52ND UIA CONGRESS

Bucharest - Romania
October 29-November 2, 2008

 

 

TAX LAW

Friday, October 31, 2008

 

REAL ESTATE TAXATION

 

QUESTIONNAIRE

 

Dr. Peter Feyl
Tuchlauben 17, 1010 Vienna, Austria
Tel +43 1 534 37-00 / Fax +43 1 534 37 6100
p.feyl@schoenherr.at

© UIA 2008

 

1UIA Congress, October 2008, Bucharest (Romania)

Questionnaire

The upcoming UIA congress in Bucharest (Romania) in October 2008 will focus on the taxation of real estate. The purpose of the present questionnaire is to analyze, for each jurisdiction represented at the Congress, the regimes of taxation of cross-border real estate ownership and transactions.

Name of Author(s)

Peter Feyl

Corresponding state

Austria

 

Introductory remarks:

The following situations have to be analyzed: The taxation of acquiring, holding and transferring real estate, whereas the person – whether an individual, a legal entity or a real estate fund, is domiciled in another state than the real estate property is located (cross-boarder situation).

Two possible scenarios have to be examined, i.e. scenario (i) where the real estate is located in your own jurisdiction and (ii) where the residence of the owner of the real estate is in your jurisdiction.

In addition, in case the real estate owner is an individual, the answer has to distinguish between a private asset and a business asset. Furthermore, the real estate may be a residential property or a business property. Finally, a distinction may be made between a structure where the property is owned directly or indirectly (through the ownership of the shares of a real estate company).

The questionnaire invites the participants to present in some brief answers the tax consequences in the different scenarios mentioned above.

The questionnaire is split into a section (i) dealing with the taxation of a transfer of real estate, into a section (ii) dealing with the taxation of ongoing ownership of real estate and into a section (iii) dealing with other objects of taxation. For all those situations, each type of tax shall be covered.

As an introduction, some basics of civil law topics are raised in order to summarize the underlying civil law system relevant for the taxation of real estate in the different jurisdictions. Additionally, general questions on some basics of tax law topics are addressed and a chapter regarding a general overview over some taxes is available.

 

Overview:

 

CIVIL LAW


TAX LAW

General Questions

Specific Questions

Civil Law

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Hereafter, some civil law questions are raised in respect of the state where the real estate is situated.

How is real estate property defined according to the law of the corresponding state?

According to the Austrian Civil Code (ABGB) real estate property is immovable property, i.e. land and buildings constructed thereupon, building rights (Baurechte) and buildings on someone else's ground (Superädifikat).

Is there a public register stating the ownership of a real estate property
(land register)?

Yes, there is a land register.

If there is a land register, what is the nature of the register and what are the legal effects of a registration with the register?

The land register is public and enjoys public faith, i.e. everyone can rely on the registrations in the land register.

In order to acquire ownership title to a piece of land, registration in the land register is required (§ 431 ABGB).

Is the land register a national or a regional register? – Which authority is in charge of the land register, how is the register kept?

It is a national register in the meaning that the land register is kept pursuant to the same rules all over Austria and that access to the land register for all of Austria is available on-line.

It is kept locally in the meaning that the competent authority is the local district court (Bezirksgericht) where the real property is situated.

Which form has to be observed when the ownership on land is transferred (e.g. public deed, notarization)?

The signatures on the contract need notarization.

Who is entitled to acquire real estate property in the corresponding state? Are there any limitations applicable to persons without residence in the state of the real estate property?

Every physical or legal person (also including registered partnerships) may acquire title to real estate.

No restrictions exist as to nationality if the acquirer is an Austrian or an EEA citizen or company. Austrian companies qualify if – basically –majority owned by Austrian or EEA citizens or companies. However, in certain Austrian provinces zoning regulations restrict acquisition of land (and buildings) to be used as vacation homes (applying to Austrian and foreign citizens alike).

In the corresponding state, how is real estate preferably acquired / held / transferred? Directly (asset deal / asset property) or indirectly (share deal / asset property)? According to civil law, what are the reasons for such structuring? (cf. also hereafter, page XX question according to tax law)

Both transaction types are possible. Real property for residential use or smaller commercial property is more frequently purchased in form of an asset deal. Larger commercial property is typically (and mostly for tax reasons) transferred by way of a share deal. Purchasers protect themselves by appropriate representations and warranties.

Is there a statutory mortgage (legal lien) securing the tax liability, due on the transfer of the ownership of real estate?

No.

 

Tax Law

 

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General Questions

Acquisition of real estate

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?
From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

 

As mentioned above, real property for residential use or smaller commercial property is more frequently purchased in form of an asset deal. Larger commercial property is typically transferred by way of a share deal.

Seller: A corporate seller may prefer a share deal in particular in case the real property is situated abroad and is held by a foreign company because the sale of an least 10 % participation in a foreign company is tax exempt after the one year minimum holding period has lapsed provided that the applicable double taxation treaty assigns the right of taxation only to Austria (some newer treaties assign the right of taxation of a capital gain resulting from the sale of shares in a real estate company to the state where the real estate is located).

As to domestic real estate forming part of seller's business assets, there is not much difference between an asset or a share sale (but see below as to VAT).

Also if input VAT was deducted for certain expenses which were capitalized or for major repairs, such input VAT may have to be reversed in part if a period of ten years has not lapsed (§ 12 para 10 of the Austrian VAT Act [UStG]). This can be avoided in case of a share sale or if seller opts for a VATable sale.

In contrast, a seller who owns the real estate as private assets will obviously carry out the sale as asset deal.

From purchaser's view, the main advantage of a share deal is the avoidance of real estate transfer tax of 3.5 % of the consideration (which inmost cases is borne by purchaser) and the court registration fees of 1 % of the consideration. Unless 100 % of the shares are transferred or unless all shares are consolidated in the hands of one owner, no real estate transfer tax accrues in the event of a transfer of real property by way of a share transfer. A transfer of a very small fraction of the shares (Zwerganteil) to a third party buyer avoids real estate transfer tax and obviously also court registration fees.

Since depreciation on buildings is normally only 2 % to 3 % per year, depreciation of buildings does not have a significant impact on the tax position. Land may not be depreciated for tax purposes.

Separation of operational business and real estate property

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

From the point of view of taxation no clear trend; case by case analysis.

Often separation of real estate and operating business in order to

  • ring fence and reduce the liability (if banks permit), or
  • facilitate sale of one or the other (more often of the operating business), or
  • facilitate transfer to successor in family (staggered transfer, first operating business, later or only upon decease real estate).

 

What is the definition of a transfer of real estate?

Is there a taxation upon change of ownership in accordance with civil law(asset deal)?

If real estate is held as business assets and if ownership in Austrian real estate changes, this will be taxable event. If real estate is held as private assets and if ownership in Austrian real estate changes, this will be tax exempt after the real property has been held for at least ten years (in certain instances 15 years; possibly to be extended).

Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

The sale of shares in a domestic (real estate) company will be a taxable event. See above at Acquisition of real estate as to the avoidance of real estate transfer tax.

Does the law of the corresponding state provide for a deferral of, or exemption from, taxation in certain cases? In what situation (e.g. upon succession; upon donation to the spouse / descendant; upon disposal of the shares of a real estate company)?

Real estate capital gains tax

No special real estate capital gains tax in Austria. No income tax on direct sale of real estate after ten (or 15) years if held as private assets.

Corporate income tax

No corporate income tax if the real property is situated abroad and is held by a foreign company because the sale of an least 10 % participation in a foreign company by an Austrian corporation is tax exempt after the one year minimum holding period has lapsed provided that the applicable double taxation treaty assigns the right of taxation only to Austria (some newer treaties assign the right of taxation of a capital gain resulting from the sale of shares in a real estate company to the state where the real estate is located).

Real estate transfer taxes

See above at Acquisition of real estate as to the avoidance of real estate transfer tax. In case of transfer of real property as part of a business by donation in connection with a (in simplified terms) retirement a tax free allowance of EUR 365.000 exists.

Inheritance and gift tax

No inheritance or gift tax in Austria as at 1 August 2008.

Other taxes

If a business or a division of a business is transferred by way of restructuring under the Tax Restructuring Act (UmgrStG), no capital gains taxation and reduced real estate transfer tax (3,5 % of two times the taxable value of the real property –usually significantly below fair market value).

Relevant time


What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

Typically when the contract is made (in case no closing occurs reversal possible).

Depreciation and amortization


Depreciation and amortization of real estate.

Since depreciation on buildings is normally only 2 % to 3 % per year, depreciation of buildings does not have a significant impact on the tax position. Land may not be depreciated for tax purposes. No depreciation if held as private assets (exception for certain repairs which may be depreciated over ten or 15 years; consequence is longer period for speculative gains of 15 years).

 

Tax Overview

Taxes relevant to real estate taxation in the corresponding state

Real estate capital gains tax

No special real estate capital gains tax in Austria.

 

Income tax (corporate and individual income taxes)

Sale of real property held as private assets within ten (in certain cases 15 years) of acquisition: taxable income (at the regular tax rate for individuals of up to 50 %). Thereafter tax exempt. Leasing income (revenues less expenses) is taxable income (at the regular tax rate for individuals of up to 50 %).

Sale of real property held as business assets: taxable income for individuals (sole proprietorship or partnership with individuals) at the regular tax rate of up to 50 % or for corporates at the flat rate of 25 %. Leasing income is taxable income (at the above rates).

No corporate income tax if the real property is situated abroad and is held by a foreign company because the sale of an least 10 % participation in a foreign company by an Austrian corporation is tax exempt after the one year minimum holding period has lapsed provided that the applicable double taxation treaty assigns the right of taxation only to Austria (some newer treaties assign the right of taxation of a capital gain resulting from the sale of shares in a real estate company to the state where the real estate is located).

Real estate transfer taxes

Real estate transfer tax is 3.5 % of the consideration and court registration fees are 1 % of the consideration. If there is no consideration, the basis is normally 3.5 % of three times the taxable value. Unless 100 % of the shares are transferred or unless all shares are consolidated in the hands of one owner, no real estate transfer tax accrues in the event of a transfer of real property by way of a share transfer.

Inheritance and gift tax

No inheritance or gift tax in Austria as at 1 August 2008.

Net wealth tax

No net wealth tax in Austria.

Special tax on immovable property

There is a local property tax on immovable property (Grundsteuer) which is not very significant (e.g. EUR 800 per year for a private villa).

Value added tax (VAT)

No VAT on transfer of real property (§ 6 para 1 no 9 UStG), unless seller opts for VATable transaction (typically if input VAT was deducted); 20 % VAT in this case.

Other taxes

n/a

Double Taxation Treaties (DTT)


Under the double taxation treaties concluded by the relevant jurisdiction, which State is entitled to levy a tax on income derived from real estate?

Almost invariably, the taxation of leasing income is assigned to the state where the real property is situated.

Which State is entitled to levy a net wealth/ net equity tax on immovable property?

Almost invariably, net wealth tax or net equity tax may be levied in the state where the real property is situated.

Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property

Almost invariably, the taxation of capital gains resulting from the sale of real property by way of an asset deal is assigned to the state where the real property is situated.

Under most (older) DTTs which Austria has concluded capital gains resulting from the sale shares in a real estate company are taxable in the state of residence of the shareholder; newer DTTs, however, often assign the right of taxation to the state where the real property is situated (e.g. DTTs with Germany, France, Canada, Poland or U.S.A.).

Methods for the elimination of international double taxation under the treaties concluded by the relevant country (tax credit/ imputation or exemption method):

Most DTTs which Austria has concluded apply the exemption method, some the credit system. If the state of the real property may tax a capital gain resulting from the sale of shares in real estate companies, mostly the credit system will apply for such income.

 

Specific Questions

 

Introduction/ Instructions:

Below you find 12 different cases. The criteria to distinguish the cases are the following:

  1. Owner of the properties: Individual ("I"), real estate company ("REC") or (other) legal entity ("LE")
  2. Type of property: Residential ("Res") or Business ("Bus")
  3. Type of deal: Asset deal ("AD") or Share deal ("SD")
  4. Type of wealth to which property or shares belong: Private ("Pr"), Business ("Bus") or Business of a legal entity ("BLE")

 

The following table gives an overview of the 12 cases:

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

 

It must be noted that the above criteria have been elected from a Swiss legal and tax perspective. It may be possible that in your jurisdiction other criteria are more relevant. For this purpose, under all cases listed below, the specific situation of your jurisdiction can be described in the section "Comments".

The 12 cases have been put into the following three sub-sections:

  • Real estate is part of private wealth of an individual: Cases 1 –4.
  • Real estate is a business asset of an individual: Cases 5 – 8.
  • Real estate is an asset of a legal entity: Cases 9 – 10.

 

Each case contains a Part A asking for the tax treatment if your jurisdiction is the country where the real estate is located. Part B deals with the situation where your jurisdiction is the country of residence of the owner, or shareholder of the real estate company, as the case may be.

Within the questionnaire, the taxation upon transfer of the ownership of real estate (e.g. by way of a sale) will be covered as well as the ongoing taxation of real estate (i.e. recurring taxation such as income and wealth taxes).

I. Real estate is part of private wealth of an individual

 

 

Case 1

 

Part A (Your jurisdiction is the country where real estate is located)

 

Description

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax

No real estate capital gains tax.

Income tax

Subject to income tax unless venture period (ten or 15 years) has lapsed.

Real estate transfer tax.

3,5 % of the consideration.

Inheritance and gift tax

None.

Other taxes (VAT, etc.)

None.

Ongoing taxation of real estate

Net wealth tax

None.

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

Rental income subject to income tax at regular rate (up to 50 %).

Other taxes

Property tax (Grundsteuer).

Comments

 

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the owner of the real estate

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

 

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax (RECGT)

Pursuant to the DTTs Austria has concluded right of taxation assigned to state where real property is situated. Mostly exemption method, sometimes credit system.

Income tax

Pursuant to the DTTs Austria has concluded right of taxation assigned to state where real property is situated. Mostly exemption method, sometimes credit system.

Real estate transfer taxes (RETT)

Local tax in the state of the real property.

Inheritance taxes

If there is also a DTT covering inheritance tax, right of taxation of the state where real property is situated. Exemption or credit system. No use of tax credit in Austria because inheritance tax abolished as at 1 August 2008.

Gift taxes

With very rare exceptions (France, Czech Republic, U.S.) no DTTs covering gift tax. Typically state of the real property has right of taxation.  No credit in Austria because gift tax abolished as at 1 August 2008.

Other taxes (VAT, etc.)

n/a

Other taxation (other than upon holding or upon disposal)

 

Comments

 

 

Case 2

 

Part A

 

Description

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

 

No special real estate capital gains tax in Austria.

Corporate income tax

Right of taxation of Austria under domestic law if shares are sold provided that the participation is at least 1 %. Under most (older) DTTs which Austria has concluded capital gains resulting from the sale shares in a real estate company are taxable exclusively in the state of residence of the shareholder; newer DTTs, however, often assign the right of taxation to the state where the real property is situated (e.g. DTTs with Germany, France, Canada, Poland or U.S.A.) if the company is predominantly holding real estate (then predominantly using the credit method).

Real estate transfer taxes.

Unless 100 % of the shares are transferred or unless all shares are consolidated in the hands of a single shareholder, no real estate transfer tax accrues in the event of a transfer of real property by way of a share transfer.

Inheritance and gift tax

No Austrian inheritance or gift tax as at 1 August 2008.

Other taxes (VAT, etc.)

No VAT.


Ongoing taxation of real estate

Net wealth tax, net equity taxes

No Austrian net wealth tax. Low property tax (Grundsteuer).

Corporate income taxes.

25 % on rental income.

Other taxes

No VAT unless lessor opts for VAT.

Other taxation (except upon holding or upon disposal)

 

Comments

 

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the (indirect) owner of the real estate property.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

Comments

The capital gain resulting from the sale of shares will be taxable under domestic Austrian tax law – and under most DTTs which Austria has concluded Austria will have the right of taxation (newer DTTs assign right of taxation to the state where the real property is situated). The tax rate is half of the average tax rate (approx 25 %). No capital gains taxation if share were less than 1 % and sold after more than one year.

 

Case 3

 

Part A

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Comments

Same tax treatment as for Case 1 because Austria does not distinguish between residential property and business property.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

See above as to Case 1.

 

Case 4

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Comments

Same tax treatment as for Case 2 because Austria does not distinguish between residential property and business property.

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No comments.

 

II. Real estate is a business asset of an individual

 

Case 5

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

This is a somewhat rare case. This would typically be the case if an individual made a business of renting residential housing to third parties. This will normally also require some additional administration set up and additional services rendered (in excess of providing a concierge, e.g. cleaning of the apartments, providing of food and beverage). If an entrepreneur uses a house for business and private purposes (e.g. local craftsmen) the house can form part of the business assets if at least 80 % are used for the business; the private use is then taxable as income (Privatentnahme). If more than 20 % are used for private purposes a split pro rata to business and private use has to be made. Otherwise similar tax treatment as in Case 2; capital gain resulting from sale taxable.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No additional comments.

 

Case 6

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Comments

Same tax treatment as for Case 2.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Similar tax treatment as for Case 2 but taxation of capital gain at marginal tax rate not half of the average tax rate.

 

Case 7

 

Description

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

Please see above at Case 5. Capital gain taxable in the state of the real estate property.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No additional comments.

 

Case 8

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

 

Comments

Same tax treatment as for Case 6.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Same tax treatment as for Case 6.

 

III. Real estate is an asset of a legal entity

 

Case 9

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The real estate property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

Comments

Same tax treatment as for Case 2.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No additional comments.

 

Case 10

 

Description

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

Comments

Under domestic Austrian tax law the capital gain resulting from the sale of a participation of 1 % or more in Austrian corporation is taxable. It depends on the DTT (if there is one) whether the DTT assigns the right of taxation to the state of residence of the shareholder or to Austria as state of the real property (some newer treaties assign the right of taxation of a capital gain resulting from the sale of shares in a real estate company to the state where the real estate is located).

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The sale of an least 10 % participation in a foreign company by an Austrian corporate seller is tax exempt after the one year minimum holding period has lapsed provided that the applicable double taxation treaty assigns the right of taxation only to Austria (some newer treaties assign the right of taxation of a capital gain resulting from the sale of shares in a real estate company to the state where the real estate is located).

 

Case 11

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

Same tax treatment as for Case 9.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Same tax treatment as for Case 9.

 

Case 12

 

Description

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

Comments

Same tax treatment as for Case 10.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Same tax treatment as for Case 10.