REAL ESTATE INVESTMENTS IN GERMANY DOING IT SMART

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1 REAL ESTATE INVESTMENTS IN GERMANY DOING IT SMART Investing through Luxembourg tax structuring YOUR PERSONAL EXPERT February 27, 2013 TAX CORPORATE FINANCE CORPORATE IMPLEMENTATION SERVICES Copyright ATOZ. All rights reserved

2 TABLE OF CONTENTS I. Why Atoz? II. III. IV. Why Luxembourg? Key Tax Issues Typical Standard Structuring V. Example of Tax Optimization in Figures VI. VII. VIII. Alternative Financing Structure Luxembourg Real Estate Vehicles Contact Information

3 WHY ATOZ? I - 1 ATOZ: the premier independent tax dedicated firm 1 st Tier 1 Tax Firm in Luxembourg in 2011 International Tax Review ATOZ IS A HIGH-END ADVISORY SERVICES FIRM OFFERING TAX, CORPORATE IMPLEMENTATION AND CORPORATE FINANCE SOLUTIONS. 1 st 1 st 1 st Luxembourg Tax Firm of the Year 2009 International Tax Review Luxembourg Tax Firm of the Year 2008 International Tax Review Luxembourg Tax Firm of the Year 2007 International Tax Review ATOZ GUIDES LEADING INTERNATIONAL ORGANIZATIONS FROM THE PRIVATE EQUITY, REAL ESTATE, CORPORATE, FINANCIAL SERVICES and FAMILY OFFICE SECTORS THROUGH COMPLEX MULTI-JURISDICTIONAL TAX ISSUES. DRAWING ON DECADES OF EXPERIENCE, INDUSTRY KNOWLEDGE AND A VAST NETWORK OF RELATIONSHIPS, ATOZ PROFESSIONALS WORK TO CREATE, OPTIMIZE AND PRESERVE INVESTMENT VALUE THROUGHOUT THE ENTIRE LIFE CYCLE OF AN INVESTMENT ENTITY IN A PROVEN AND PRACTICAL WAY. 1 st Luxembourg Tax Firm of the Year 2006 International Tax Review 3

4 WHY ATOZ? I - 2 Atoz: a single point of contact in Luxembourg ATOZ PROVIDES COMPREHENSIVE SET OF SERVICES: FROM THE DESIGN AND IMPLEMENTATION OF TAX EFFICIENT STRUCTURES TO THEIR CORPORATE IMPLEMENTATION, MAINTENANCE SUPPORT AND COMPLIANCE. ATOZ Tax Services Tax advisory (international, national, corporate & individual) Corporate implementation services Financial advisory and restructuring Corporate finance Tax compliance services Coordination with local law firms / service providers THE PROCESSES ARE FACILITATED TO PROVIDE FOR THE MOST EFFICIENT AND EFFECTIVE WORKFLOW BETWEEN THE CIENT AND THE INTERNAL AND EXTERNAL TEAMS OF ADVISORS. ATOZ Corporate Implementation Services Other Service Providers Local Service Providers A single contact person managing: Trust Agencies Domiciliation Agent Banks Luxembourg Notary Public 4

5 WHY LUXEMBOURG? II Advantages of using Luxembourg as a platform for your investments Luxembourg is a country highly focused on servicing international trade flows 1. Tax environment providing for reduced WHT rates / WHT exemption and CIT exemption on: Dividends Interest Repayment of debt and interest Convertible instruments premium Capital gains (share deals) 2. Flexibility under domestic law: look-through structures, hybrid instruments, Etc Secure and business friendly environment: Tax advance clearance practice Highly developped financial industry Stable legislation Multi-cultural country EU institutions environment Government focus on maintaining competitivity Luxembourg has come to be used extensively by: ProLogis Heitman Hines Tishman Speyer Invesco LBREP MSREF And many more European Directives Double tax treaties Domestic law flexiblibility Business environment Domestic law

6 KEY TAX ISSUES WHEN INVESTING IN GERMAN REAL ESTATE III Choice of an intermediate jurisdiction In Germany: High withholding taxes on outbound payments to Israel 25% on dividends 15% on interest payments Thin-Cap Regime («Zinsschranke») Local Business Tax («Gewerbesteuer») Cash Trapping profits and cash not matching due to high depreciation Transfer Pricing Issues Real Estate Transfer Tax upon acquisition and sale of property Israeli Investor German Real Estate Choice of an intermediate jurisdiction Favourable double tax treaty with both Israel and Germany Strong jurisdiction in terms of income tax rate Flexibility in terms of repatriation Stability in terms of tax and legal system, possibility to obtain tax clearances Efficient vehicles depending on strategy 6

7 TYPICAL STANDARD STRUCTURING IV Structuring through a Luxembourg holding company / Luxembourg branch For tax exempt investors For fully taxable investors Israeli Investor Israeli Investor Participation exemption in Luxembourg Real Estate Transfer Tax in Germany can be avoided through proper structuring in Germany debt No taxation of capital gains in Germany or Luxembourg upon sale of PropCo LuxCo financed by debt 1 Lux Holding Co Lux Branch No taxation of capital gains in Israel upon sale of PropCo No Taxation of capital gains in Germany or Luxembourg when LuxCo is sold German Real Estate Lux Property Company debt German Real Estate No taxation in Israel of regular income through Luxembourg branch Real Estate Transfer Tax in Germany can be avoided through proper structuring in Germany Lux PropCo financed by debt and equity 1 Hybrid financing available 7

8 TAX OPTIMIZED STRUCTURE IN FIGURES V Using a German KG and intra-group financing German real estate is acquired for 1000 and sold after 10 years for 1400 Acquisition is financed for 60% with loans at an interest rate of 4% Scenario 1 without structuring Scenario 2 with structuring Annual Income Gross return (11%) annual amortization (2%) Management fees (1,5%) Interest on bank loan Interest on intra-group loan - 10 Annual Costs Annual Income Annual Costs Annual Profit Corporate Income Tax + Local Tax (30%) -15,3-12,3 Net Income in Germany 35,7 28,7 Interest Income Lux Master HoldCo - 10 Net Income Master HoldCo 35,7 38,7 debt Israeli Investors Israeli Investors Lux Branch 100% Computation for the 10-year period LuxCo Lux PropCo Intra-Group Loan for 200 at 5% RETT (5%) upon acquisition 50 0 RETT (5%) upon sale 70 0 Total RETT Limited Partner 94,9% Capital gain from sale after RETT taxable capital gain RETT Corporate Income Tax + Local Business Tax (30%) Net Income from Sale of property Net Annual Income in 10 years Total Net Income General Partner 5,1% German KG 8

9 ALTERNATIVE FINANCE STRUCTURING VI The use of a securitization vehicle in Luxembourg Israeli Investors Israeli Investors Dutch Stichting No Real Estate Transfer Tax in Germany through structuring using a KG Lux Branch 100% Bank Interest payments deductible at the level of German KG debt 20% of the investment financing Junior Note (20% of the investment financing) Luxembourg Securitization Vehicle Senior Note (secured by the property) (60% of the investment Financing) DTT benefits between Lux PropCo and German KG Tax exempt exit (share deal) at Lux Branch level LuxCo Lux PropCo WHT exempt income repatatriation through Lux PropCo / Lux Branch Limited Partner 94,9% Notes (80% of the investment financing) Financing enhancement through the use of orphan securitization vehicle (e.g. listing) General Partner 5,1% German KG 9

10 LUXEMBOURG REAL ESTATE VEHICLES VII Alternative platforms to use in Luxembourg SICAV SIF (Specialized Investment Fund) SICAR (Venture Capital Investment Vehicle) SOPARFI (holding company) Securitization Vehicle Eligible assets: Unrestricted Direct or indirect investment in securities that represent risk capital Normal company with at least 90% of financial assets Risks linked to all kinds of assets risks relating to obligations or liabilities assumed by third parties Eligible investors: Well-informed investors Income tax: Tax exempt Tax exemption for income derived from transferable securities. Tax exemption for one year for income on cash held for the purpose of a future investment. Remaining income subject to income tax of 29%. Well-informed investors All Kinds All kinds Normally taxed company Tax exemption for income from financial assets Normally taxed company Reduction of tax burden to almost 0, because of deductibility of engagements made to investors and other creditors Withholding tax on outbound payments Subscription tax: Supervision by Luxembourg finance authority: Interest: No Dividends: No 0,01% of Net Asset Value Yes, monthly and annual reports Interest: No Dividends: No Interest: No Dividends: 15%, but 0% if participation exemption regime applies No No No Interest: No Dividends: No Yes, reporting twice a year No Only when offering securities to the public 10

11 CONTACT INFORMATION VIII INTERNATIONAL AND CORPORATE TAX SERVICES FREDERIC DUPONT DIRECTOR CONTACT Phone: (+352) Fax: (+352) LANGUAGES English German French INDUSTRY SECTOR Banking Pension funds and Insurance companies Alternative asset managers and investment funds SERVICE LINE International and Corporate Tax FREDERIC DUPONT is a Director with the International and Corporate Tax team of ATOZ, a high end advisory service firm offering comprehensive solutions, encompassing the entire life cycle of an investment entity: from tax planning, design and implementation to compliance and exit planning, with industry focus on Private Equity, Real Estate, US Multinational Corporations, Financial Institutions and Family Offices. Frederic leads the capital markets practice within the International and Corporate Tax team, serving financial services organizations on dedicated tax matters, including institutional investors dedicated solutions, (re)financing operations and regulatory driven tax restructurings. He is especially known for managing complex multi-jurisdictional engagements involving the use of tailored financial instruments. Frederic offers a wealth of academic and practical international tax experience. His career includes successful engagements with a big four and a number of the leading law firms in Luxembourg and abroad. Frederic is a graduate of the University of Paris II (Assas) with Master of Business Law, the University of Munich (Germany) with LLM in Business Law, and the University of Strasbourg DJCE-DESS Droits des affaires et fiscalité (business and tax law). 11