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International
Property Investment - Are REITs Right For You?
by Jeremy Hetherington-Gore
and Caroline Maxwell
IMPORTANT
WARNING:
The contents of this article have been compiled in good
faith by Investorsoffshore.com to provide assistance
to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
information given in order to choose types or routes
of investment but should make their own independent
enquiries before making choices. Investorsoffshore.com
has taken reasonable care in researching and presenting
the information herein but makes no representations
as to its accuracy and accepts no liability for actions
taken or not taken as a result.
If
you are in the right place at the right time, investing
in real estate can be one of the most profitable and
enjoyable forms of medium to long term investment there
is. Depending on your circumstances, international real
estate investment may prove preferable, for a number
of reasons, despite the additional challenges it can
sometimes pose. Diversifying your investment portfolio
by buying property in several different countries, for
example, can help to cushion you against downturns in
any one particular market. Even if you cannot afford
to do this, you may find that you will be able to snap
up an incomparable bargain in an up-and-coming country
which would never have been available in your country
of residence. (Unless you happen to have the good fortune
to be resident in a newly popular emerging market country,
of course!)
Now, if
you decide that international property investment is
for you, there are several different ways of going about
it. Those with neither the time nor the inclination
to become landlords, or who simply want to diversify
a top-heavy portfolio, might choose to invest indirectly,
using one of the many real estate related funds available.
Ground rent funds, for example, are proving increasingly
popular with investors, and offer a relatively low risk
and secure investment with the possibility of high returns.
As with all mutual fund investments, there are specific
advantages and disadvantages, but if you are interested
in the growth possibilities in this market and would
prefer a less 'hands on' approach, then this may be
for you.
On the
other hand, you may not even have an investment portfolio
- you may just be looking for somewhere nice and sunny
to retire to. Or you may be an expat looking to supplement
your income. Or you might have been relocated by your
employer, and need somewhere to live. Or… well,
the list goes on. There could be any number of circumstances,
both personal and financial, driving you to consider
investing in property overseas. In this article we will
deal with the issues raised by international property
investment, and the possible taxation implications raised
by such purchases.
REITs
While many
international investors choose to invest directly in
their own homes (first, second or third, as the case
may be!), one very interesting way of putting surplus
funds into real estate is through a REIT.
In an increasing
number of countries, real estate funds often take advantage
of REIT status (stands for Real Estate Investment Trust).
Typically, a REIT is a fund, publicly listed or not,
which holds real estate assets, and is tax-transparent
(pass-through) as long as it distributes 90% of its
gains and profits to its shareholders. Countries with
REIT legislation in place include the USA, the UK (from
1st January 2007), Hong Kong, Malaysia, Singapore, Japan,
Germany (from 2007), Australia, and the Netherlands.
Individuals
can invest in REITs either by buying their shares, if
they are publicly-listed, or by making direct investments
into fund units. Dividends or returns paid to share-
or unit-holders are untaxed in the REIT, and are taxable
(or not, according to where you invest from) in the
hands of the investor. There may be 'exit' or 'withholding'
taxes on foreign distributions in certain countries
- it is always wise to check first!
A REIT
usually has to fulfil various other conditions besides
the distribution rule. In the US, for instance, where
REITs have been established for many years, a REIT must:
- Be
structured as corporation, business trust, or similar
association;
- Be
managed by a board of directors or trustees;
- Have
fully transferable shares;
- Have
a minimum of 100 shareholders;
- Derive
at least 75% of gross income from rents or mortgage
interest;
- Invest
at least 75% of total investment assets in real estate;
- Have
no more than 20% of its assets in the stocks of taxable
REIT subsidiaries.
REITs
In The UK
In
the UK, property companies have created a new internet
portal and supporting publicity campaign, called Reita,
as an impartial source of expert information on quoted
property investment, REITs and the funds that will invest
in them.
Members
of the
REITs and Quoted Property Group, the organisation behind
the Reita campaign, include eight of the biggest quoted
property companies – some of which have announced that
they intend to convert into REITs and others that are
likely to maintain their current structure – nine of
the leading fund managers, the London Stock Exchange,
ten merchant banks and advisers, the British Property
Federation and the Investment Property Forum.
Historically,
most investment in quoted property companies has been
institutional. The new REITs regime, by exempting eligible
quoted property companies from corporation tax, will
end the double taxation of the sector, making it attractive
to a whole new world of investors who want to hold tax
efficient indirect property investments in their portfolios.
In addition to REITs, there are quoted property companies
and other vehicles for indirect investment that private
investors could consider.
The
British Property Federation (BPF) is a founder member
of The REITs and Quoted Property Group and played a
key role in its establishment and in the creation of
the Reita campaign. BPF Chief Executive, Liz Peace,
comments:
“The
long awaited arrival of UK REITs on New Year’s Day 2007
marks an important and exciting milestone in property
investment in Britain. It opens up a host of opportunities
for property companies, financial services providers,
financial advisers and investors to significantly increase
the level of investment in the commercial property sector.
But while there is a clear appetite for property among
private investors, there is little unbiased information
publicly available on REITs and quoted property. We
wanted to create something to fill this gap and we are
confident that reita.org will be widely welcomed and
used.”
Patrick
Sumner, Chairman of The REITs and Quoted Property Group
added:
“We
are delighted to have received such tremendous support
for the group, which now has the backing of so many
senior organisations right across the industry. Our
portal will be the UK’s first non-partisan resource
for information on REITs and property investment, providing
a definitive reference point, covering all the key issues
and addressing any questions which the visitor has,
whether they are a professional adviser, stockbroker
or even a private investor."
“Our
aim is to really add value to professional advisers’
business and ensure that reita.org can provide a one-stop
resource for comprehensive, non-partisan and regularly
updated information."
“The
subject matter may appear complex to some, but our aim
is to expand and educate a wider audience to the benefits
of property investment. With such a great team behind
us, we are extremely well placed to do this.”
It
emerged in July 2006 that the Channel Islands Stock
Exchange (CISX) has experienced significant interest
from tax advisers and fund management companies in using
the CISX for the listing of UK REITs when they are introduced.
The
flow of enquiries about the potential for listing REITs
was one of a number of developments at the CISX which
Chief Executive, Tammy Menteshvili, highlighted when
she delivered a presentation to finance professionals
at a recent event organised in association with Jersey
Finance.
The
presentation was arranged to update Members of Jersey
Finance about the growth and development of the CISX
since its inception in 1998 and how it had contributed
to the success of the finance industries in the Channel
Islands.
The
CISX already - in 2006 - listed more than 40 offshore
property funds on the Exchange and, with the requirement
for REITs to be listed on an authorised Exchange, Ms
Menteshvili expressed the belief that the CISX would
be ideally placed.
"We
are being inundated with enquiries from tax advisers
and fund management groups and initial interest indicates
that we are favoured over some other Exchanges," she
explained.
The
CISX chief outlined a number of other developments including
the Exchange’s intention to create an index of CISX
listed securities by sector which would allow tracker
funds to track securities on the Exchange.
She
also revealed that negotiations were taking place to
provide CREST settlement for Open Ended Investment Companies
(OEICs) traded on the CISX, an enhancement to the facility
introduced in 2005 which permitted trading in OEICs
for the first time.
REITs
In Dubai
The
Dubai Financial Services Authority (DFSA) announced
in August, 2006, that rules to permit the operation
of real estate investment trusts (REITS) within the
Dubai International Financial Centre (DIFC) were introduced
with effect from 6th August 2006.
The
rules followed the approval on 1st August 2006 of the
Investment Trust Law, DIFC Law No. 5 of 2006 by His
Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President
and Prime Minister of the UAE, and Ruler of Dubai.
Commenting
upon the new rules, DFSA Chief Executive David Knott
noted that:
“In
many of the world’s major capital markets REITS have
become the most favoured method for attracting public
ownership in property investments. They provide a convenient
form for listed and tradable property ownership with
transparent pricing and liquidity."
He
continued: "The REITS industry attracts widespread investor
support in countries including United States of America,
Australia, Canada and Hong Kong.
"Under
these Rules it will be possible to issue REITS for the
first time in this region, utilizing the facilities
of the DIFX. It will add a significant new dimension
to the UAE’s property market.”
Asian
REITs
Asian
real estate investment trust (REIT) transactions are
using offshore entities in the British Virgin Islands
and the Cayman Islands in increasing numbers, according
to an analysis of the Hong Kong REIT market by Walkers,
the offshore law firm.
“We
have been involved in a significant number of the REIT
transactions in Singapore and Hong Kong in the last
12 months. Direct investment into commercial real estate
in China is also growing rapidly,” observed Hugh O’Loughlin,
managing partner for Walkers’ Hong Kong office.
According
to a recent Standard & Poor’s report, the total market
value of REITs across Asia, including Australia, exceeded
the US$100 billion mark at the time of writing.
O’Loughlin
continued: “One of the trends that we have seen is that
both of these types of deals are using a mix of BVI
and Cayman Islands entities in the same transaction.
Since Walkers offers legal services for both jurisdictions,
as well as Jersey counsel, we are in a unique position
to be an integral part in some of the region’s most
important projects.”
A
significant development in Hong Kong's REIT market in
2006 was the announcement of the first REIT to be offered
by a private firm, Charles Yeung.
“Another
change that could really affect the market over the
next several months is the expected move by Japan to
allow REITs listed in Japan to acquire foreign properties,”
noted Carol Hall, a partner in Walkers’ Hong Kong office.
“Hong
Kong, Australia, and other countries already allow this
as a way to diversify investments and reduce risk, so
this is a sign that Japan wants to be competitive,"
she added.
In
a bid to capitalise on the Asian REIT boom, Walkers
posted O’Loughlin and another partner, Philip Millward,
to its Hong Kong office. Both were previously based
in the Cayman Islands.
Malaysia
is considering cutting its tax on property trusts in
order to become more competitive for investment with
other jurisdictions in the region, particularly Singapore.
Speaking
at a regional real estate investment conference in July,
2006, Kris Azman Abdullah, Director of the Issues and
Investment Division at Malaysia’s Securities Commission
stated that, at 28%, Malaysia's withholding tax on property
trusts was a "stumbling block" to the growth of the
country's market in real estate investment trusts (REITs).
"We
recognise that for markets to be attractive, they have
to be internationally compatible," Abdullah noted.
The
official observed that Malaysia's current tax regime
looked particularly unattractive when compared with
nearby Singapore, which last year cut withholding tax
on property trusts for foreign investors to 10% from
20% for a period of five years.
Nonetheless,
Malaysia was still attracting potential REIT listings,
Kris explained, going on to add that three, including
one Islamic property trust, were considering listing
there that year.
International
mortgages - Do I need one?
One of
the primary considerations, when purchasing property
either domestically, or on an international level, is
raising the necessary amount of money. Unless you happen
to have enough ready cash just lying around (down the
back of the sofa, for instance…), chances are you
will need to take out a mortgage. There are several
options:
1)
Taking out a mortgage with a local bank. You may, however,
find yourself constrained by exchange control rules
(where they still exist). Even in jurisdictions where
exchange controls have been lifted, such as Spain, you
may find that domestic banks and building societies
will charge non-resident foreign nationals higher rates
of interest.
2)
Taking out a mortgage or loan from a bank or building
society in your country of origin.
3)
Taking out the mortgage offered by the developer. Sometimes,
with new complexes, developers will offer their own
mortgages in order to increase sales
4)
Taking out a mortgage with an international institution.
Even if you are confident in your understanding of the
processes involved in purchasing property in your country
of choice, this is probably the most sensible option,
for the simple reason there are likely to be issues
involved in dealing with an expatriate client which
a local provider may not have the expertise to cope
with.
There are
a growing number of international mortgage brokers and
relocation specialists offering international products
tailored to meet the needs of expatriate property investors,
and although it is possible to go it alone, you may
find that enlisting the services of a professional company
experienced in dealing with international markets eases
a purchase considerably, as they are likely to be well
versed in the processes and legislation applicable to
non-resident purchasers, and can often mediate between
yourself and the local entities involved.
What
sort of mortgage?
There are
several different sorts of mortgages available, so you
should really shop around to make sure that the international
mortgage broker or IFA you choose to handle your affairs
offers a wide range of products, from a varied group
of international providers. Below is a basic rundown
of the different types of mortgage available, although
not necessarily all for your country of choice, so you
need to check:
1) Repayment
mortgages. With this type of mortgage, you pay a
little of the interest and a little of the capital off
each month, so that at the end of the term, the debt
has been repaid completely, and the property is yours.
Although in the early years, very little of the capital
is repaid, as the amount of capital owed decreases,
so does the amount of interest which accrues, so towards
the end of the term there is a kind of 'snowballing
effect' in terms of the amount of capital which can
be paid off at a time. This is generally considered
the safest bet in terms of mortgage loans, although
it is usually more expensive than an interest only mortgage.
2) Interest
only mortgages. With one of these, your payments
to the lender simply pay off the interest on the loan,
and the capital is paid off at the end of the term.
Monthly payments are (obviously) lower than they would
be for a repayment mortgage, and the idea is that you
put the money you save on repayments each month into
an investment fund, so that by the time the term ends,
you will have accumulated enough to pay off the mortgage.
Or that's the theory. If your investments do well, you
could be in a position to repay the mortgage early,
or have some money left over at the end of the term.
However, in order for that to happen, your investment
fund needs to bring you returns which are higher than
the interest you are paying on you mortgage, otherwise
there will be a shortfall at the end of the term.
3) Endowment
mortgages. These used to be used quite a lot in
conjunction with interest only mortgages. They are designed
to guarantee that if you die before the end of the term,
the mortgage will be repaid, and to provide a means
of paying off the capital owed at the end of the term.
However, there is no guarantee that an endowment will
repay the loan in full at the end of the term, and as
with many pensions and life assurance products, there
are high 'front-end' costs. Where there is preferential
tax treatment for life assurance premiums they may still
be of some use, but as the majority of expatriates are
excluded from the benefits of domestic pensions investment,
they are rarely suitable.
Usually,
international mortgage providers will offer both repayment
and interest only mortgages at fixed, variable, capped
and sometimes discounted interest rates, all of which
are fairly self explanatory, and have specific benefits
and disadvantages.
International
home-owning - The logistics…
Several
of the problems you may encounter if you decide to purchase
property in a country other than that in which you are
resident are likely to be logistical. Okay, so you can
afford to take time off to find a property in your country
of choice, and maybe even visit a few times a year,
but that is likely to be all. This is where designated
international organisations come into their own.
For example,
in Spain, the completion of a mortgage must take place
in front of an appointed notary, and all parties to
the purchase including the vendor, lawyers, the buyer,
and a representative of the lender. However, if you
are unable to be there due to previous commitments (or
simply geography!) an international broker should be
able to help you obtain a power of attorney, allowing
someone else to sign on your behalf.
Renting
your property out when you are constantly on the move
can be a bit of a headache, but hiring a letting agent
qualified in dealing with international clients could
take the pressure off. They can help you find suitable
tenants, prepare a letting agreement, take the security
deposit, deal with utilities bills, collect the rent
(the important bit!), visit the property on a regular
basis, check empty properties, and undertake property
maintenance during a tenancy.
Costs
Ignoring
taxation (which we will deal with in more detail later),
and quite apart from the cost of the mortgage itself,
there are other expenses to bear in mind when arranging
a mortgage for your investment property, and these vary
considerably from country to country. For example, in
France, the fee level can be affected by the age of
the property (as newer properties attract lower charges),
the number of people involved, and how many outside
agencies (e.g. estate agents, lawyers, brokers, letting
agencies) are involved.
If buying
a property in France, (over and above the broker or
IFA's fee) you should be prepared to pay:
- A land
registry fee, which will vary according to the age
of the property.
- The
notaire's sales commission (where an estate agent
is not used. If an estate agent is used, their fees
are usually paid by the seller of the property).
- Stamp
duty at varying levels (be warned that the rate rises
quite steeply on properties over five years old.
- The
notaire's conveyancing fees, which vary according
to the value of the property.
As previously
stated, costs will vary depending on the location of
your property, as you can see the issue of additional
expenses needs to be taken into account when deciding
whether international property investment is for you-
although the returns can sometimes be spectacular, it
ain't cheap!
The tax implications of international property investment
Capital
acquisitions tax, capital gains tax, inheritance tax,
gift tax, property transfer tax, VAT, stamp duty, tax
on rental income, share transfer tax, land tax…no,
wait a minute. Come back…sit down and take deep
breaths - I didn't mean to frighten you. And see above
for a description of REITs, which 'pass through'
their profits untaxed to individual investors, although
in certain countries there may be 'exit' or 'withholding'
taxes even for REIT income.
Although
the majority of countries impose some kind of taxation
on international property investment by foreign nationals,
it would be a rare (and unpopular!) country which levied
all of the above. The tax implications of your foreign
real estate investment will vary in complexity and impact
according to where it is located, and to a certain extent,
what you intend to do with the property when you have
purchased it. As a general rule, in the majority of
countries if the tax authorities believe that the purchase
was made as a 'commercial' investment (i.e. if you habitually
buy, renovate, and sell on, or if you have bought undeveloped
land with a view to building a housing complex or leisure
facility), they will view you as a property dealer,
and tax your investment accordingly at a higher rate.
Where taxes
are levied on international property investment, they
will usually fall into the following categories:
1)
Taxes on the purchase, acquisition or transfer of the
property or land, such as capital acquisitions tax,
inheritance tax, stamp duty and property transfer tax.
2)
Taxes on the ownership of and/or residence in the property,
such as local and national property taxes, and land
tax.
3)
Taxes on rental income. (If you choose not to live in
the property, be aware that there may be additional
taxes imposed on non-resident or foreign landlords.
Not necessarily devastating, but still a factor to be
considered if buying to let overseas.)
4)
Taxes on disposal of the property, such as capital gains
tax, gift taxes, and death duties
As previously
stated, property taxation regimes vary widely from country
to country, and you may feel that low, or no-tax jurisdictions
are the ideal choice for you. However, in some (although
not all), due to limited resources and space, property
investment opportunities are limited only to the very
wealthy, who must be willing to contribute substantially
to the local economy, and purchase luxury real estate.
Other jurisdictions limit the number of foreign nationals
permitted residence or work permits in order to maintain
the standards of living, and protect the employment
chances of existing residents.
Governments
in non-tax haven countries tend to impose fewer restrictions
on property purchase for investment or residential purposes
by foreign nationals. However, in such countries, the
likelihood is that you will face more taxes on your
investment. Some property investors choose to purchase
international property via an offshore company or trust
in order to bypass some of the taxes levied in high
tax countries, and although this can be a valid option,
it is not suitable in all circumstances. We will discuss
this in more detail later.
Where you
decide to purchase property is, in the final analysis,
a personal choice, and will need to be based on your
circumstances, resources, and eventual goals. If you
have your heart set on retiring to a beachfront house
in the Bahamas, you are unlikely to be satisfied with
a one-bedroom apartment in Cyprus. If, however, you
are looking to subsidise your income by providing affordable
housing to expatriates and other professionals, the
latter would be ideal. It all depends…
Although
tax shouldn't necessarily be the most important consideration
when choosing a property, there is no denying that it's
certainly up there at the top of the list for most people.
Probably the best way to illustrate the variety of taxes,
and the way in which they are imposed, is to look at
three countries with very different tax regimes:
Greece
Currently
in Greece, purchase, inheritance, possession, use, and
donation of property are taxable. Greece has a unified
inheritance and gift tax on property acquired as the
result of a gratuitous lifetime transfer or death, with
the liability resting on the transferee, or beneficiary
of the property. Property situated in Greece, and moveable
property situated abroad owned by both resident and
non-resident foreign citizens is liable for inheritance
tax. Non-residents may wish to reduce their tax burden
by purchasing Greek real estate through a non-resident
company, as then the asset held by them is a shareholding
in a foreign company, which is not subject to inheritance/gift
tax under Greek law. However, this solution will provide
no protection for Greek residents, as the shares themselves
would be subject to the unified tax.
Property
transfers are subject to a 9% tax for property up to
EUR15,000 and 11% for any amount beyond that. There
is also a municipal transfer tax imposed on top of that
equal to 3%.
Ownership
of Greek real estate by individuals is taxed at a rate
of between 0.3% and 0.8% on the value of the property,
after deductions, plus a further 0.25-0.35% real estate
duty known as the TAP, on the whole value of the property.
Rental
income is subject to Greek income tax and also stamp
duty calculated at a percentage of the actual rent,
and payable on a monthly basis. However, no VAT is charged
on payments, and there are no plans to introduce it
while stamp duty is payable.
There are
no capital gains tax implications following the sale
of a property, but the proceeds from a disposal of real
estate which takes place 5 years or less before death
are deemed to be part of the taxable assets of the deceased,
although this presumption can be challenged by the beneficiaries
of the estate.
Tenerife
Tenerife
is the largest of the Canary Islands, which although
they are autonomously governed, for taxation purposes
generally fall under Spanish jurisdiction (although
a great deal of autonomy is afforded to the regional
governments).
When the
purchase, acquisition, or transfer of Spanish property
takes place, one of two taxes will be payable. VAT is
levied on the purchase of newly constructed property
and land immediately available for construction. (In
the Canaries there is an Indirect General Tax for the
Canary Islands, but it is similar in many ways to the
Spanish VAT).
In situations
where VAT is not levied, property transfer tax at a
rate of 6-7% of the purchase price (Escritura value)
is levied instead. When buying newly built property,
stamp duty is also payable. However, there is an exemption
for property investors who create employment, whereby
transfer tax and IGIC are not payable. (Corporate income
tax can also be very low in these cases).
Liability
for inheritance tax is dependent on residence status,
and for non-residents is payable only on Spanish sourced
income or gains. The level of the tax varies according
to the degree of kinship between the deceased and the
beneficiary, and the previous level of wealth of the
beneficiary.
There is
an annual real estate tax payable for both residents
and non-residents, and as in France, a 3% tax levied
on the purchase of Spanish property by non-resident
companies (although there are certain situations in
which this doesn't apply, and property purchased by
a Spanish company, even if all of the shareholders are
non-resident, is exempt from this). Non-resident property
purchasers must also appoint a resident fiscal representative,
and submit a wealth tax declaration. Resident property
owners are exempt from wealth tax on Spanish assets
below a certain threshold, but non-residents must pay
a wealth tax on the total value of their Spanish assets.
Rental
income from property obtained by a Spanish non-resident
is subject to taxation, although maintenance costs and
expenses incurred as a result of obtaining the income
(for example interest paid on mortgages and loans) are
deductible. Capital gains tax on the sale of a property
is levied on a progressive scale related to the difference
between purchase price and selling price, although the
rate is usually higher for non-residents.
The
Cayman Islands
At the
other end of the spectrum lie the Cayman Islands. Other
than import duties (imposed at various rates), and a
stamp duty rate of 7.5% on real estate transfer and
1% on legal documents pertaining to valuable assets
and transactions, there are no direct taxes imposed
on Caymanian residents or non-residents.
There are
no restrictions on foreign ownership of real property
in the Cayman Islands as such, and due to the lack of
direct taxes, it is equally possible to buy a condo
and rent it out for the majority of the year, or to
buy an undeveloped piece of land, and leave it undeveloped
until you have the time and resources to build your
dream home. If you choose the former option, your rental
income will be free from income tax (in Cayman at least),
and the absence of property taxation, or of any rules
stipulating the time frame within which land must be
developed, means that the latter is in essence a 'maintenance
free' investment until such times as you choose to develop
the land.
However,
achieving residence and/or a work permit can be problematic,
as access to employment is fairly restricted for foreigners.
An expat wishing to apply for permanent residence in
the Cayman Islands on retirement should be prepared
to invest a significant amount in local enterprise or
real estate. Caymanian status is usually granted on
a quota basis to citizens from the UK and British dependent
territories, and certain other countries including the
United States, Eire, Australia and New Zealand.
Offshore Companies and Trusts
As you
can see from the examples above, the country in which
you choose to locate your property (as well as your
country of residence if different) will almost certainly
have an impact on the amount of tax payable by your
estate in the event of disposal of the property, or
of your death.
In order
to alleviate some of the tax consequences involved in
the ownership of foreign real estate in high tax countries,
some investors may choose to purchase property through
a non-resident company or trust, often established in
a low tax jurisdiction. Trusts in particular can sometimes
be effective in protecting the investors and their beneficiaries
from punitive estate and death duties. In countries
such as Greece, where there are no provisions in the
country's tax legislation to facilitate the taxation
of the underlying assets of a foreign company, an offshore
company can often be a tax efficient and effective vehicle
in which to hold property investments.
However,
although in some countries (for example Spain, Portugal,
and Australia) non-residents are encouraged to make
their real estate investments through an offshore company,
this form of tax planning may not be effective (or even
possible to implement legally) everywhere, so again
it depends on your chosen location.
In France,
for example, legislation was enacted in 1983 to prevent
property investors from avoiding registration and wealth
taxes. The tax authorities complained that when French
real estate was purchased by legal entities in offshore
jurisdictions, it was impossible to levy the aforementioned
taxes on the sale and transfer of shares within these
entities because they were unable to discover the identity
of the shareholders, due to the stringent secrecy laws
in place. They therefore demanded that a 3% tax be levied
on the fair market value of real estate in France owned
by these companies.
The tax
was later ruled by the supreme court to have violated
the non-discrimination clauses contained in some of
France's bilateral tax treaties, however, and so was
modified. As it stands now, foreign entities which own
real estate in France (either directly or indirectly)
are only subject to the 3% tax if the value of such
real estate represents 50% or more of their French assets.
French residents and foreign companies registered or
resident in countries with which France has a double
tax treaty are also exempted, provided they furnish
the French tax authorities with the identities and addresses
of the shareholders on an annual basis.
Although
double tax treaties are of more interest to corporate
and commercial international property investors, they
can sometimes have an effect on the amount of taxation
that an individual's real estate investment income is
subject to, especially if they are resident in a country
which taxes world-wide income, or are planning to purchase
property in a country which does this. Certain double
tax treaties may enable you to claim tax paid on rental
income from overseas against your domestic income taxes,
or to receive dividends at a lower rate of withholding
tax. However, the number of different tax treaty models,
and the sheer volume of treaties in force on a global
level make it impossible to give a comprehensive picture
of the likely consequences of a double tax treaty in
any given circumstances. We would therefore strongly
recommend that you take advice as to the potential implications
from a qualified professional before making a decision
as to the location of your investment property.
So- Is it worth it?
The answer
to this question will depend on your personal circumstances,
what you hope to achieve by investing, and how much
you can afford to spend. There is a vast spectrum of
opportunities available within the property investment
field, ranging from the ridiculously expensive to the
nicely affordable, and with the help of an international
broker or IFA, you should be able to find something
suited to your tastes and pocket.
Investing
in a 'real' asset, as opposed to an intangible one can
sometimes provide more stability, and property tends
to hold its value better than other commodities. You
do need to be aware that the overall liquidity and health
of the property markets, and possible fluctuations in
interest rates and inflation can affect the value of
your investment, but generally it is possible to achieve
a very healthy return on your investment.
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