It’s not too much of an exaggeration to say that, until just a few years ago, tax considerations for non-listed real estate vehicles were limited to optimising the tax efficiency of the investment structures – in effect, minimising tax leakage.
In the past few years, however, the amount of tax paid by corporates and other entities engaged in cross-border transactions has come under intense political and press scrutiny. Revelations that major international corporations such as Microsoft, Apple, Google and Starbucks are using SPV structures in different countries to arbitrage tax rules and avoid paying their ‘fair share’ of tax, served as a call to action within the G-20, OECD, NGOs and national tax authorities to put an end to practices that resulted in little tax being paid by some entities.
The non-listed real estate investment industry has responded by taking a close look at our own practices. At the same time, we engaged with the OECD’s BEPS – Base Erosion and Profit Shifting – Action Plan, designed to curb the worst abuses in international tax avoidance.
Real estate is of course a physical asset located in a specific jurisdiction and, as a result, property owners pay property, payroll and transfer taxes in the normal process of doing business. In real estate funds, SPV structures are used primarily to facilitate the financing of assets while ringfencing liabilities. Their principal purpose is not to avoid paying tax. Rather, their goal is to ensure that investors who invest collectively through fund structures do not pay significantly more tax than they would if they had invested alone.
Fortunately, the OECD agrees that real estate fund structures should not be deemed to be abusing the protection of double tax treaties to avoid paying tax when SPVs in different countries are related to the business purposes of real estate and fund management. However, more than meeting the technical tax-related legal requirements of fund structuring, investors want to ensure that legal structures and new funds meet both the spirit and letter of the law. Heightened scrutiny is being applied to tax structures against a backdrop of rapidly evolving tax rules and concerns about protecting reputations against suggestions of tax avoidance.
In a short period of time, tax has become an important strategic issue for real estate investors and fund managers. It’s firmly in the spotlight now.