Changed regulations for real estate owners – an analysis

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PwC-skatteradgivning-Pen+Paper-solid_0001_maroon.pngThe real estate packaging Committee presented its proposal for changed tax regulations for real estate owners on 30 March. Less than one week later the Government announced that a further consequence analysis was required. It was also stated that the proposal will not be included in the forthcoming autumn budget. However, the Committee’s entire proposal has now been sent out for consultation with the final date for replies being 14 August 2017. Following is an analysis of the proposal.

Contradictory proposal

Taking consideration of not only corporate tax but also the burden of real estate tax, the investigators conclude in their report that the real estate industry cannot be seen to be treated advantageously in terms of taxation in relation to other industries. The Committee has not considered the effects of possible new limitations on interest expense deductions, but leaves this to the Government to consider in its final law proposal.

The Committee is also careful to note that the elimination of tax exemptions for transactions with packaged real estate will probably lead to lower real estate prices, a reduction in new construction, smaller real estate portfolios and higher rents. It can also be assumed that the turnover rate of real estate portfolios will decrease if the possibility of undertaking packaged transactions is prohibited.

In spite of this, it is seen to be ”justified” to propose regulations implying that direct and indirect external transactions of Swedish real estate are equal, with just a few exceptions. One has had, in other words, and with this as the starting point, no need to define what is meant by “packaging”.

Unusual method in the area of income tax

The method the investigators have chosen in their proposal on the income tax area is unusual without any actual forerunners or similar solutions to be found in other countries. To date, this method has been found in special rules within the closely owned company sector, which have previously been introduced as a “stop-rule” to counter-act the corporatization of private housing. As a supplement, a standard income tax is levied to compensate for the elimination of stamp duty.

New tax regulations

According to the proposal, taxation is to take place in the real estate company being sold as in the case of a fictitious sale of, and reinvestment in, the Swedish real estate at market price. This applies on the premise that the company’s assets are primarily comprised of real estate (this also includes foreign real estate assets). Taxation is to take place as soon as any company (self-employed business operators are exempt) has sold one or a number of the shares and the controlling influence over the company owning the real estate ceases. The same applies if the transactions take place higher up in a chain of companies in a group.

It is proposed that taxation can take place under special circumstances, even if controlling influence terminates. The sale of listed shares is, however, exempt. Taxation is to not to apply when the sale is based on liquidation or bankruptcy or in a situation in which the taxation of liquidity for the shares is to be reported for shell company taxation. Neither is taxation to take place if the taxpayer can evidence that the company’s main income and expenses do not refer to real estate. But it is very uncertain if this assessment is to apply for just the year of disposal or over a period of time.

There are no proposed transition rules

The proposal contains no transition rules which implies, amongst other things, that the first sale to take place after the regulations come into effect, and which is covered by the requirements in the proposed regulations, will incur taxation of all historically developed surplus values for the real estate in question – also those arising before the exiting during the previous owner’s period of ownership.

Changes regarding stamp duty

The Committee also proposes that amalgamation measures, in contrast to current regulations, are to be covered by stamp duties. However, it is proposed that the stamp duty rate be reduced to 2 percent and that intra-group transactions be entirely exempt from stamp duty.

Profit liability (capital gains) on real estate sale

The question of the relevance and appropriateness of the regulations on profit liability on real estate sales has been a topic of discussion during many years. Here the Committee proposes that all real estate is treated as capital assets in the corporate sector. In addition, they also propose complete fiscal continuity as regards acquisition values, fiscal residual values and reported depreciation in underprice transfers of buildings with land.

It is more surprising perhaps that one has found that it is within the framework of the work of the investigation to propose an adaption of the regulations based on the merger directive in order to counter-act avoidance of the now proposed tax regulations.

Comments

The proposal produced by the Committee gives rise to a large number of questions, primarily, as regards the manner in which it is to be seen in relation to the goals regarding new housing construction. In addition, one perhaps lacks, in the investigation, a thorough analysis of how it impacts the valuations undertaken in the real estate sector and the financial stability of the sector; not to mention the very large increase in taxes which will take place as a result of the proposal.

The proposal also gives rise to questions of a legal nature:

The legitimacy of the regulations is, as can be expected, dependent on, amongst other things, their predictability and that they are not in conflict with the prohibition on retroactivity. It is true that it is difficult to see that a formal breach of retroactivity prohibition takes place on the basis of the proposed rules. However, in practice, the new rules would initially have a retroactive effect as the current owner of the real estate company would incur taxation of historically earned surplus values which have already been considered in the pricing of this owner’s most recent acquisition. This can be experienced as a sign of a major lack of predictability in the same manner as in the case of the Company Tax Committee’s earlier proposal on interest deduction rules and a reduction of loss carry forward deductions by fifty percent.

An important question which has not been addressed at all in the investigation is that of the tax benefit principle. Here it is proposed that a company be taxed as a result of an owner choosing to sell all or even a small part of its ownership in the company in question. In other words, this affects not just the company but also the remaining group of owners. The company has not incurred any increase in liquidity as a result of the transaction and, therefore, lacks funds from the taxable transaction to cover tax costs. Contributions from the remaining owners can, therefore, be necessary. This can also apply in the case of very limited sales undertaken to spread ownership. Such a lack of liquidity and resultant financial position of the company can also, reasonably seen, give rise to a negative impact on the possibility of group contributions from the company (in those few cases involving year-end transactions where this might be possible).

An interesting question is the impact the proposal, in itself, will have on the real estate market –would the proposal result in such uncertainty in the market that it would negatively impact the transaction climate going forward?

The proposal has now been sent for consultation but considering that it will not be included in the forthcoming autumn budget, it is uncertain if the new tax rules for real estate owners can come into effect prior to July 2018, and to what extent will at all be enacted in their present form. Tax matters will continue to follow developments in terms of the response to this proposal.

Do you have any questions on corporate taxation?

Peter Lindstrand

Peter Lindstrand

Peter Lindstrand arbetar på PwC:s kontor i Stockholm med företagsbeskattningsfrågor och är särskilt inriktad på skattefrågor för fastighets- och byggbolag.
010-213 31 97
Peter Lindstrand works at PwC in Stockholm, specialising in corporate taxation issues and, in particular, tax issues for property and construction companies.
+46 10-213 31 97

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