Recent Tax Changes and Planning for Real Estate Transactions: Key Considerations
This presentation by Scott Antel, Partner at DLA Piper, explores recent tax changes affecting real estate transactions, including VAT updates, profit tax adjustments, and land tax reforms. Key areas addressed include self-construction and capital construction rules, reinstatement of VAT for capital projects, and implications of new profit tax regulations. The session also covers acquisition case studies and strategic planning considerations for both buyers and sellers in Russian and offshore contexts. Stay informed on how these changes impact asset management and transaction structuring.
Recent Tax Changes and Planning for Real Estate Transactions: Key Considerations
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Presentation Transcript
Recent Changes and Tax Planning Considerations in Real Estate TransactionsScott Antel, PartnerAmCham Tax Seminar23 October 2005
VAT Changes • Self Construction Current Rule: -Self assess output VAT when placed in service - Offset input VAT when paid Rule for 2006: - Self asses output VAT on last day of tax period - Offset input VAT when booked in accounts • Capital Construction Current Rule: Offset VAT only when building placed in service Rule for 2006: Offset when booked in the accounts Possibility to offset prior incurred, but not offset, VAT
VAT Changes. Reinstatement of VAT on Capital Projects and Real Property • Previously offset VAT reinstated in case of exempt operations(Except for: Fully depreciated properties and properties commissioned more than 15 years ago) • VAT reinstated for 10 years after the property is commissioned • VAT reinstated in the last tax period for each year • VAT reinstated annually is equal to 1/10 of the portion of the offset VAT multiplied by the ratio of exempt operations to the total sales in the respective calendar year
Profit TaxChanges • Capital expenditures 10 % immediate write-off • Leasehold capital improvements depreciated by: - Lessor if lessee reimbursed - Lessee if not reimbursed • Charter contributions recorded at tax basis of contributor and valuation requirement (effective now).
Land Tax • Tax base moves from local formula to cadastral value • Tax rate: maximum 1.5 % • Effective from when localities adopt Land Tax Law and enact cadastral plan
Acquisition Case Study DLA MW Limited. Partner Scott Antel
Asset Onshore • Issues: • Seller • Gain recognized in Russia. • Buyer • No historical entity risk. • Increased tax basis. • Recovery of VAT. • Operating concerns-licenses. • Migration of local I.P. • Preference of Buyer. Sale I.P. Intangibles Abroad Russia Russian S/H2 Assets Sale
Share Acquisition from Offshore Russian S/H • Issues: • Seller • Russian S/H gain offshore. • Real property holding co. capital gain. • Buyer • Tax/other history of new OPCO. • Inherit low asset basis. • Migration of local I.P. • Operating concerns-licenses. Sale I.P. Intangibles Abroad Russia Hotel Assets Russian S/H 3) Purchase of New Co. (or Offshore Hold Co.) 1) Asset sale or contribution by Hotel OPCO to New Co. 2) Sale of new Co.
Post Acquisition Structuring • Owner Issues: • Financing renovations/ improvements: • - Loans up to 15%; • - Leasing (3x depreciation); • - CIK (VAT/customs exempt); • Merger of multiple entities if any. • Buy out of land. Abroad Russia
Operation and Repatriation • Owner Issues: • Tax effective repatriation: • - Loan @ 0%; • - License fees @ 0%; • - Offshore services (res. and mktg.) @ 0%; • - Dividends @ 5-15%; • Non-Russian tax planning: • - Holding company jurisdiction taxes; • - Home country CFC rules, etc.; Abroad Russia
