Newsletter Real Estate

Transcription

1 Newsletter Real Estate Edition March 2014 Contents A. IAS 40 (Investment Property) Overview... 2 Due to fluctuating prices, increasing regulation and a wide variety of business and contractual arrangements, the real estate industry is facing a high degree of complexity. This is reflected in the applicable accounting standards and regulations. An overview. B. EMIR European Market Infrastructure Regulation... 3 The regulatory changes affecting the financial sector often have indirect consequences for companies in every industry. This has now been changed through the introduction of the European Market Infrastructure Regulation (EMIR). C. Exercising a preventive control option during the sale of a business as a whole... 3 In practice, when properties are sold in addition to the agreement of a non-taxable sale of a business as a whole often an ancillary agreement is made as a precautionary option for the seller. This precautionary agreement takes the value added tax into consideration in the event that the tax authorities do not recognize (at a later point in time) the sale of a business as a whole. This is done with the intent that the seller avoids the value added tax adjustment as per 15 UStG (German Value Added Tax Act) based on the tax-free sale of the property. D. Real estate transfer tax in contribution (of a property) into a corporation... 4 Contribution agreements regarding the contribution of a property into a company fulfill 1 I Nr. 1 AO (German Fiscal Code); for the contribution into a business partnership: if the business partnership is reorganized into a corporation within a period of five years, then the exception of 5 I GrEStG (Real Estate Transfer Tax Act) does not apply. The basis is the valuation as per 138 paragraph 2 to 4 BewG (Valuation Tax Act). E. Standard on the Principles for the Valuation of Property... 6 On 14 August 2013, IDW released the Standard on the Principles for the Valuation of Property (IDW S 10). This includes various changes in regards to the draft version (see Real Estate Newsletter Edition 1/2013). These changes are based on the comments and opinions gathered in the course of various technical discussions F. Property tax reduction for reduced earnings... 7 In particular when units or areas cannot be rented, but also for reduced income as a result of other reasons, the property tax can represent a significant cost factor for the owner. G. Guest Article (Baker Tilly Poland) Real Estate Market in Poland - Legal & Tax Perspective... 8 The regulations regarding the acquisition of real estate by foreigners have been stipulated by the 1920 law "Acquisition of properties by foreign residents" (law). The general regulations in this law provide that foreign residents may only purchase real estate if they have received approval from the Ministry of Internal Affairs. A byline article by Baker Tilly Poland.

2 Page 2 of 11 A. IAS 40 (Investment Property) Overview Due to fluctuating prices, increasing regulation and a wide variety of business and contractual arrangements, the real estate industry is facing a high degree of complexity. This is reflected in the applicable accounting standards and regulations. To shed some light onto the most applicable international standard IAS 40 we will provide an initial overview. In future issues, the most significant industry-specific questions regarding the life cycle of real estate (project development, construction, and holding property as an investment) will be looked at more closely. Investment property is property held for the purpose of attaining rental income and/or for purposes of capital appreciation; investment property is not used for the creation and/or delivery of goods, for the provision of services or for administrative purposes, or with the intention of being sold within the scope of ordinary business activities. In particular, mixed-use properties held as investment properties present problems in terms of their classification. These must be determined separately, insofar as it is ensured that the parts of the property can be individually sold. If this is not the case, then a classification as an investment property is only considered if the owner-occupied part is insignificant (in its overall area). When an investment property is initially purchased, it is handled as a fixed asset (PP & E), i.e. the valuation is performed at acquisition or production cost. In addition, directly attributable acquisition-related costs, such as brokerage and agency fees, notary fees, costs involved for registration in the land register and land transfer tax must be included. Furthermore, any future demolition and restoration costs must be capitalized insofar as these are based on contractual or public service grounds. For the subsequent valuation, it creates an option between amortized acquisition or production cost and fair value. Within the scope of the acquisition or production cost model, the property must still be subjected to an impairment test insofar as no specific external or internal signs of a loss in value exist. An impairment loss is required if the targeted amount (higher amount resulting from fair value minus selling costs and the use value) is lower than the net book value. If the fair value assessment is made, this must be determined on every balance sheet date, and changes affecting net income must be recorded. Therefore, when the fair value model is used, the validity of the year-end result is often called into question, particularly in times of falling market prices. If there is an operating lease agreement this (insofar as it meets the criteria for an investment property) can be handled like a finance lease agreement, i.e.: after capitalization of the property and the corresponding recording of a liability, the subsequent assessment is conducted at fair value. This option can be selected for every property. René Witzel & Andreas Weissinger

3 Page 3 of 11 B. EMIR European Market Infrastructure Regulation The regulatory changes affecting the financial sector often have indirect consequences for companies in every industry. This has now been changed through the introduction of the European Market Infrastructure Regulation (EMIR). This regulation is the first financial market regulation that places all non-financial companies (counterparties) under the responsibility of a direct financial advisory body. As a political consequence of the effects of the financial crisis, the G20 countries have decided to increase the transparency and monitoring of OTC derivatives transactions (OTC derivatives transactions). While the US legislators enacted the Dodd-Frank Act, in Europe the EMIR became legislation on 16 August Both regulations are independent of one another and one does not replace the other. In Germany, in accordance with EWIR, companies that process a certain number of OTC derivative transactions are required by law to process the business via a central clearing position (clearing obligation) and report the processed OTC transactions in a transaction register. Further regulation affects the requirements of risk management as well as the management of securities. Every year a report validating the company's willingness to implement EMIR must be submitted to the BaFin (Federal Financial Supervisory Authority). Furthermore, every legal entity involved in the derivatives transaction (including the beneficiary) requires a Legal Entity Identifier (LEI). For interest rate swaps and credit default swaps, the obligations to report took effect in September 2013; for the other asset classes the obligations became effective beginning on 14 February On 14 November 2013, four transaction registers were approved by EMSA. These are now active as certified transaction registers of the relevant contact person. In addition, the EMIR requires a statutory audit to be carried out by a certified auditor. René Witzel & Verena von Tresckow-Bronke C. Exercising a preventive control option during the sale of a business as a whole In practice, when properties are sold in addition to the agreement of a non-taxable sale of a business as a whole often an ancillary agreement is made as a precautionary option for the seller. This precautionary agreement takes the value added tax into consideration in the event that the tax authorities do not recognize (at a later point in time) the sale of a business as a whole. This is done with the intent that the seller avoids the value added tax adjustment as per 15 UStG (German Value Added Tax Act) based on the tax-free sale of the property. Up until now the issue was that as per Section 9.1 paragraph 3, phrase 1 of the Value Added Tax Application Decree (UStAE) an option can only effectively be implemented until the constituent power of the respective annual tax assessment takes effect.

4 Page 4 of 11 Therefore, an option can no longer be retroactively applied if at the time of the entry condition (denial of the existence of a business as a whole by the tax authorities) the annual tax assessment in the year the sale was concluded is already formally definitive, which more often than not will be the case. Previously both the regional tax office (OFD) Lower Saxony (order dated 14 February 2013) and the regional tax office Frankfurt (order dated 11 March 2013) have expressed their view. They suggest not tying the option to another legal condition and to explain this in addition to the agreement of a non-taxable sale of a business as a whole. For a lack of conditions, Section 9.1 paragraph 3, phrase 1 UStAE would not apply and the option would be considered effectively declared from the beginning. In a letter dated 23 October 2013, the Federal Ministry of Finance (BMF) finally incorporated this approach in Section 9.1 paragraph 3, phrases 2 and 3 UStAE. It does clarify that there generally is not an option in the context of the sale of a business as a whole. However, this does not apply to cases when in the notarized purchase contract both parties have stated their agreement regarding an option that only applies in cases where the parties' legal assessment of the sale of a business as a whole is later determined to be insufficient. In that case, the option is considered as unconditionally agreed and described as effective on the date of signing of the agreement. Corresponding wording must be carefully examined. Marion Fetzer & Kerstin Baudisch D. Real estate transfer tax in contribution (of a property) into a corporation Contribution agreements regarding the contribution of a property into a company fulfill 1 I Nr. 1 AO (German Fiscal Code); for the contribution into a business partnership: if the business partnership is reorganized into a corporation within a period of five years, then the exception of 5 I GrEStG (Real Estate Transfer Tax Act) does not apply; the basis for assessment of the property value as per 138 paragraph 2 to 4 Valuation Tax Act is: 1. The contribution of a property into a KG (limited partnership) and subsequent reorganization of the KG within a period of five years, the prerequisites for the noncollection of land transfer tax lose their validity retroactively. 2. The agreement of the net book value as a basis for the real estate transfer tax with the FA (tax and revenue office) is illegal. BFH, judgment dated 25 September 2013 II R 2/12 The case The plaintive GmbH (incorporated company) was established through the reorganization of a KG. Limited partners were A and their children, K1 and K2. Prior to the reor-

5 Page 5 of 11 ganization, A and K1 obligated themselves to contribute a property which they were joint owners of to the KG in exchange for new rights to the corporation. They declared the transfer of property and approved the registration in the land register. For the contribution, the tax and revenue office (FA) determined the real estate transfer tax amount. The GmbH and the FA agreed to the net book value of the property as the basis of the tax assessment. With its lawsuit, the GmbH sought the non-assessment of the tax as per 5 I GrEStG. The finance court rejected the lawsuit. Upon appeal of the GmbH, the BFH nullified the ruling and relegated the case back to the FG for the further hearing and decision. The repercussions In the opinion of the BFH, the contribution contracts fulfill the requirements of 1 I Nr. 1 GrEStG. These are considered legal transactions that justify the right to the transfer of ownership of a domestic property. The exception set forth in 5 I GrEStG where no real estate transfer tax is determined could perhaps apply in the case of partnerships insofar as a co-owned property passes to joint ownership and whose joint ownership share in the assets is equal to the fraction of the property's ownership distribution (share). However, the reorganization into a corporation within 5 years after the contribution (of the property) leads to the retroactive inapplicability of 5 I GrEStG as per 5 III GrEStG. The separation between the assets of the corporation and the firm's partners leads to the discontinuation of the immediate rem joint ownership of the corporation's assets, which is material to the tax not being charged. This is also appropriate in terms of the fact that the immediate transfer of the property to the corporation would have been as per 1 I Nr. 1 GrEStG a taxable acquisition transaction. However, the agreement with the responsible FA for the determination of the real estate transfer tax using the net book value is illegal. But using this net book value could provisionally be applied in accordance with 155 AO II. The applicable real estate value must, however, be determined by the local FA and separately determined in accordance with 151 I 1 Nr. 1 BewG. What needs to be done? For acquisition transactions on a company law basis (e.g. contributions), it should be considered that these generally trigger property transfer tax. If you want to use the exception noted in 5 I GrEStG when contributing a property to a business partnership, then the time limit stated in 5 III GrEStG must be observed. Agreements deviating from the assessment law pertaining to the assessment basis violate applicable and valid laws and are therefore ineffective. The value of the real estate (the property) is essential. In exceptional cases the fair market value can be used if this can be verified and determined. Stephan Zuber

6 Page 6 of 11 E. Standard on the Principles for the Valuation of Property On 14 August 2013, IDW released the Standard on the Principles for the Valuation of Property (IDW S 10). This includes various changes in regards to the draft version (see Real Estate Newsletter Edition 1/2013). These changes are based on the comments and opinions gathered in the course of various technical discussions. Before the explanation of the valuation process (profit-oriented method, comparative value method and cost approach), both a tabular overview of the process as well as general principles were included in the standard. The tabular overview, which distinguishes application areas and typical assessment grounds, provides the evaluator with assistance in the selection of the method pertinent to their individual case. The general principles recommend that the evaluator first gets an overview of the market and, within the scope of a tour of the property, to critically question the property's value-influencing parameters. Furthermore, the standard has been supplemented with a section about the special features used in the determination of a subjective value. The subjective value is generally measured using the cash value of the financial surpluses that result from the intended use of the property. The intended use of the property is the use which is deemed possible when taking the potential individual relationships of the acquirer or seller into consideration. In the determination (of the value), the acquirer of the property must consider both real as well as artificial synergies, while for the seller only artificial synergies are relevant. Regarding the gross rental method as per ImmoWertV, aside from the general gross rental method, both the simplified gross rental method as well as the gross rental method on the basis of periodically different rental income are used and are all considered valid. Using the general and simplified gross rental method, the gross rental value is determined through the capitalization of the property's net income. A division into a property and building value percentage, which the general gross rental method provides for, is not a part of the simplified gross rental method. For the gross rental method on the basis of periodically varying rental income amounts, the income is calculated as the total of the capitalized net income within a predetermined period under review in addition to the discounted residual value of the property. The determination of the discounted interest rate on the basis of the capital asset pricing model (CAPM) is qualified in the sense that as opposed to how it appears in the standard the required data is not available in most cases. However, a reference is made to the valuation methods and practice and that often references a typical local interest rate for a (quasi-) risk-free capital market investment, plus a risk premium. Corresponding to the target of the standard whereby this is only intended to show the general principles per which the auditors can value real estate or with which they can assess the value of prepared real estate estimations the standard does not provide for any detailed instructions for property valuation. Hence, there will still be a high demand for real estate-specific consulting services. Since the standard is only

7 Page 7 of 11 intended to represent a supplement to the existing standards and guidelines (RICS, IVS for IFRS / IAS, ImmoWertV for German GAAP), these must still be considered for use in the valuation. Viewed globally, the standard can therefore be seen as a guideline for the implementation of real estate/property valuations. Andreas Weissinger & René Witzel F. Property tax reduction for reduced earnings In particular when units or areas cannot be rented, but also for reduced income as a result of other reasons, the property tax can represent a significant cost factor for the owner. As per 33 GrStG, the property tax can be reduced by (on request): 25% if the nominal gross income has been reduced by more than 50%. 50% if the nominal gross income has been reduced by 100%. In terms of the legal provisions, for developed properties the normal (standard) gross revenue is the standard annual gross rental income estimated under the conditions existing at the beginning of the abatement period. However, the prerequisites are: That an application is submitted by March 31st of the following year. That the person liable for the tax is not personally responsible for the reduction of the gross income. Furthermore, for the approval of the application it must be proven that appropriate measures have been taken to increase the gross rental income. The proof that the person liable for the tax is not responsible for the reduction and has undertaken measures to increase the gross profit can be verified through presentation of advertisements, websites, commissioning of a rental agent, etc. The reduction of the gross profit can result from a lower square meter (area) rental income or be due to (partially) vacant rooms/areas. For the calculation of the lower profit, the actual rental income of the rental units is compared to the local rent index. The reduction in profit is calculated for the building as a whole. If, therefore, in a fivestory office building, a floor (1/5 of the total) is empty and the other floors are rented at normal market conditions, the reduction in profit is only 20% for the whole building This does not justify or legitimate an application for reduced property tax payment. For the approval of the application, the local city representatives will request additional information. The prerequisites for the application are validated every year. However, no (partial) reduction of the property tax due to reduction in profit exists if the profit reduction for the abatement period can be taken into account through a continuation of the assessment value or if it could have been considered if the application for assessment value continuation had been submitted on time. Kerstin Baudisch & Peter Rohrwild

8 Page 8 of 11 G. Guest Article (Baker Tilly Poland) Real Estate Market in Poland - Legal & Tax Perspective GENERAL LEGAL REMARKS Types of and titles to real properties Polish law defines real property as land, buildings on land or apartments (separated parts of buildings). The main titles to the real property are the following: a) ownership b) perpetual usufruct c) lease and tenancy Ownership under Polish law is synonymous with ownership as understood in Western codified and common law countries and entitles the owner of real estate to use exclusively an area of real estate for unlimited period of time. The right of perpetual usufruct is the tittle to land which in many aspects is similar to the ownership (gives the right to use land exclusively, to own buildings on the land etc.). Perpetual usufructs may be established for a period of 40 to 99 years on the land owned by the State Treasury or municipality (or unions of municipality). Both lease and tenancy gives the right to use the property exclusively. Tenancy gives additionally to the tenant the right to take profits from the property if there are any. Land and mortgage register Every property in Poland must be entered in a so-called land and mortgage register ( księga wieczysta ), which contains basic legal and factual information about the property. Land and mortgage registers are maintained by district courts and are open to the public for inspection. Alienability of properties Real properties in Poland are normally freely alienable, in the sense that they may be bought, sold, inherited, and encumbered. The transfer of ownership and perpetual usufruct requires an agreement in the notary deed form. Acquisition of properties by foreigners The rules concerning acquisition of properties by foreigners are specified in the Act on the Acquisition of Immovable Properties by Foreign Persons 1920 ( Act ). The general

9 Page 9 of 11 rule provided in this Act is that foreigners may purchase real estate only after receiving permission from the Ministry of Internal Affairs. Nevertheless, since 1 May 2004 (the day of Poland s accession to the EU) foreigners who are citizens or entrepreneurs of the EEC countries do not need permission to purchase real estate situated in Poland or shares in companies which are legal owners or perpetual usufructuaries of such real estate. The only exceptions to the above is the purchase of farms and woodlands (permission will be required until 2 May 2016, however there are also some circumstances described in Act in which permission for purchase of the farm and woodland before this date shall not be required). Foreigners who are not EU citizens are required to obtain permission in most of the cases but the Act provides for a few derogations in that case. For example, the purchase by non - EU citizen of independent residential premises (apartment) or purchase of real estate by a foreigner who has been residing in Poland for at least five years from the issuance of a permanent residence permit is exempted from the obligation to obtain a permit. GENERAL TAX REMARKS VAT Generally, since 1 January 2009, the supply of buildings, structures or parts thereof is exempt from VAT, except where: (a) the supply is made as part or before first occupation, (b) the period between first occupation and the supply of buildings, structures or parts thereof is shorter than 2 years. The first occupation is defined as the "delivery of buildings, structures or parts thereof for occupancy, in the performance of transactions subject to taxation, to the first purchaser or occupant, upon their (a) construction or (b) enhancement if the expenses made for the enhancement, in the meaning of the provisions on income tax, amounted to at least 30% of the initial value". What is important, the delivery for occupancy should be performed within the scope of a transaction subject to VAT, such transactions meaning, inter alia, taking of a building, structure or parts thereof for possession by the first purchaser or the first occupant. However, if relevant conditions are met the parties may resign from exemption and chose VAT taxation of the sale transaction. If the supply of the real property is exempt from VAT, the purchaser is obligated to pay 2% stamp duty on the value of the transaction. The sale of land and the right of perpetual usufruct undeveloped with buildings and structures is subject to 23% VAT. If the land or the right of perpetual usufruct is developed with building or structures, then VAT treatment on sale of the land and the right of perpetual usufruct will be the same as in case of those buildings or structures.

10 Page 10 of 11 The standard VAT rate on the sale of buildings is 23%. The sale of residential properties shall be subject to 8% VAT. The reduced rate is applicable to apartments with surface under 150 sqm and houses with surface under 300 sqm. The surplus of these areas will be taxed at 23 % VAT. Lease and rental services of commercial real properties are subject to 23% VAT. Lease of residential property for housing purposes is VAT exempt. Income tax Generally, the profits on sale of real estate are subject to taxation at 19% CIT and 19% PIT. In case of sale made by individuals, under relevant conditions an income may be tax exempt. Real estate tax Basically owners of buildings, lands and the rights of perpetual usufruct are obligated to pay real estate tax to local authorities, depending on size of floor area (buildings) or area (land and rights of perpetual usufruct) The rates per sqm are determined by local authorities, where the property is located. Structures, e.g. roads, bridges, parking, are subject to tax at 2% of their initial book value or, when fully depreciated, of their book value from 1 January of the year when the last write-off was made. Janusz Tunkiewicz This Briefing Note has been prepared by Baker Tilly Poland as a general guide to legal and tax issues relating to the Real Estate market in Poland. We trust that you will find it useful, however, it is not comprehensive and is not a substitute for taking professional advice. If you wish to discuss any matters set out in this Briefing Note then please contact us.

11 Page 11 of 11 Authors contributing to this edition Verena von Tresckow-Bronke Partner, Accountant and Tax Advisor Phone: Marion Fetzer Partner, Tax Advisor Phone: Andreas Weissinger Partner, Accountant and Tax Advisor Phone: Kerstin Baudisch Partner, Tax Advisor Phone: Peter Rohrwild Partner, Tax Advisor Phone: René Witzel Accountant Phone: Stephan Zuber Partner, Attorney at Law Phone: Imprint Baker Tilly Roelfs AG Wirtschaftsprüfungsgesellschaft, Cecilienallee 6-7, Düsseldorf Notice The contributions and articles appearing here were composed to the best of our knowledge. Despite careful monitoring and processing of the content, we do not accept any liability whatsoever. The explanations only serve general information purposes and can therefore neither partially nor completely replace a qualified, professional individual consultation. Baker Tilly Roelfs would be more than happy to assist you. About Baker Tilly Roelfs Baker Tilly Roelfs formerly RölfsPartner is one of the largest partner-managed consultancies in Germany and is an independent member of the global Baker Tilly International network. Our accountants, auditors, lawyers, tax advisors and management consultants provide a broad range of innovative and individual consulting services to medium-sized corporations, public institutions and high net worth individuals. Baker Tilly Roelfs develops solutions which are tailored to the precise needs of individual clients and proceeds to implement them to the highest standards of quality and efficiency. On the basis of an entrepreneurial consulting philosophy, the partners with responsibility for clients form interdisciplinary teams of specialists who meet the requirements of the particular project exactly. The interdisciplinary competencies are divided among the following nine Competence Centers: Financial Services, Fraud Risk Compliance, Private Clients, Public Sector, Real Estate, Restructuring, Sport, Transactions and Public Utilities. In Germany, Baker Tilly Roelfs has 750 employees at twelve different locations. Global consulting is in the hands of 161 partner companies with more than 27,000 employees in 137 countries. These firms are all members of the worldwide Baker Tilly International network of independent accounting, auditing and consulting companies.