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Changed rules for real estate owners – this is the Government’s proposal!

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PwC-skatteradgivning-Meeting-solid_0002_burgundy.pngOn 30 March, the Government’s so-called real estate packaging Committee presented its proposal for changes in the regulations regarding taxation of real estate owners. These changes are proposed to come into effect on 1 July 2018, and the proposal will imply that a packaged real estate transaction is comparable with the situation in which real estate is sold directly, that is, not packaged – this refers both to capital gains tax and stamp duty.

The Committee also proposes that land amalgamation procedures should be subject to stamp duty. Examples of positive aspects of the proposal, include the fact that stamp duties are proposed to be reduced to 2 percent and intra-group transactions are proposed to be exempt from stamp duty.

The Government appointed a Committee in June 2015 with the assignment to investigate certain issues within real estate and stamp duties. Today, after almost two years of work, the Committee has presented their proposal.

In brief, this proposal can be summarized as follows:

  • When real estate is sold in a packaged form (in the form of a company), the real estate company is considered as having disposed of the property and then acquired it for market value, thus being forced to pay taxes on a fictive transaction (market value - tax residual value = taxable gain). This is not meant to be applied on intra-group transfers/reorganizations, only external transactions. According to the proposal, the fictive tax is triggered if the controlling influence over the real estate company ceases.
  • The real estate company will also need to report a standardized amount of income to compensate for not having to pay stamp duties ("RETT"), as would have been the case if the property was directly disposed of.
  • The previous exemption from stamp duties applying to the sale of real estate involving certain types of land amalgamation procedures will no longer be in effect.
  • Stamp duty should no longer be levied on intra-group property transactions.
  • The stamp duty tax rate for legal entities will be lowered from 4.25 percent to 2 percent.
  • The classification of real estate as either inventory or capital assets will be eliminated from the corporate sector and all real estate will be treated as capital assets.
  • Intra-group real estate transactions of land and buildings that can be carried out below market value are to support continuity in terms of acquisition values, accumulated depreciation and the tax residual value.
  • An adaptation of the tax legislation based on the EU Merger Directive to prevent the tax avoidance. The amendment is an adaption to the Directive’s wording through new rules on the maximum reimbursement that can be paid in cash in such a restructuring.

The Committee proposes that the changes should come into effect on 1 July, 2018.

The proposal has now been sent for consultation and, then, it is up to the Ministry of Finance to draw up the final bill. Parliament is required to approve the bill before it can come into effect.

Comments

The Committee states that transactions with packaged real estate are very common and the main, but not the only, purpose for undertaking this type of transaction must be to reduce the tax. The Committee’s analysis also reveals that real estate companies pay a low proportion of their earnings in corporate tax compared with companies in other industries, however, considering property-related taxes such as tax on real estate and stamp duty, real estate companies can, still, not be considered to be tax favoured in comparison with other industries.

The Committee also point outs that abolishing the tax exemption for transactions with packaged real estate is likely to lead to lower real estate prices, a decrease in construction of residentials, smaller portfolios and higher rents. The movement in property portfolios can also be expected to be reduced if the possibility of undertaking packaged transactions is abolished.

The decision to propose these changes – in spite of the fact that the new regulations imply that the industry will be overtaxed compared with other industries – is difficult to understand. That lowering the stamp duty to 2 percent can adequately compensate for the increased tax burden appears very doubtful, indeed. The scope of the expected rules as regards interest expense deduction limitations is, as the Committee also points out, something that will affect the overall tax burden for the real estate industry.

The Government has, therefore, a major task ahead of it to evaluate the proposal, together with the expected proposal on interest expense deduction limitations, and how these proposals support the Government’s goals of housing and construction, as well as their desire to maintain an active real estate market.

The reaction from the real estate industry was immediate, and a number of real estate company shares fell on the following Monday. The investigation noted that the real estate industry will, with this new proposal, be overtaxed and that the proposal will negatively affect housing and property values.

Gösta Brunnander, Press Secretary to Finance Minister Magdalena Andersson (S), told Dagens industri that “the proposal is not relevant in the context of the autumn budget”. The Government were also supposed to look at the impact of the proposal before sending it out for consultation.

Sweden currently has a high level of construction activity and there is no intention of slowing it down which is why the Government needs to look a little extra at these matters.

It is encouraging that the Government has taken the industry’s reactions seriously and intends to evaluate the effects of the proposal. However, on 10 April the entire proposal was sent out for consultation and any comments to the proposal should be presented before 14 August 2017.

Tax matters will return next week with a more analytical article on the implications of these various proposals.

Do you have any questions on corporate taxation?

Katarina Menzel

Katarina Menzel

Katarina Menzel arbetar på PwC i Stockholm med företagsbeskattningsfrågor och är särskilt inriktad på skattefrågor för fastighets- och byggbolag.
010-212 47 92, katarina.menzel@pwc.com

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