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Investing into Real Estate Tax Aspects

Investing into Real Estate Tax Aspects

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Investing into Real Estate Tax Aspects

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  1. Investing into Real EstateTax Aspects Jānis Taukačs Attorney-at-Law, Member of the Latvian Bar Riga, 20 May 2005

  2. CONTENT • Taxes Applicable to Real Estate • Tax Planning Opportunities 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  3. (1) TAXES APPLICABLE • Real Estate Tax • Income tax (both corporate and individual), incl. Taxation of Capital Gains & Withholding Tax • VAT • Stamp Duty 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  4. REAL ESTATE TAX • 1.5% of cadastral value • The real estate tax on buildings is still calculated from the book value of such real estate and such taxation of buildings should be in force until 31st December 2006 • Case law - Legitimate expectations under APL (If an institution makes a mistake, it may not adverselyaffect the individual) • Lessee – foreign company 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  5. INCOME TAXES – CIT (15%) • Withholding tax • Use of property located in Latvia – 5% • Sale of immovable property located in Latvia – 2% • Dividends – 10 / 5 / 0% • Payments to Low-tax or No-tax Jurisdictions (Off-shores) – 15 / 0 % • Permanent Establishment - Owning and leasing out an immovable property – no PE (object of business), unless place of business through which business is carried on (e.g., sales office, office for managing the development, etc.) is in Latvia • Societas Europeae - No unified taxation of SE rules in EU - SE is generally taxable in that Member State where it has its registered office (global income) - Another Member State may tax SE’s permanent establishment 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  6. INCOME TAXES – IIT (25%) • Residents of Latvia for the derived worldwide income • Non-resident individuals for the income derived in Latvia • Some exemptions from IIT: • sale of shares • sale of real estate provided that • ownership for a period of at least 12 months • dividendsreceived from Latvian or EU companies • Exemptions do not apply to non-resident individuals for the income derived in Latvia 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  7. VAT • PURCHASE OF REAL ESTATE - VAT-exempt (input VAT deductibility problems forseller possible, if sold within 10 y. after acquiring) - first sale of “unused” buildings - subject to 18%VAT(cash flow & input taxdeductibility problems possible for purchaser (refund from state required, if no sufficient output VAT)) • PURCHASE OF SHARES - VAT exempt (VAT registered seller may be restricted todeduct input VAT) 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  8. VAT • INVESTMENT INKIND INTO SHARE CAPITAL - Not subject to VAT (30 days registration of new entity in LV) • DEMERGER (in order to split-off an immovable) - Not subject to VAT, no negative impact on input VAT deductibility (30 days registration of new entity in LV) - No need to demerge for VAT purposes, if output (sales) VAT is applicable to asset deal (first sale of “unused” immovable property) - Complicated regulations (both corporate and VAT) • LEASE 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  9. VAT • Sale - exempt without option to tax • Real Estate must be registered with SRS • The deduction of input VAT after acquisition of realestate has to be reassessed annually during the period of 10 years 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  10. TRANSFERRING STAMP DUTY • All transactions that involve alienation of real estate are subject to 2% stamp duty from the value of the real estate (but not more than LVL 30,000) upon registration in the Land Book (real estate register) • Taxable base • Duty Evasion (illegal reduction of the taxable base) • Purpose (tax?) 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  11. (2) FORMS OF TAX PLANNING • Avoidance vs Evasion • Jurisdiction of income recipient - off-shore, EU, tax treaty network country, etc. • Personliable to tax - legal entity, branch, individual, permanent establishment, real estate funds, trusts, Societas Europeae, EEIG, etc. • Forms of transactions - sale & purchase (shares vs. assets), lease, M&A, investment in kind, construction, financing (debt vs. equity, loan vs. leasing ), etc. • Other - Deferment of tax; Tax incentives (SEZ); Advance ruling; etc. 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  12. VAT: Areas for planning • Cash flow - Pay as late as possible - Recover as early as possible • Input tax - Recover as much as possible • Output tax - Charge as little as possible to non-recovering entities (within own group) 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  13. VAT: Timing of Purchases 2004200520042005 Recovery Recovery Recovery Recovery Rate 50%Rate 75% Rate 50% Rate 75% Purchases Purchases Purchases Purchases made made made made VAT – Ls 600 VAT - Ls 500 VAT – Ls 400 VAT - Ls 300 (including Ls 200 (plus Ls 200 delayed tax point) delayed tax point) VAT recovered Ls 250 Ls 300 Ls 150 Ls 450 Total recovered 2004/5Ls 550Total recovered 2004/5Ls 600 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  14. CASE STUDY (1) • Transaction - purchase of “used” building - construction (developing) of a building - selling the building (within 1 year after construction is finished – “unused”, but more than 1 year after purchase) • Figures - Purchase of “used” building – Ls 100 - Construction – Ls 200 (+ 36 input VAT) - Sale – Ls 400 (+ 72 output VAT) 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  15. CASE STUDY (2) – IIT – SALE OF ASSETSSELLER IS INDIVIDUAL 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  16. CASE STUDY (3) – CIT – SALE OF ASSETSSELLER IS CORPORATE ENTITY 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  17. CASE STUDY (4) – IIT – SALE OF SHARESSELLER IS INDIVIDUAL 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  18. CASE STUDY (5) – CIT – SALE OF SHARESSELLER IS CORPORATE ENTITY 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  19. ADVANCE RULING • An enquiry to the institution about the legal aspects of a specific factual situation • If the person acts in accordance with the recieved advance ruling, the consequences may not be more adverse than those provided for in the ruling • The principle continues even if the responsible institution later finds that it has made a mistake in the ruling 20.05.2005, Riga, Investing into Real Estate: Tax Aspects

  20. Thank you! Jānis Taukačs E-mail: janis.taukacs@sorainen.lv EstoniaLatvia Parnu mnt. 15 Kr. Valdemara iela 21 10141 Tallinn, Estonia LV1010 Riga, Latvia Tel: +372-6 400 900 Tel: +371-7 365 000 Fax: +372-6 400 901 Fax: +371-7 365 001 Email: sorainen@sorainen.ee Email: sorainen@sorainen.lv LithuaniaFinland Jogailos g. 4 Museokatu 9 B 17 LT01116 Vilnius, Lithuania 00100 Helsinki, Finland Tel: +370-5 2685 040 Tel: +358-9 43 690 840 Fax: +370-5 2685 041 Fax: +358-9 43 690 841 Email: sorainen@sorainen.lt Email: sorainen@sorainen.com