MONEY MATTERS

Living in a tax free environment in the UAE has meant that many

UAE investors into foreign property markets do not consider tax

planning a vital consideration when investing in foreign property.

Indeed, it is very often the case that NO consideration is given to

using a tax effective structure for the acquisition of foreign property

investments, or to the fact that you may be creating a tax liability to

file tax returns in those countries.

Example: Acquiring Us Property May Mean Filing Us Tax Returns!

The United States generally taxes foreign investors on their US source

income and income that is “effectively connected” (or treated as

effectively connected) with a US trade or business. Under Section

897(a), income from the disposition of a US real property interest

(USRPI) is treated as effectively connected income and, therefore,

subject to net taxation in the United States. Foreign investors with

effectively connected income must file US tax returns.

The international tax considerations in acquiring foreign real estate investment are amongst the most complex areas of law which require careful planning to maximise the benefits and avoid the pitfalls of your real estate acquisition.

Ten Vital Tax Factors To Be Taken Into Account When

Acquiring Foreign Property

To give potential investors an idea of the pitfalls that they may encounter, consider the list below as identifying some very typical taxes that may be levied on your real estate acquisition. These will vary according to the jurisdiction that your property is located in:

• Gift or Inheritance tax when you die, which could be as high as 40 per cent of the value of the property;

• Taxation of your rental income (including the requirement to file returns or suffer, typically, a 30 per cent withholding tax on your rental income);

Foreign Real Estate Investment: Traps and StrategiesWealthy UAE and Saudi investors have been acquiring

luxury properties in London following nationals from

Russia, India, France, Italy and the United States in

capitalising on the low currency and fall in real estate

prices in the UK and Europe. Little is known about the

inheritance or gift tax which is up to 40 per cent of the

value of the property, let alone other considerations.By: Jas Sekhon

9 Free Spirit Sep / Oct 2010

MONEY MATTERS

• Capital Gains Tax on your disposal;

• Taxation of your profits from speculative real estate profits as

income in the foreign country;

• The effect of financing the acquisition must be of

paramount importance to ensure deductibility of interest

against rental income;

• The carry forward of excess interest and management

charges may be important with low income-producing

properties where any resultant capital gain will be subject

to local tax;

• Creating a “permanent establishment” in the foreign country

(meaning taxable presence) may also play an important role

in the over-all tax treatment of real estate profits;

• Indirect taxes such as transfer and registration taxes;

• Value added tax; and

• Intermittent taxes at, say, 10-year intervals on the increase

in value of the real estate or special annual taxes on the

ownership of real estate by non-tax treaty protected entities

The Simple Solution – A Foreign Holding & Finance Company

Typically, clients who wish to acquire foreign real estate should form a holding company in a tax advantaged jurisdiction, such as the UAE (RAK International Company). It is surprising that most UAE investors will acquire these properties in their own names, thereby, immediately creating a potential inheritance tax liability of up to 40 per cent and this can be eliminated as below by simply holding the real estate in a company name and not your individual name.

To minimise taxation on your rental income, the holding company may receive a loan from a related company and pay an arm’s length

interest rate. The funds are provided by the buyer to their finance

entity and then lent to the holding company for the acquisition.

Five Key Advantages of the Structure

The five key advantages of the structure above are:

1. No Inheritance tax on the death of the owner or where a

gift is made (in the UK this may be up to 40 per cent of

the property value).

2. Minimising tax on rental income which may be up to 30 per

cent of the gross rentals received.

3. Minimising capital gains tax – the shares in the company are

transferred and not the property itself;

4. Minimising income tax on the development of the property

as a speculative gain; and

5. Confidentiality and discretion as to the identity of the real

owner (usually resulting in reducing the price paid for the

property as well.)

Of course, you need proper professional legal and tax advice to

ensure that the detail in the structure allows for the accurate

consideration of arms length pricing rules for the interest and the

local tax planning legislation in the home country; however, the

above provides a simple starting point to ensure that you do not

fall into traps in acquiring foreign property which cannot be undone

after the property has been acquired.

Issues such as VAT registration may also be dealt with in expanding

on the above structure. In some jurisdictions, a local company may

also be required to own the property. In our next article we will look

specifically at the acquisition of real estate in Switzerland, where

there are restrictions on foreign entities buying properties.

Sep / Oct 2010 Free Spirit 10

JASWINDER SEKHON

Jas is an international tax lawyer and currently the

head of the T&F (Tax and Finance) Group’s operations

in Dubai, which is a trustee company regulated by the

Dubai Financial Services Authority and is located in the

Dubai International Financial Centre. T&F Group also

have offices in London, Lugano, Monte Carlo, Dublin,

Luxembourg and Panama.