Issues facing the hotel industry

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1 The alliance of major European law firms CMS Adonnino Ascoli & Cavasola Scamoni CMS Albi nana ~ & Suárez de Lezo CMS Bureau Francis Lefebvre CMS Cameron McKenna CMS DeBacker CMS Derks Star Busmann CMS von Erlach Klainguti Stettler Wille CMS Hasche Sigle CMS Reich-Rohrwig Hainz Issues facing the hotel industry Stamp duty saving for real estate transfers 1 March 2005 Overview The rates of duty on transfers of hotels within Europe vary considerably. The attitude of the authorities and taxpayers in the various jurisdictions within Europe to the payment, or rather avoidance of stamp duty, also varies considerably. In the UK the quadrupling of the rate of duty during the 90s led to a wholesale avoidance industry and eventually to the demise of stamp duty and its replacement with stamp duty land tax a tax on transactions rather than documents. The purpose of this article is to outline various possible methods for avoiding or mitigating stamp duty or real estate transfer tax across Europe looking in particular at the possibility of selling shares in hotel owning companies whether those companies are local or foreign companies. The high level of real estate duties across Europe should certainly be sufficient to lead multinational hotel groups to consider structuring their companies and real estate assets so as to minimise the impact of real estate duties on an eventual sale of whole or part of the group. Even though such minimisation may not be of direct benefit to the vendor it is quite likely that it will lead to the achievement of a higher sale price. Unlocking potential Delivering solutions

2 1. Austria There is no stamp duty on the transfer of shares in Austria but if 100% of the shares in a real estate (including hotel owning) company are transferred or acquired, the real estate rate of 3.5% will apply, calculated on the basis of triple standard value (standard value is a standardised value which is usually far lower than market value) of the real estate. The treatment of a sale of shares in a real estate corporation as if it was an indirect sale of the property will however only apply if 100% of the shares in the real estate company are acquired. Thus if one share is held back, the 3.5% rate will not apply. It is possible to use a trustee acting on behalf of the purchaser and for a few shares to be transferred into the name of the trustee. In a development structure another possibility for minimising tax is to have the building constructed by a construction company to whom the bare land may be transferred. A subsequent acquisition of 100% less one share of the construction company does not trigger tax or stamp duty. In that case, tax would be triggered only upon acquisition of the land, and the building would not be subject to real estate transfer tax. 2. Belgium In principle no tax arises on the transfer of shares even if the assets of the company comprise wholly or mainly real estate. Tax will however arise when the hotel is originally transferred to the company at a rate of 12.5% (10% if the property is located in Flanders). 3. Czech Republic The same Czech tax and stamp duty rules apply to hotel transfers as apply to transfers of any other immovables. Accordingly, real estate transfer tax of 3% will apply to a sale of immovable assets, including hotel buildings. The seller is obliged to pay this tax; however, the purchaser is a guarantor. Real estate transfer tax is charged on the price or on the standard value, whichever is higher. The payment of tax is often avoided by a sale of shares in the company owning the hotel; however, this is not recommended if the company has no other assets. As an alternative the hotel can be provided as a contribution to the share capital of a subsidiary followed by a sale of the shares. This solution is practicable only if less then 100% of the shares are transferred. 4. France Whilst it has not generally been possible to avoid French registration tax on dealings in property in the same way as it has been, for instance, in the UK, it is possible in practice to eliminate the French registration tax liability by means of transactions in shares. In particular, the transfer of shares in an offshore holding company is not subject to French stamp duty. A transfer of shares in a French company is subject to registration tax of 1% up to a maximum of EUR 3,049 unless more than 50% of the gross assets of a company (whatever its country of residence) or indeed its subsidiaries as a whole comprise French real estate in which case it will be taxed at 4.8% provided that the company is not listed on a stock exchange. The separate valuation of hotel business goodwill will assist in this, as will the ownership of non-french hotels or other non-real estate assets through the French corporate structure.

3 5. Germany Germany is the most difficult country for the avoidance of registration tax (currently at the rate of 3.5%). Germany does not levy transfer taxes on shares. The transfer of 95% or more of the shares of a German real estate holding company or indeed any foreign company that also owns German real estate or a German real estate company will however trigger an indirect stamp duty liability in relation to the property itself. It is noteworthy that in Germany there is no real estate transfer tax relief for transfers of land within the same group of companies save exceptionally for certain hive-ups of land to a parent company. That said the wide application of German real estate transfer tax is more than offset by the lower tax base to which it applies. The total value may often be as little as 1/2 of the sale value. Sales of just under 95% of the shares in a company or a partnership are not unusual and silent partnership structures are occasionally used to minimise the commercial impact of leasing over 5% of the economic value outstanding. 6. Hungary The standard rate of transfer duty on real estate transfers in Hungary is 10% in the case of a transfer of nonresidential property such as hotels. The transfer duty is payable by the purchaser of the property and is calculated on the gross value of the real estate (including VAT, at 25%). This particularly heavy tax burden may be avoided by transferring the shares or business quotas of a company holding the hotel, as such transfers are exempt from transfer duty and from VAT (however a minor registration duty is payable for the registration of the changes of the shareholders of the Every member of the team is committed towards maximising value and quality of service for the client. company with the Hungarian Commercial Register). In the case of a transfer of the shares of a real estate company, it is recommended that a thorough due diligence of the company is carried out. 7. Ireland The avoidance of the Irish stamp duty that would otherwise arise on the sale of a hotel at the rate of 9% can best be achieved through transfers of shares in an Irish company or indeed an overseas holding company. Transfers of Irish shares is at a rate of 1% and non-irish company share transfers are usually exempt. 8. Italy The sale of a hotel (located in Italy) by a seller who is registered for VAT purposes is, in general, subject to VAT at the 20% standard rate, while the sale of a hotel by a seller who is not registered for VAT purposes is normally subject to registration tax (7%) and to cadastral and mortgage taxes (3%). A transfer of shares in an Italian real estate company provides a means of avoiding Italian transfer taxes; generally, the sale of shares is VAT exempt, the registration tax is due in the fixed amount of EUR 168 and a stamp duty equal to 0.14% of the share price is applied. 9. Netherlands Transfer tax is levied at 6% of the market value of the underlying real estate on the acquisition of shares in real estate companies if the acquirer obtains directly or indirectly, at least one third of the nominal paid up capital (including shares already in its possession). A real estate company is a resident or non-resident company whose purpose is to invest in immovable property and whose assets consist of at least 70% of immovable property located in the Netherlands. It is noticeable that the 6% rate is applied to the true value of the property and not the much lower reported value seen in other jurisdictions such as Germany. The transfer of shares in an overseas holding company will also trigger that same liability. It is worth noting however that under certain circumstances stamp duties do not apply if the company s object is the commercial exploitation of a hotel enterprise and it actually carries on such activities.

4 10. Poland In Poland, stamp duties are charged on the market value of the property or shares sold, but the tax authorities usually accept the transactional price, especially if the sale is carried out between independent parties. Stamp duty is charged at the rate of 2% in relation to the sale of real estate and other assets and 1% in relation to the sale of rights other than real estate, e.g. shares. The sale of shares in a foreign holding company would not be subject to Polish stamp duties if carried out outside Poland. Stamp duty does not apply if the sale is subject to VAT. There are schemes available to avoid stamp duty. For instance: A sale of shares could be carried out through a brokerage agency in such a case the sale will be exempt from stamp duty; If the vendor (V) and the purchaser (P) are companies and P wishes to acquire real estate from V for X, instead of a direct sale P can contribute X to V in exchange for shares in V (subject to 1% stamp duty). If P s shares in V are then redeemed and in return V transfers real estate to P no stamp duty arises. Alternatively V could be divided into two companies, with P taking the shares of the new company, which holds the real estate. However, each case needs to be specifically considered, as these techniques will not apply in all cases. 11. Slovak Republic There is no stamp duty on the transfer of shares in the Slovak Republic. Moreover, the Slovak real estate transfer tax was abolished as of 1 January Therefore, the transfer of the shares in a real estate company or a hotelowning company as well as the direct transfer of real estate (such as a hotel) is not subject to Slovak stamp duties or real estate transfer tax. The transfer of shares in a Slovak company is only subject to minor registration fees for the registration of the share transfer with the Slovak Commercial Register or the Central Depository. The direct transfer of real estate is also only subject to minor registration fees for the registration of the real estate transfer with the Slovak Real Estate Register. Our approach is commercial and practical with a high standard of legal skill, based on a detailed understanding of the hotel industry. 12. Spain Disposals of hotels are generally exempt from VAT. However, VAT exemption can be waived where the buyer is a person registered for VAT purposes and is fully taxable. If the transaction is subject to VAT (that is, when the transfer is of a newly built hotel or where the VAT exemption is waived), VAT at 16% is chargeable but is generally recoverable as input tax. In this case, the transfer will also be subject to stamp duty at rates ranging from 0.5% to 2% (depending on the Region where the property is located). Where the transfer of a hotel is not subject to VAT, Transfer Tax, at rates between 6%-7% (varying by Region) will be levied. No stamp duty is payable in this case. Disposals of shares are exempt both from VAT and from Transfer Tax unless more than 50% of the assets of the transferred company consist of real estate located in Spain, and the purchasing company acquires control over the Spanish property holding company, in which case Transfer Tax is levied (generally between 6%-7%). This is an anti-abuse rule, which aims to ensure the collection of indirect tax on disposals of properties, which are channeled through the sale of the shares of the property holding company concerned. If the said anti-abuse rule cannot be avoided (that is, Transfer Tax becomes due on the disposal of the shares of a property holding company), the sale of the property itself becomes more efficient as the applicable VAT on the sale of the property is deductible and the rate of stamp duty is substantially lower; whereas Transfer Tax on the disposal of shares cannot be directly recovered.

5 13. United Kingdom Stamp duty land tax (SDLT), a tax on transactions, replaced stamp duty in late 2003 but continues to be collected at up to 4% rates, when applicable. Whilst the introduction of SDLT (including subsequent regulations) has attacked almost all of the possible savings schemes, there remain several saving possibilities based on sales of holding vehicles such as companies and unit trusts and the manipulation of available relieves. If you would like to find out more about how transfer tax saving issues impact upon the hotel industry or to explore further the saving opportunities please contact the following partner from our CMS International Hotel Group: Mark Nichols, Head of Tax T +44 (0) F +44 (0) mark.nichols@cmck.com Company share sales will be subject to duty at up to 0.5% of the sale value. These may be in the form of new or old company sales. While those who have already dropped hotels into SPVs can take advantage of this route more complex schemes do remain available to allow hotels to be dropped now into new SPV or unit trust structures until quite late in the day. The UK has widened considerably the exemption for transfers or leases of properties falling within so-called disadvantaged areas. Thus transactions in commercial property, including hotels, of whatever value in some popular areas in London, as well as in vast tracts of Wales and other poorer regions in the UK, qualify for exemption from stamp duty land tax. It is important, therefore, in dealing with any property in the UK, including hotels, to check whether the postcode of the property falls within the specification of a disadvantaged area.

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7 This commentary is not a full review of the topic it covers and does not purport to give legal advice. If you would like to receive specific legal advice please speak to your usual contact at CMS or the partner detailed above. All liability for damages arising from the information provided is explicitly excluded.

8 CMS is the alliance of major European law firms providing clients with a full range of legal and tax services based on a thorough understanding of their business. CMS member firms: CMS Adonnino Ascoli & Cavasola Scamoni, CMS Albiñana & Suárez de Lezo, CMS Bureau Francis Lefebvre, CMS Cameron McKenna, CMS DeBacker, CMS Derks Star Busmann, CMS von Erlach Klainguti Stettler Wille, CMS Hasche Sigle, CMS Reich-Rohrwig Hainz CMS offices and associated offices worldwide: Berlin, Brussels, London, Madrid, Paris, Rome, Utrecht, Vienna, Zurich, Aberdeen, Amsterdam, Antwerp, Arnhem, Beijing, Belgrade, Bratislava, Bristol, Bucharest, Budapest, Buenos Aires, Casablanca, Chemnitz, Cologne, Dresden, Dusseldorf, Edinburgh, Frankfurt, Hamburg, Hilversum, Hong Kong, Leipzig, Lyon, Marbella, Milan, Montevideo, Moscow, Munich, New York, Prague, Sao Paulo, Seville, Shanghai, Sofia, Strasbourg, Stuttgart, Warsaw and Zagreb.