentes) at a rate of 25% in 2019.

The taxable income is the net profit after deducting costs, as shown in the annual profit and loss account. With some minor exceptions, all costs relating to the activities of the permanent establishment are tax deductible, apart from interest, royalties or commission paid to the head office in exchange for technical assistance or for the use of other goods or rights.

Many of the management and general administration expenses are deductible.

Depreciation of property is tax deductible to the extent permitted under the relevant regulations.

Direct investment without a permanent establishment

If the investor does not have a permanent establishment in Spain, income derived from letting property is subject to Spanish non-resident income tax at the standard rate of 24% (19% if the taxpayer is resident in the EU or in the European Economic Area). The basis for calculating taxable income is the gross income received. However, if the taxpayer is resident in the European union expenses are deductible in accordance with the Spanish corporate income tax law, provided that the taxpayer proves that they are linked to the economic activity developed in Spain.

Note that investment in real estate, could create a permanent establishment, in which case income generated from letting is taxed as above.

Indirect investment through a corporate entity

Income from letting is subject to Spanish corporate income tax (Impuesto sobre Sociedades) at 25%. Taxable income is the net income after the deduction of expenses, as shown in the annual profit and loss account.

Indirect investment through a partnership

Since a partnership is deemed to be transparent for tax purposes, any profits generated by the partnership are attributed to the individual partners.

Income derived from letting property is taxed as above, depending on whether or not the property is deemed to constitute a permanent establishment in Spain.

Sweden

Sweden

Rental income, or any other income, is treated as business income and is taxed at a rate of currently 21.4% (20.6% in 2021)  (for corporations).  A general reduction of net interest deduction corresponding to 30% of EBITDA applies. However, the reduced interest deduction applies only if negative net interest exceeds SEK 5 million (simplification rule). The amount is measured on a group level. Certain additional restrictions apply to the deduction of interest on intercompany loans. For corporations, depreciation of a building for tax purposes is currently allowed at 2% to 5% annually for industrial premises, 3% for retail property and 2% for offices. Speeded up depreciations — additional 2% the first six years — are available for newly produced apartment houses.  Certain options to postpone taxable income are sometimes available but detailed advice should be sought on this matter.

Partnerships are transparent for income tax purposes. The tax rate is currently 21.4% (20.6% in 2021) for corporate partners, and there is a progressive tax rate of between 30% and 68% for individuals.

Thailand

Thailand

Rental/lease income and capital gains would be treated as income subject to personal income tax (if the recipient of the income is an individual) or to corporate income tax (if the recipient of the income is a corporation).

As far as personal income tax is concerned, the owner is subject to progressive tax rates ranging from 5 percent to 35 percent. An allowance of 30 percent of total rental/lease income may be deducted from the taxable income. However, if the owner can substantiate that the cost is actually higher than the 30 percent threshold, the actual expenses evidenced by supporting documents may be deducted from the taxable income in computing the personal income tax.

For owners that are corporate entities, the normal corporate income tax rate is currently 20 percent of net profit. Some companies may be subject to progressive tax rates at 15 percent and then 20 percent provided that such companies have registered capital of not more than THB 5 million and total revenue of not more than THB 30 million per year.

If investment is made through a qualifying property fund, real estate investment trusts (REITs) or other relevant tax rules, the net profit is not subject to tax.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

Most of the individual Emirates have issued income tax decrees. While these decrees are in principle applicable to all (respective) entities, in practice corporate tax is currently only enforced against oil and gas companies, certain petrochemical companies and branches of foreign banks.

The enforcement practice may change at any time and corporate tax could be enforced, potentially even retroactively, on a larger population of corporate entities. Companies established in one of the Emirate level instated free zones could enjoy a temporary exemption from corporate tax, granted by the relevant free zone authority.

United Arab Emirates - Dubai

United Arab Emirates - Dubai

Strictly speaking, all companies in the UAE are required to pay corporation tax on their earnings of up to 55 percent. However, in practice, the enforcement of corporation tax legislation has been restricted to enforcement against:

  • Foreign banks
  • Oil, gas and petrochemical companies
  • Hotels
UK - England and Wales UK - England and Wales

UK - England and Wales

All entities or persons receiving income from UK property will be subject to UK tax and will generally be required to file a UK tax return.

The tax position will depend upon the type of entity that holds the English or Welsh real estate and whether the real estate is held as an investment or for the purposes of a trade. The following can be noted in relation to certain types of vehicles holding UK real estate as an investment.

Partnerships, “bare” trusts and non-UK unit trusts

If the property is held in a limited partnership, a limited liability partnership or a “bare” trust (that is a trust in its simplest form), the entity will generally be treated as transparent for UK tax purposes and so the partners or members or beneficiaries of the trust (as applicable) will be directly subject to UK tax on income arising from the property. A non-UK unit trust is normally structured so that income is treated as accruing directly to the unit holders and not to the trustees of the unit trust in which event the unit holders will also be taxed directly on any income arising. Different taxes will apply depending on the circumstances of the individual partners, members, beneficiaries or units holders (as the case may be); for example relevant circumstances include:

  • Whether they are UK resident
  • Whether they are corporate entities or individuals
  • What kind of activities are carried on by the relevant entity

Non-UK companies

If the property is held in a non-UK-incorporated and non-UK tax resident company, the company is not trading in property in the UK and the company does not hold the property for the purposes of a UK business then the company will be subject to UK income tax on any taxable income at a rate of 20%.

It should be noted that  from 6 April 2020, non-UK tax resident companies will become subject to UK corporation tax on profits and gains made from the ownership of UK real estate.  From that date non-UK companies will be taxable in the same way as UK companies (see below).

UK companies

If the property is held by a UK tax resident company the company will be subject to UK corporation tax on any income or gains from the property at a rate of up to 19%.  It is intended that the rate will drop to 17% from April 2020.

Tax deductions and other tax reliefs

Generally, a tax deduction can be claimed for any costs or expenses that are “wholly and exclusively” incurred in connection with a UK property letting business. Subject to UK transfer pricing rules and other anti-avoidance principles, deductions may be available for interest costs on borrowings to fund the purchaser of property in England and Wales.

Generally

Where the benefit of any rental income (from a property in England or Wales) is paid to or attributed to a non-UK person, then the income may be required to be paid after a 20% withholding of tax under the UK's “non-resident landlord scheme”. However, the requirement for a withholding of tax may be avoided if the person or persons entitled to the income make an application to the UK tax authorities for the right to receive gross rents.

If this application is successful, then rental income will be received without any tax withholding but the persons receiving the rent will be required to file UK tax returns and account for tax at the appropriate rate. If a 20% withholding is incurred then credit for that tax will be obtained when subsequently filing any UK tax return in relation to the same income.

UK - Scotland

UK - Scotland

All entities or persons receiving income from UK property will be subject to UK tax and will generally be required to file a UK tax return.

The tax position will depend upon the type of entity that holds the Scottish real estate and whether the real estate is held as an investment or for the purposes of a trade. The following can be noted in relation to certain types of vehicles holding UK real estate as an investment.

Partnerships, 'bare' trusts and non‑UK unit trusts

If the property is held in a limited partnership, a limited liability partnership or a 'bare' trust (that is a trust in its simplest form), the entity will generally be treated as transparent for UK tax purposes and so the partners or members or beneficiaries of the trust (as applicable) will be directly subject to UK tax on income arising from the property. A non‑UK unit trust is normally structured so that income is treated as accruing directly to the unit holders and not to the trustees of the unit trust in which event the unit holders will also be taxed directly on any income arising. Different taxes will apply depending on the circumstances of the individual partners, members, beneficiaries or units holders (as the case may be); for example relevant circumstances include:

  • Whether they are UK resident
  • Whether they are corporate entities or individuals
  • What kind of activities are carried on by the relevant entity

Non‑UK companies

If the property is held in a non‑UK-incorporated and non‑UK tax resident company, the company is not trading in property in the UK and the company does not hold the property for the purposes of a UK business then the company will be subject to UK income tax on any taxable income at a rate of 20%.

It should be noted that from 6 April 2020, non-UK tax resident companies will become subject to UK corporation tax on profits and gains made from the ownership of UK real estate.  From that date non-UK companies will be taxable in the same way as UK companies (see below).

UK companies

If the property is held by a UK tax resident company the company will be subject to UK corporation tax on any income or gains from the property at a rate of up to 19%. It is intended that the rate will drop to 17% from April 2020.

Tax deductions and other tax reliefs

Generally, a tax deduction can be claimed for any costs or expenses that are “wholly and exclusively” incurred in connection with a UK property letting business. Subject to UK transfer pricing rules and other anti‑avoidance principles, deductions may be available for interest costs on borrowings to fund the purchaser of property in Scotland.

Generally

Where the benefit of any rental income (from a property in Scotland) is paid to or attributed to a non‑UK person, then the income may be required to be paid after a 20% withholding of tax under the UK's 'non‑resident landlord scheme'. However, the requirement for a withholding of tax may be avoided if the person or persons entitled to the income make an application to the UK tax authorities for the right to receive gross rents.

If this application is successful, then rental income will be received without any tax withholding but the persons receiving the rent will be required to file UK tax returns and account for tax at the appropriate rate. If a 20% withholding is incurred, then credit for that tax will be obtained when subsequently filing any UK tax return in relation to the same income.

Ukraine

Ukraine

Income from real estate is included in taxable income and taxed at the standard corporate profit tax (CPT) rate which currently is 18 percent.

The taxable profit of the company is equal to the accounting profits calculated in accordance with either local or IFRS standards subject to certain adjustments established by the Tax Code.

Income may be reduced by deducting allowable expenses (costs) including depreciation charges.

The rate of depreciation applicable to real estate depends on the depreciation method chosen by the taxpayer as well as on the period of useful life of the real estate defined in accordance with the applicable legislation, except in the case of plots of land which cannot be depreciated.

The rental income of a non-resident derived from Ukrainian real estate is subject to withholding tax at the rate of 15 percent and, in most cases, may not be avoided under double tax treaties.

United States

United States

The tax system in the US is a complex web of various taxes imposed by different governing authorities. The multi-layered tax system reflects the US constitutional structure of overlapping federal and state governments, with the result that taxes may be imposed at any one or more of the following levels:

  • US federal taxes
  • State taxes
  • Local (city and county) taxes

While US federal taxes apply uniformly throughout the country, state and local taxes vary widely from jurisdiction to jurisdiction.

US federal income taxes

Generally

Taxable net income (ie the excess of income over deductions) derived from the ownership and operation of real property is treated as ordinary income and is subject to federal income tax at graduated rates. Effective January 2018, the maximum income tax rate on ordinary income has been reduced to 21 percent for corporations and 37 percent for individuals (note, however, the maximum income tax rate on ordinary income for individuals is set to sunset after 2025 and return to 39.6 percent). In addition, individual taxpayers holding interests in ‘pass-through entities’ such as partnerships and limited liability companies may be entitled to a deduction of up to 20 percent of ‘qualified business income’, subject to certain restrictions, income limitations, and exclusions. As of 2013, US individuals, estates and trusts are potentially subject to an additional tax known as the Net Investment Income Tax (NIIT), which applies at a rate of 3.8 percent on the lesser of net investment income (including, amongst other items, gain from the sale of investment real estate) or the amount by which modified adjusted gross income exceeds a statutory threshold (ranging from US$125,000 – US$250,000 depending on filing status); non-resident aliens, however, are not subject to the NIIT.

Disregarded entity

Generally, a limited liability company or other unincorporated business entity that has a single owner is disregarded for US tax purposes. The tax consequences of owning real property indirectly through a disregarded entity are substantially the same as if the property were held directly by the single owner of the disregarded entity.

Partnership

Real property that is owned by an entity that is classified as a partnership for US tax purposes generally is not subject to US federal income tax. Instead, the taxable income from the ownership and operation of the property ‘flows through’ the partnership to the partners, who are subject to tax on the share of that income which is distributed to them.

Regular corporation

If real property is owned by an entity that is classified as a corporation for US tax purposes, net income from the ownership and operation of the property is subject to two levels of federal income tax. First, the corporation is subject to tax on any net income at regular tax rates applicable to US corporations. In addition, dividends paid by the corporation to its shareholders are subject to tax at the shareholder level.

Real estate investment trust (REIT)

US tax law provides a tax-efficient treatment for a corporation (or trust) that qualifies for and elects to be taxed as a real estate investment trust (REIT). To qualify as a REIT, a corporation (or trust) must principally own interests in real estate and satisfy other highly technical organizational, income and ownership requirements. The governance and tax treatment of such entity is very complex. A REIT, assuming that it complies with various REIT requirements, will not be subject to US federal income tax.

Deductions

In computing taxable income from the ownership and operation of real estate, the owner generally is entitled to deduct interest expense on borrowings to acquire, own and operate the property, which may be capped at 30% of ‘adjusted taxable income’ of the applicable year, as well as the ordinary and necessary costs of owning and operating the property. An owner of buildings and other improvements to US real estate is also generally entitled to reduce taxable income by deductions for depreciation or cost recovery deductions.

No depreciation deductions may be claimed with respect to the cost of land. Under current law, the cost of building improvements is generally depreciated on a straight-line basis over 27.5 years for residential rental property, and 39 years for other types of non-residential real property. Electing to extend the depreciation recovery period may result in a more beneficial interest expense deduction if the 30% cap applies.

Use of losses from other properties and activities

Generally, corporate taxpayers can use taxable losses generated from the ownership and operation of the corporation’s other properties and other business activities to offset current and future taxable net income derived from the ownership and operation of real property owned by the corporation up to 80 percent of such taxable income in a given year. The ability of an individual taxpayer to use taxable losses generated from the ownership and operation of other properties and other business activities to offset taxable net income derived from the ownership and operation of real property owned by the individual is much more restricted, in light of various complex limitations imposed by federal income tax laws.

State and local taxes

Most (but not all) states impose income tax on the net income generated from the ownership and operation of real property owned and business activities conducted within that state. Income taxes may also be imposed at the local (city and county) level.

Zimbabwe

Zimbabwe

Income derived from letting property is subject to income tax, levied at the rate of 25% in terms of the Income Tax Act [Chapter 23:06].