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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 l.jpg

Investing into Real EstateTax Aspects

Jānis Taukačs

Attorney-at-Law, Member of the Latvian Bar

Riga, 20 May 2005


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CONTENT

  • Taxes Applicable to Real Estate

  • Tax Planning Opportunities

20.05.2005, Riga, Investing into Real Estate: Tax Aspects


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(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


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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


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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


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    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


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    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


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    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


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    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


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    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


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    (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


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    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


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    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


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    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


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    CASE STUDY (2) – IIT – SALE OF ASSETSSELLER IS INDIVIDUAL

    20.05.2005, Riga, Investing into Real Estate: Tax Aspects


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    CASE STUDY (3) – CIT – SALE OF ASSETSSELLER IS CORPORATE ENTITY

    20.05.2005, Riga, Investing into Real Estate: Tax Aspects


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    CASE STUDY (4) – IIT – SALE OF SHARESSELLER IS INDIVIDUAL

    20.05.2005, Riga, Investing into Real Estate: Tax Aspects


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    CASE STUDY (5) – CIT – SALE OF SHARESSELLER IS CORPORATE ENTITY

    20.05.2005, Riga, Investing into Real Estate: Tax Aspects


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    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


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    Thank you!

    Jānis Taukačs

    E-mail: janis.taukacs@sorainen.lv

    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: sorainen@sorainen.ee Email: sorainen@sorainen.lv

    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: sorainen@sorainen.lt Email: sorainen@sorainen.com