Real Estate Horizons

The changing landscape of real estate taxation in the UK, Germany, France, and the U.S.

By Elliot Weston, Dr. Michael Dettmeier, Ludovic Geneston and Shawna R. Tunnell

There are some significant changes coming to the way real estate is taxed which will affect investors acquiring, holding, or selling real estate in the UK, Germany, France, and the U.S.

UK

From 6 April 2019, UK tax will be charged on gains made by non-UK resident investors on disposals of UK property and of interests in UK property-rich vehicles (“NRCGT”).

Non-UK residents making disposals subject to NRCGT will generally have 30 days to file a UK tax return and pay the NRCGT so should take advice prior to making any such disposals.

Germany

In the German real estate market, the most important change to law aims at tightening the real estate transfer tax (“RETT”) treatment of share deals.

Today, share deals are generally structured in a RETT neutral way. RETT does not arise if an independent co-investor acquires 5.1% of the shares in the target company or, in the case of joint ventures, if the seller retains a 5.1% interest in the target for five years.

It is proposed that the relevant threshold be reduced from 95% to 90% and the minimum holding period increased from five to ten years.

Additionally, a new provision may be introduced whereby RETT is attracted if, within any given time period of ten years, the shareholding in a company changes, directly or indirectly, by 90% or more. This latter provision would create immense tax risks and is severely criticized by the industry and tax practitioners.

France

The new double tax treaty signed between France and Luxembourg should finally come into force as of 1 January 2020 (instead of 2019 as initially contemplated). The new treaty includes the OECD/ G20 BEPS standards aiming at preventing tax evasion and avoidance, and also contains specific provisions which may impact investors holding French real estate via one or more Luxembourg vehicle(s).

United States

The U.S. tax regulators have been working on providing guidance, mostly in the form of proposed regulations, on the U.S. Tax Reform known as the Tax Cuts and Jobs Act.

On 18 January 2019, the IRS issued final regulations on the Section 199A deduction for “pass-through” entities. Section 199A allows individuals and certain trusts to deduct 20% of their “qualifying business income,” subject to certain limitations. Section 199A also allows individuals and certain trusts to deduct 20% of their ordinary REIT dividends.

The IRS also issued proposed regulations, which clarify that the Section 199A deduction applies to shareholders invested in REITs through a mutual fund. Taxpayers may rely on these proposed regulations until final regulations are issued.