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Investing into Real Estate Tax Aspects . Jānis Taukačs Attorney-at-Law, Member of the L atvian Bar Riga, 20 May 2005. CONTENT. Taxes Applicable to Real Estate Tax Planning Opportunities. 20.05.2005 , Riga , Investing into Real Estate: Tax Aspects. (1) TAXES APPLICABLE. Real Estate Tax

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investing into real estate tax aspects

Investing into Real EstateTax Aspects

Jānis Taukačs

Attorney-at-Law, Member of the Latvian Bar

Riga, 20 May 2005

content
CONTENT
  • Taxes Applicable to Real Estate
  • Tax Planning Opportunities

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

1 taxes applicable
(1) TAXES APPLICABLE
  • Real Estate Tax
  • Income tax (both corporate and individual), incl. Taxation of Capital Gains & Withholding Tax
  • VAT
  • Stamp Duty

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

real estate tax
REAL ESTATE TAX
  • 1.5% of cadastral value
  • The real estate tax on buildings is still calculated from the book value of such real estate and such taxation of buildings should be in force until 31st December 2006
  • Case law

- Legitimate expectations under APL (If an institution makes a mistake, it may not adverselyaffect the individual)

  • Lessee – foreign company

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

income taxes cit 15
INCOME TAXES – CIT (15%)
  • Withholding tax
      • Use of property located in Latvia – 5%
      • Sale of immovable property located in Latvia – 2%
      • Dividends – 10 / 5 / 0%
      • Payments to Low-tax or No-tax Jurisdictions (Off-shores) – 15 / 0 %
  • Permanent Establishment

- Owning and leasing out an immovable property – no PE (object of business), unless place of business through which business is carried on (e.g., sales office, office for managing the development, etc.) is in Latvia

  • Societas Europeae

- No unified taxation of SE rules in EU

- SE is generally taxable in that Member State where it has its registered office (global income)

- Another Member State may tax SE’s permanent establishment

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

income taxes iit 25
INCOME TAXES – IIT (25%)
  • Residents of Latvia for the derived worldwide income
  • Non-resident individuals for the income derived in Latvia
  • Some exemptions from IIT:
      • sale of shares
      • sale of real estate provided that
        • ownership for a period of at least 12 months
      • dividendsreceived from Latvian or EU companies
  • Exemptions do not apply to non-resident individuals for the income derived in Latvia

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

slide7
VAT
  • PURCHASE OF REAL ESTATE

- VAT-exempt (input VAT deductibility problems forseller possible, if sold within 10 y. after acquiring)

- first sale of “unused” buildings - subject to 18%VAT(cash flow & input taxdeductibility problems possible for purchaser (refund from state required, if no sufficient output VAT))

  • PURCHASE OF SHARES

- VAT exempt (VAT registered seller may be restricted todeduct input VAT)

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

slide8
VAT
  • INVESTMENT INKIND INTO SHARE CAPITAL

- Not subject to VAT (30 days registration of new entity in LV)

  • DEMERGER (in order to split-off an immovable)

- Not subject to VAT, no negative impact on input VAT deductibility (30 days registration of new entity in LV)

- No need to demerge for VAT purposes, if output (sales) VAT is applicable to asset deal (first sale of “unused” immovable property)

- Complicated regulations (both corporate and VAT)

  • LEASE

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

slide9
VAT
  • Sale - exempt without option to tax
  • Real Estate must be registered with SRS
  • The deduction of input VAT after acquisition of realestate has to be reassessed annually during the period of 10 years

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

transferring stamp duty
TRANSFERRING STAMP DUTY
  • All transactions that involve alienation of real estate are subject to 2% stamp duty from the value of the real estate (but not more than LVL 30,000) upon registration in the Land Book (real estate register)
  • Taxable base
  • Duty Evasion (illegal reduction of the taxable base)
  • Purpose (tax?)

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

2 forms of tax planning
(2) FORMS OF TAX PLANNING
  • Avoidance vs Evasion
  • Jurisdiction of income recipient

- off-shore, EU, tax treaty network country, etc.

  • Personliable to tax

- legal entity, branch, individual, permanent establishment, real estate funds, trusts, Societas Europeae, EEIG, etc.

  • Forms of transactions

- sale & purchase (shares vs. assets), lease, M&A, investment in kind, construction, financing (debt vs. equity, loan vs. leasing ), etc.

  • Other

- Deferment of tax; Tax incentives (SEZ); Advance ruling; etc.

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

vat areas for planning
VAT: Areas for planning
  • Cash flow

- Pay as late as possible

- Recover as early as possible

  • Input tax

- Recover as much as possible

  • Output tax

- Charge as little as possible to non-recovering entities (within own group)

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

vat timing of purchases
VAT: Timing of Purchases

2004200520042005

Recovery Recovery Recovery Recovery

Rate 50%Rate 75% Rate 50% Rate 75%

Purchases Purchases Purchases Purchases made

made made made VAT – Ls 600

VAT - Ls 500 VAT – Ls 400 VAT - Ls 300 (including Ls 200

(plus Ls 200 delayed tax point)

delayed tax point)

VAT recovered

Ls 250 Ls 300 Ls 150 Ls 450

Total recovered 2004/5Ls 550Total recovered 2004/5Ls 600

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

case study 1
CASE STUDY (1)
  • Transaction

- purchase of “used” building

- construction (developing) of a building

- selling the building (within 1 year after construction is finished – “unused”, but more than 1 year after purchase)

  • Figures

- Purchase of “used” building – Ls 100

- Construction – Ls 200 (+ 36 input VAT)

- Sale – Ls 400 (+ 72 output VAT)

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

case study 2 iit sale of assets seller is individual
CASE STUDY (2) – IIT – SALE OF ASSETSSELLER IS INDIVIDUAL

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

case study 3 cit sale of assets seller is corporate entity
CASE STUDY (3) – CIT – SALE OF ASSETSSELLER IS CORPORATE ENTITY

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

case study 4 iit sale of shares seller is individual
CASE STUDY (4) – IIT – SALE OF SHARESSELLER IS INDIVIDUAL

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

case study 5 cit sale of shares seller is corporate entity
CASE STUDY (5) – CIT – SALE OF SHARESSELLER IS CORPORATE ENTITY

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

advance ruling
ADVANCE RULING
  • An enquiry to the institution about the legal aspects of a specific factual situation
  • If the person acts in accordance with the recieved advance ruling, the consequences may not be more adverse than those provided for in the ruling
  • The principle continues even if the responsible institution later finds that it has made a mistake in the ruling

20.05.2005, Riga, Investing into Real Estate: Tax Aspects

thank you
Thank you!

Jānis Taukačs

E-mail: [email protected]

EstoniaLatvia

Parnu mnt. 15 Kr. Valdemara iela 21

10141 Tallinn, Estonia LV1010 Riga, Latvia

Tel: +372-6 400 900 Tel: +371-7 365 000

Fax: +372-6 400 901 Fax: +371-7 365 001

Email: [email protected] Email: [email protected]

LithuaniaFinland

Jogailos g. 4 Museokatu 9 B 17

LT01116 Vilnius, Lithuania 00100 Helsinki, Finland

Tel: +370-5 2685 040 Tel: +358-9 43 690 840

Fax: +370-5 2685 041 Fax: +358-9 43 690 841

Email: [email protected] Email: [email protected]

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