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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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