The Global Magazine for Private

Real Estate Investment & Finance

The 2010 Global Guide to Tax

Levying the world Debt dealing Country updates The big tax take
Taxand’s Keith The impact of Key developments Compare
O’Donnell on the purchasing in China, India, the world’s
global trends that fund distressed loans France, Germany markets with
managers need to know in the US and beyond Taxand’s data

Page 3 Page 6 Page 10 Page 24

Plus: Five issues to worry UK investors Page 22

Table of Contents
COVER STORY 16 India
The new Draft Direct Taxes Code 2009, and what it means
2 Global trends for private equity real estate
We interview Taxand’s head of real estate Keith O’Donnell
on the grand tax themes taking shape globally 18 Luxembourg
One of the most popular jurisdictions for holding companies
is coming under pressure from foreign countries. We take a
COUNTRY REPORTS look at what can be done

20 Switzerland
6 US Why a law passed before the credit crunch is gaining
A question and answer guide to buying distressed loans attention
in north America, as well as a look at new tax rules allowing
distressed property owners to talk to special servicers 22 UK
without penalty. Also, we examine signals from Capitol Hill The country’s tax authority, Her Majesty’s Revenue and
that politicians will overhaul an outdated property tax act Customs (HMRC) has been busy bringing in new rules
affecting fund structuring and the taxation of debt
10 China
We focus on a recent example where a tax authority cracked
down on an offshore structure DATA AND RESEARCH
12 France
The OPCI is on the rise in France, leading tax brains to work 24 Data
out the best overall structure for private equity real estate firms We exclusively reveal initial findings from new global
research tool Taxand T3, showing the world’s most
14 Germany expensive jurisdictions in terms of tax-take
Moves to restrict the deductibility of interest are causing a
headache in Europe’s largest economy

The information contained in this publication is intended only to be a guide. It must not be relied on in, or applied to, specific situations without previously seeking proper professional advice. Even though
reasonable care has been taken in its preparation, the publishers, Taxand and all the members of the Taxand network do not accept any liability for any errors that it may contain or lack of update before going
to press, whether caused by negligence or otherwise, or for any losses, however caused, or sustained by any person. Descriptions of, or references or access to, other publications within this publication do not
imply endorsement of them. As provided in the US Treasury Department Circular 230, this publication is not intended to be used by any person or entity for the purpose of avoiding tax penalties that may be
imposed on any taxpayer. The publishers and Taxand firms have produced this publication in connection with the marketing of Taxand firms’ tax services relating to matters discussed herein. Taxand is a global
network of tax advisory member firms. Each member firm is a separate and independent legal entity responsible for delivering client services. © Taxand Economic Interest Grouping 2009. Registered office:
1B Heienhaff, L-1736 Senningerberg – RCS Luxembourg C68.

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 The 2010 Global Guide to Tax

Editor’s Letter
In the autumn of 2009, the long lull in private equity real estate transactions seemed to be nearing
an end.
The Blackstone Group, for example, acquired a 50 percent stake in London’s Broadgate office
complex in a £2.12 billion (€2.37 billion; $3.4 billion) joint venture, while in Italy, Goldman
Sachs’ Whitehall Funds acquired almost 900 non-performing and sub-performing loans from an
insolvent company.
Plenty more deals have been reported by PERENews.com not only in Europe, but in North
America and Asia.
So what’s the sting in the tail? Well, where there are deals, the taxman is close behind in every
jurisdiction. Politicians need to refill their country’s fast emptying coffers with fresh sources of
revenue. And given that a crackdown on some of real estate’s favourite tax-efficient inventions
began even before the credit crunch, it stands to reason that more effort than ever before is being
exerted by tax authorities on taxing the value creators.
Mindful that this era should usher in a return to super returns, and by definition, potentially
super tax revenue for jurisdictions, what better time to publish a detailed and practical guide to
the tax issues our readers are going to be encountering?
The 2010 Global Guide to Tax - published by PERE and Taxand - is a global publication that
touches on the big issues all firms must grapple with. To begin with, Taxand’s global head of real
estate, Keith O’Donnell, highlights the macro trends in an interview with PERE, on p. 2.
With debt being the new equity, we then look at the tax treatment in the US of buying loans -
something that many funds are currently considering. And regardless of what 2010 brings, our
country tax profiles will help alert firms to local tax issues in these important markets. We think
you will find this of benefit at both a strategic and operational level, need it be said, but in real
estate the difference between winning and losing can often be shaped by tax strategy.

Enjoy the guide,

Robin Marriott
Editor (Europe)
PERE Magazine

November 2009 PERE 1

INterview
 The 2010 Global Guide to Tax

The Taxander take

From crackdowns on abuse of
tax treaties to attacks on interest
deductibility of intra-company loans
and the taxation of debt investments,
there is plenty to concern private equity
real estate. Robin Marriott catches up
with Keith O’Donnell, the global head
of real estate at Taxand, to discuss the
grand tax themes shaping the industry.

November 2009 PERE 3

 INterview
It is August 26 in Luxembourg and
Taxand’s leader of global real estate, Keith
O’Donnell, is getting animated. You see,
he and other Taxanders (the name given
to those that belong to the global Taxand
network), are increasingly seeing deal–
making activity among private equity real
estate clients. This extends beyond Europe
to the US and Asia too.
This is clearly good news. From his
vantage point, more deals equates to more
tax advice required.
But before we delve too deeply into the
machinations of structuring tax efficient
vehicles for, say, cross-border distressed
debt deals, there are more fundamental
macro issues to discuss. The broad point
is that private equity real estate firms can
expect to come under greater pressure from
the local taxman, something all real estate
firms need to be aware of, and possibly act
on. What hasn’t changed is that
cross-border real estate investing
can come with a major tax cost.
Taxand research has shown that
without careful handling, taxes can
exceed 80 percent of the return on
any given investment.
To an extent, local tax
jurisdictions were paying more
attention to private equity
structures even before the credit
crunch, says O’Donnell.
In a typical investor group,
a large proportion of investors will
consider foreign taxes as an absolute cost,
requiring the private equity firm to avoid
unnecessary local taxes as a fiduciary
matter. Private equity houses have to strike
a delicate balance between what is fair and
reasonable in the local jurisdiction and the
fiduciary duty to investors.
In the heyday of private equity from
2004 to 2006, the typical modus
operandi for firms was to take the
tax-base down as low as possible in
local jurisdictions. The typical model
was to use debt funding as extensively as
possible as it creates a deductible expense
in the local country. The debt was a
combination of third party debt and
debt drawn from fund commitments – so
called “internal debt”. This model was
common to traditional LBOs of operating
companies and to the private equity real
estate sector.
However, the problem is that success of
some structures has become a slight curse.
It has drawn the attention of governments,
press and the tax authorities, exemplified
by the takeover of telecoms company
TDC by KKR and a consortium of fellow
LBO titans. In this case, the extensive use
of debt led to a disappearing tax base in
what was a high profile local company.
The reaction was swift with new “earnings
stripping” legislation being introduced in
June 2007. Germany and Italy followed
with similar legislation. The UK and the
Netherlands have proposed similar limits,
adds O’Donnell.
But besides populist point-scoring,
governments now have the added reason
to watch private equity real estate funds
more closely: they need to replenish their
cash vaults given the scale of the national
bailout schemes put into place. Private
equity real estate firms are unlikely to be
key voters and do not win many popularity
contests either, so they are a soft target.
To an extent, the evidence is already
before us. Local jurisdictions in some parts
of the world are increasingly challenging
the “substance” of foreign entities
incorporated to take advantage of cross-
border tax treaties. This can be seen in
various jurisdictions, China included.
Get organised
“It is a big issue for the private equity
real estate world,” argues O’Donnell.
“There have been several cases where
private equity investors have been
heavily challenged by local jurisdictions.
The firms were expecting to exit from
a particular investment without any
tax, applying clear legislation, but the
local tax authority has challenged the
‘substance’ of the foreign companies and
treated it like a ‘letterbox company’.
This happened in a very high profile
manner to one of Lone Star’s real estate
transactions in Korea recently, but
for every case that hits the press there
are many more that are not public. In
addition, some of these cases can take
on a political dimension that can be very
tricky to manage.”
Why does this happen? By their nature
private equity real estate houses are
geographically dispersed and manage large
amounts of assets with relatively small
teams. Tax authorities frequently mount
challenges to investment structures
using legislation and standards
drawn from the industrial age,
arguing that because an individual
legal entity does not have large
offices, employees, or own
infrastructure, it is not entitled
to tax attributes. “This line of
argument may ignore commercial
reality, but it has become a fact of
life,” says O’Donnell. The warning
is clearly: get your house in order.
Says O’Donnell: “Private equity
real estate houses have to accept this fact of
life and organise accordingly.”
Operating within this constraint is a real
challenge and may require private equity
real estate firms to organise themselves
in ways that can feel “unnatural” at first,
the typical example is the balance between
insourcing and outsourcing of activities.
Taxing sitting ducks
While tax authorities are looking to ramp
up efforts to enforce existing tax regimes
and challenge cross-border structures,
O’Donnell also says there is likely to be
more competition between countries to
pull tax revenue in from their own back
yard at the expense of others. So select your
jurisdiction with care.

Immovable objects such as offices and
logistics facilities are sitting ducks for the
taxman at the behest of political masters.
O’Donnell is at pains to point out that
there is a dilemma here. In the eyes of
many, real estate created the global credit
bubble. Now that it has burst, governments
do not want to further depress property
values. Increasing tax barriers to cross-
border investment could lower values
further however.
Yet on the other hand, governments
understandably want to use real estate as a
tool to boost revenue.
Whether that comes through tax
changes or just greater enforcement
of rules, says O’Donnell, is a “moot
point”. He argues: “I think it will be a
blend of the two.” The signs are already
there, though. They can be seen in more
challenges to investment structures in
Germany, France and Italy and legislative
proposals around the globe from the US
to the UK through to India.
If this all seems a little gloomy, then when
the conversation returns to the theme of
transactions, O’Donnell’s tone begins to
lift. Taxanders are reporting from around
the world signs of more activity than in
the recent past, with an emphasis on core
Contact:
Taxand Luxembourg
Keith O’Donnell
T. +352 26 940 257
E. keith.odonnell@atoz.lu
property assets. Taxand is
increasingly busy advising
private equity clients
on the acquisition of
well-let buildings in prime
locations whose values
have already plummeted.
Beside core property,
the good news is that the
opportunities for buying
distressed assets, including distressed debt,
are dumbfounding, as many GPs are aware.
If a firm is lucky enough to have a deal
in front of it, the chances are that the
discount is amazingly high. However,
this raises the prospect of potentially
huge capital gains tax bills being
charged upon exit. Many jurisdictions
treat such capital gains on equity
investments favourably, applying some
form of “participation exemption” to
dividends and or gains on significant
shareholdings. The theory is that the
underlying profits have been already
taxed at the level of the company. But
it is not the same for debt which tends
to be subject to normal taxation. This
means a lot of grey matter is going
into constructing the right platform to
invest in assets in order to escape being
taxed too highly on the expected pick
up in values. Says O’Donnell: “This
is a global issue because the typical
Biography
In July 2004, Keith created Atoz Tax
Advisors with five other partners. Atoz
was a founder member of Taxand, the
first global network of over 2,000 leading
tax advisers, represented in nearly 50
countries. Taxand, founded in March
2005, is headquartered in Luxembourg
and provides international tax advice
to global clients through its member
firms. Keith is the leader of the global
real estate team of Taxand. Previously,
Keith was a tax partner in Andersen and
subsequently in Ernst & Young. Keith
had senior regional responsibilities in the
investment management and real estate
industries within both firms. Keith studied
law at the National University of Ireland
The 2010 Global Guide to Tax
profile of entities in these deals is private
equity funds with investors in multiple
jurisdictions.”
Though huge profits have been made in the
past – think of the early 1990s and the RTC –
the additional challenge of distressed real estate
debt investing is that in the interlude, domestic
tax laws and regulatory frameworks have been
changed (and in some cases improved). The
advice required is complex because advisors
have to marry the tax analysis of legal and
regulatory constraints with any analysis of
bankruptcy issues. With some understatement,
he says: “It gets challenging.”
This looks likely to remain one of the key
areas of tax for private equity real estate
firms to grapple with in coming months.
When combined with governments looking
to challenge tax structures and possibly
introducing new rules, real estate tax
advisors might need to be wizards if they
are to succeed in reducing the tax burden of
investing. The wands are out.
(Dublin), and subsequently qualified as
a Chartered Accountant, as a member of
the Institute of Taxation in Ireland and
as member of the Luxembourg Ordre des
Experts Comptables. In Luxembourg, he
is a member of the ALFI (Luxembourg
Investment Fund Association) tax
commission, chairman of the Double Tax
Treaty Sub-Commission and participates
in various ad hoc consultative bodies.
He was responsible for drafting the tax
provisions of the SICAR (private equity
fund) legislation on behalf of industry
bodies. Recently he has represented
ALFI on the OECD workgroup on the
application of Double Tax Treaties to
Collective Investment Vehicles and was
a member of the EU Commission expert
group on Open Ended Real Estate Funds.
November 2009 PERE 5
 Country Report: US
Buying distressed loans

Debt dealing
A Q&A session with
Frank Walker, Taxand’s
head of real estate in the US
If there is one type of deal activity Frank Walker is deep into, it is advising private equity real estate firms on the tax aspects of buying distressed debt.
Walker, the Atlanta-based managing director of Alvarez & Marsal Taxand US, says clients all over the US are looking at engineering such
deals, and at deep discounts too.
Whether there is an adequate volume of attractive debt out there to truly satisfy all those chasing it is certainly one debate raging in the
market. Sam Zell is one such doubter, judging from recent comments he made to PERE’s US Editor Zoe Hughes in this month’s issue.
But a separate question (and the one tax experts are struggling with) is how a firm should structure a deal if indeed it is fortunate enough
to find an attractive opportunity before it. As a teaser: if you think that the taxman is only interested in US investors, you would be wrong.
Below is a question and answer session on this important issue. See also p. 8 for a legal update.

Q. What happens when an investor buys
debt at a discount and follows through
with significant debt modifications?
A. This may result in ‘phantom income’ to
the borrower and the investor.
Q. When would both the borrower and
investor be taxed?
A. If the modification of the debt instrument
is deemed to be “significant modification”
as defined by US law, this is treated as a
deemed exchange of the old debt instrument
for the new one. This is generally taxable for
both the borrower and the investor. It may
also result in some additional complexity if
the new debt is considered an “applicable
high-yield discount obligation” (AHYDO)
for tax purposes, although Congress has
provided some temporary relief for some of
these complications.
Q. What is modification?
A. It is generally defined as any alteration,
including any deletion or addition, in
whole or in part, of a legal right or
obligation of the issuer or holder of a
debt instrument. That alteration could be
evidenced by an express agreement – oral
or written down – or by the conduct of the
parties or otherwise.
Q. What tax does the investor face?
A. The investor is required to recognise a
taxable gain on a sale or exchange gain if
the new redetermined principal exceeds the
tax basis to the investor of the old debt.
Assuming the debt is not publicly traded
and has “adequate stated interest” under US
tax laws, a deemed gain to the investor is
generally equal to the difference between the
face amount of the modified loan note and
the investor’s tax basis in the original note.
Q. Can this ‘phantom income’ created
by a deemed exchange gain be
significant if the investor is a REIT?
A. Yes. A REIT is required to distribute 100
percent of its taxable income in order to
avoid a corporate level income tax. However,
the deemed exchange gain may result in
capital gain income for the REIT with no
corresponding cash to make a distribution.
Or, the deemed exchange gain may result in
a REIT prohibited transaction. That could
mean 100 percent tax on the net gain.
Q. Is it always clear which one it is?
A. No. Several industry groups such
as NAREIT have requested guidance
on a number of issues with distressed
debt but it is difficult for the IRS to
publish any meaningful guidance with
the prohibited transaction issue. REITs
that are concerned about the prohibited
transaction risk with their transactions
may conduct these activities in a taxable
REIT subsidiary.
Q. What happens when debt instruments
are purchased in the secondary market?
A. The investor may be subject to the
market discount rules. Market discount
would be in an amount equal to the
discount. What happens is that the market
discount accrues over the remaining term
of the debt instrument and the amortised
discount is required to be recognised as
ordinary income as opposed to a capital
gain upon repayment, redemption or
disposition of the instrument.

Q. Does this market discount rule apply
to all forms of debt?
A. It generally applies to all non short term debt
acquired at a discount. The investor may have
to work out if it is better to modify the acquired
loan (subject to the modification rules), or
hold the loan to maturity, redemption, and/
or disposition with its current terms and
potentially face ordinary income treatment as
opposed to capital gain treatment.
Q. How are foreign investors treated?
A. If a foreign entity acquires and modifies a
debt instrument it may affect the applicable
withholding tax rates on the interest income
for the investor under US tax law and/or
a treaty between the US and the foreign
country relevant to the buyer.
Q. What is the withholding tax level?
A. Non-US entities are generally subject to
30 percent withholding tax on the receipt of
certain passive interest income unless they
meet the portfolio interest exception, though
the rate could be subject to a reduction under
the relevant income tax treaty.
Q. Are there any other issues for foreign
investors?
A. There may be. Say a foreign investor
buys a portfolio of distressed debt, and then
modifies the loans significantly. It may be
deemed to be engaging in a “US trade or
business” for US income tax purposes. As a
result, certain income earned in connection
with the business could be taxed in the US as
Effectively Connected Income.
Q. Is this for sure?
A. This is a facts and circumstances
analysis. That is, it is not completely
clear whether the acquisition of a loan
with a view towards or expectation of a
significant modification rises to the level
of a US trade or business. If it does, then
the non US investor may ultimately be
required to file US federal and/or state
income tax returns and be subject to tax
as a US taxpayer as Effectively Connected
Income. To the extent that a portfolio of
defaulted loans is actively managed with a
large number of significant modifications
and subsequent sales of the modified loans
then the activities may rise to the level of
a US trade or business. Foreign investors
concerned about this risk may use a blocker
corporation to manage that risk.
Q. What if the foreign firm invested in
debt indirectly through a US partnership?
A. Then the income earned may also be subject
to withholding tax under the Branch Profits
Tax regime. This is an additional 30 percent
tax levied on net income after Effectively
Connected Income withholding tax which is
subject to reduction under income tax treaty.
Q. And what if the foreign investor
forecloses on the collateral of a loan?
A. This will generally subject the foreign
investor to US income tax consequences such
as federal and state income tax obligations,
tax return reporting requirements, the
branch profits tax regime and/or the Foreign
Investment in Real Property Tax Act
(FIRPTA) on future real property income.
Q. Lastly, we hear a lot about the potential
for firms to buy back their own debt at
discounts. What are the tax consequences?
A. A borrower who repurchases or retires
it owns debt for an amount less that the
outstanding principal amount of the debt
will generally be required to recognise
‘cancellation of indebtedness income’ (COD)
for the difference. It is generally taxable
income unless certain exceptions are met.
Q. What if the borrower buys back its
debt but doesn’t make a change to the
outstanding principal balance?
A. The borrower may still be required to
recognise COD. There is an issue involving
‘related parties’ buying back debt. Working
out whether a party is ‘related’ can be a highly
complicated task full of traps. In a general sense,
US tax law would treat two parties as being
related if the same person or persons owning
more than 50 percent of the borrower directly
or indirectly own more than 50 percent of the
investor/acquirer. It is, as they say, complicated.
Taxand US
Frank Walker
T. +1 404 260 4086
E. fwalker@alvarezandmarsal.com
The 2010 Global Guide to Tax
case study A
A REIT buying non-performing loans at a
discount
A Public REIT acquires non-performing,
non-publicly traded debt with an
outstanding principal balance of $100
for $60 cash in the expectation that the
loans will be modified through a reduction
in principal. The REIT writes the loan
principal balance down to $70. All of the
other terms of the debt including interest
and the term remain unchanged. The REIT
has a potential gain of $10 for which there
is no corresponding current or future cash
payment. The $10 is either 1) Capital
gain income which must be distributed or
subject to a corporate level income tax, or 2)
Prohibited transaction subject to 100% tax.
Planning note: To avoid the risk of 100%
tax on the net income from a prohibited
transaction, many REITs acquire these
types of debt instruments through their
taxable REIT subsidiaries. By doing this,
they concede to a 35% US federal corporate
level income tax rate on the net profit, but
the potential for a 100% tax is eliminated.
case study B
Buying back your own debt at a discount
A corporation owns greater than 50%
of the capital or profits of a borrower
partnership. An investor partnership in
which the same corporation owns 49%
of the capital or profits decides to acquire
the debt of the borrower partnership from
the lender at a discount. Cancellation
of indebtedness income (COD) likely
results to the borrower partnership in the
amount of 49% of the discount on the debt
purchased by the investor partnership. If
the corporation had owned more than 50%
of the capital or profits of both the investor
partnership and the borrower partnership,
then COD income would have resulted in
the amount of 100% of the discount on
the debt acquired. If the corporation had
owned less than 50% of both partnerships,
then no COD income would have resulted.
The case study assumes that the other
owner(s) in both partnerships are unrelated
to the corporate partner. If they are related
directly or indirectly, the situation becomes
more complicated to analyse.
November 2009 PERE 7
 Country Report: US
Restructuring loans

Restructuring securitised
loans rules eased
Distressed US property owners will now be allowed to
talk to special servicers about restructuring securitised loans
before imminent default without triggering tax penalties.
The move has been criticised for reinforcing the ‘extend
and pretend’ attitude of the financial industry.
By Zoe Hughes, PERE Editor (Americas)
New US tax rules will make it easier Roundtable, welcomed the move – but
for distressed real estate owners to it was criticised by some as reinforcing Zell: scale of debt
restructure securitised loans not in the industry’s attitude of “extend and opportunity won’t be
imminent danger of default. pretend”. as ‘significant’ as RTC
To date, owners of loans that had been Roundtable chief executive Jeffrey
rolled up into securitisation vehicles, DeBoer said the move was needed to Sam Zell, the co-founder of Equity
such as investment trusts and real prevent a massive wave of commercial Group Investments has cautioned that
estate mortgage investment conduits real estate debt defaults. “Borrowers the scale of the debt opportunity in US
(REMICs), couldn’t modify a loan until need to be able to talk with their loan real estate won’t be as “significant”
they were about to, or had, defaulted servicers about restructurings in a timely as many predict – insisting extend and
without triggering tax penalties. manner, before the point of default. The pretend will see many borrowers try to
Those rules made it difficult for [Internal Revenue Service] has taken a hang on to assets.
borrowers current on their payments very positive step toward easing today’s Interviewed by PERE magazine at
to hold restructuring talks with special crushing liquidity crisis in commercial the 4th Annual Kirkland & Ellis Real
servicers. real estate.” Estate Private Equity Symposium in
However, in September the US Securitised “conduit” debt accounted New York, Zell said many borrowers
government issued guidance that will for more than 60 percent of the had been given a “hope certificate” by
allow loan servicers to modify loans commercial real estate mortgage market financial institutions, which are willing
where it “reasonably believes there is during the first half of 2007, according to extend maturities when debt service
a significant risk of default … upon to the Roundtable, which predicted payments are current.
maturity of the loan or at an earlier defaults and late payments on securitised To read the full interview with Zell,
date”, without triggering tax penalties. loans could surpass 7 percent by the end see the November issue of PERE
The US lobby group, the Real Estate of the year. published with this guide

Breaking through the trade barriers
Calls for reform of the US FIRPTA taxation rules have fallen
on deaf ears for decades. Now though change could be in the
making. By Zoe Hughes, PERE Editor (Americas)
When it was introduced in 1980, the
Foreign Investment in Real Property Tax
Act (FIRPTA) was intended to prevent
farmland in America’s heartland from being
consumed wholesale by overseas investors.
Almost 30 years since its enactment
and FIRPTA is known to have had much
wider consequences than prohibiting
the acquisition of agricultural land
and operations. Billed as an outdated,
irrelevant, protectionist measure,
opponents say FIRPTA has had a
detrimental impact on US residential
and commercial real estate markets by
restricting additional equity investment in
the asset class.
Until the credit crisis, such arguments
gained little, if any, traction on Capitol Hill.
However, in the wake of the collapse of real
estate markets across the US, there are not
only fresh calls for change – but signs that
lawmakers may be paying attention.
The FIRPTA tax requires sellers of real
estate assets in the US, who are not resident
aliens or US citizens, to allow buyers
to withhold part of the gains from any
disposition for taxable purposes. The tax
is usually 10 percent of the sales price but
can be up to 35 percent – and comes on top
of all other US taxes paid by the overseas
investor or foreign corporation.
Although difficult to quantify, most real
estate investors, especially foreign investors
in US real estate, insist it does discourage
investment in North American assets and
for some a significant barrier to entry.
“If FIRPTA ever had a purpose it has
long outlived it and now needs to be
substantially reformed if not completely
repealed,” says Jeffrey DeBoer, chief
executive of the industry lobby group, the
Real Estate Roundtable.
The Roundtable has been a long-time
proponent of change on the issue, and this
year included repeal of the tax in its five-
point plan aimed at restoring liquidity to
the US real estate markets.
“We now live in a global economy
where capital should be flowing with as
little burden as possible and the current
rules are clearly an impediment to foreign
investment in US equity real estate
transactions,” says DeBoer.
The credit crisis isn’t the sole catalyst of
demands for reform. Concerns over the tax
were heightened in 2007 when the Internal
Revenue Service (IRS) ruled against the use
of private REITs by sovereign wealth funds
as a means of avoiding FIRPTA. Foreign
investors will often invest in US-controlled
real estate investment trusts and blocker
corporations to mitigate FIRPTA. IRS
Notice 2007-55 though further muddied
already murky waters by ruling that
distributions from such entities to foreign
shareholders were taxable.
“This ruling reawakened the debate
about the tax in 2007,” explains Jay
Zagoren, a partner at law firm Dechert’s
finance and real estate group. But as he
The 2010 Global Guide to Tax
adds: “Now with real estate markets
experiencing firesale situations, there is a
greater urgency to calls for change.”
As DeBoer says, with politicians among
those calling for new investment and
capital to be injected into real estate,
excluding foreign investors is simply
counter-intuitive. “There is a tremendous
need for new equity into US real estate
owing to the dramatic deleveraging and
repricing of the asset class.”
Conversations with politicians on Capitol
Hill are in their formative stages but
DeBoer says legislators are keen to learn
more about FIRPTA and its impact on US
real estate. “The meetings we have had
have been very productive and engaging
and I think they will ultimately result in
some change to FIRPTA,” he says.
DeBoer concedes that whether the debate
will translate into repeal or “something
short of that”, it is too early to say. But
to help further the debate, the Roundtable
was due at press time to publish a survey
quantifying the amount of additional
equity US real estate could attract if
FIRPTA was changed.
“A lot of our members meet with non-US
investors who would like to invest more
in the US, but are discouraged from doing
so by FIRPTA,” DeBoer says. “This tax is
discriminatory and needs to be repealed.
Lowering this burden against foreign
capital will help ultimately and be very
positive for US economic growth.”
November 2009 PERE 9
 Country Report: China
Challenging offshore structures

China’s offshore chill

A recent private equity deal that invoked China’s tax treaty with
Barbados shows firms need to structure their offshore vehicles carefully
Peering out of the window of a 52-storey real estate investors are relying on to avoid applied on behalf of the Barbados company
Shanghai skyscraper, Dennis Xu, the leader the same levy. for tax exemption from the capital gain.
of Taxand China, has a better view than The private equity example involves a To the dismay of the US company,
most of the infrastructure miracle that has company from the Xinjiang area of China the Xinjiang tax bureau rejected the
taken place in China’s cities. Glitzy mall and a company from Urumqi that formed a application. Here was an example of the
shopping, five star hotels and the main joint venture in March 2003. Chinese authorities deciding the Barbados
East-West thoroughfare, Yan’an Elevated In 2006, a US private equity firm entity was not ‘of substance’.
Highway, tell the story of how Shanghai Hence, it said the Barbados company
in particular has modernised. could not be treated as being tax
Foreign investors have been playing resident in Barbados because it had no
their part too, buying up or improving management there. In fact, all three
assets. But what is also noticeable is There is now a risk that the tax of its directors were US nationals.
that some of the earliest firms into authorities of China may rely more In addition, the capital gain was not
the city are now beginning to exit on GAAR to challenge transactions made from actual operations but a
investments, such as Morgan Stanley or structures that lack substance.” pre-agreed contractual arrangement.
and Netherlands-based ING Real To make matters worse, it was
Estate. This is turning the spotlight on difficult to determine the nature of the
the tax treatment of transactions involving established an entity in Barbados and Barbados company’s investment. The cost?
foreign firms. through this acquired a one third interest in Witholding tax of 10 percent should be
It is especially the case seeing as there the JV from the Xinjiang company. imposed on the capital gain.
is recent evidence of a crackdown in one Less than a month later according to As Taxand’s Xu explains, though this
of the favourite centres foreign investors Taxand, the Chinese company increased was a private equity deal, the Chinese
have being using to structure funds or its registered capital in the JV. In 2007, the authorities could also challenge private
transactions – Barbados. Just last year, private equity firm’s Barbados company equity real estate structures used for
the government decided that a US private then altered the capital structure. It investing in China as well.
equity firm would have to pay local tax transferred all of its equity interest back Generally, foreign firms will set up a
on a non-real estate transaction despite the to the Xinjiang company making a capital fund offshore either in the form of a limited
firm in question believing it could avoid gain of $12 million in the process. Not a company or limited partnership (Super
withholding tax based on the tax treaty bad profit in less than 12 months. holdco) in domiciles such as Barbados, the
between Barbados and China. This is the It was then that the Chinese authorities Cayman Islands, Mauritius, or the British
same treaty that some foreign private equity began to take notice, because the JV Virgin islands where there is a favourable tax

treaty with China. Barbados used to be the
preferred domicile as it ranks better in tax rate
in terms of tax on dividends and capital gain
tax, but Barbados is losing its appeal as its tax
treaty is under negotiations for renewal.
Companies will also set up special purpose
vehicles under the fund for each investment
into China for better tax planning, financial
accountability and risk control.
But China has now introduced General
Anti-Avoidance Rules (GAAR) under the
new Enterprise Income Tax Law.
Says Xu: “There is now a risk that the
tax authorities of China may rely more
on GAAR to challenge transactions or
structures that lack substance.”
Echoing what Taxand’s head of real estate
Keith O’Donnell says on p. 2, Xu says foreign
investors should review their investment
structures for investments in China in light of
the recent changes.
So far, private equity real estate firms do
not have a significant presence in China,
according to Xu. He says the real estate
market is highly relationship driven. “Most
of the successful players are from Hong
Kong, Taiwan and Asian countries with
some Chinese roots.”
That said, Taxand has worked in the country
for international players such as GE Real Estate
and JP Morgan’s real estate department. “I
think it takes a significant amount of time on
the learning curve here. They are not really in
the development business, but are looking for
mostly commercial buildings that can be leased
and then sold.”
“The whole question is: ‘What is the
government’s attitude towards foreign
investors?’”
There are quite a lot of restrictions for
foreign companies coming into this sector.
Xu says the Government has made
it clear that foreign investors need to
demonstrate a strong background in real
estate. It has also restricted firms so that no
100 percent foreign real estate company is
allowed to operate. Hint: they should tie up
with a local company.
If anything, says Xu, the People’s Republic
is getting hotter on foreign companies
trying to operate in the country. This is
partly because the government is scared
of repeating mistakes made in emerging
markets regarding property speculation.
On tax issues as a whole, China is moving
towards a more international tax system.
In other words, there’s a lot of anti-treaty
shopping regulations coming up.
“Let’s say a foreign investor owns a building
in Shanghai through a holding and financing
structure involving a Barbados company. Let’s
say the Barbados company is sold to the buyer,
as an easy way to effect a sale of a package of
equity and finance instruments that have
funded the building. Legally, there should be
no tax paid. But the new ruling on similar
structures would suggest that if the authorities
decided that the Barbados company were
just a ‘shell ’ or ‘paper’ entity and most of the
activity is in China, the Barbados company
would be disregarded. So the investor could
end up paying capital gains tax.”
Xu adds: “From our perspective, private
equity is going to experience more difficult
times for structuring their assets. On the
one hand central and local governments
The 2010 Global Guide to Tax
want to encourage foreign investment.
On the other hand there is always the
temptation to seek more taxes where a
transaction is visibly profitable. ”
This will be important for new players.
As PERE has reported in the recent past,
despite the economic slowdown, there are
fresh examples of foreign investors trying to
invest in China for the first time. Axa Real
Estate Investment Managers, for example,
has plans to raise a China-focused fund.
It seems that foreign companies are still
keen to invest in the long term growth story.
But they will have to make sure they get their
structures right. Otherwise, the clunking
fist of the People’s Republic of China will
come down hard. The good news is that
real estate is important to China. There are
about 400 industrial classifications in China,
and around 240 are related to the real estate
industry. With that in mind, the government
will (hopefully) be careful in implementing
and applying new regulations that affect the
tax treatment of deals.
The challenge in China as one foreign
investor puts it is that tax laws change quite
frequently.
One fund sponsor told PERE: “The
problems with structuring a China fund
is that policies change quite often and
secondly, it is more tax-efficient to customise
the structure based on deals according to
sectors, development, investments, source of
capital, holding period, even the partners so
there is really no one-size fits all solution.”
Taxand China
Dennis Xu
T. +86 21 6447 7878
E. dennis.xu@hendersen.com
November 2009 PERE 11
 Country Report: FRANCE
OPCIs (Organisme de Placement
Collectif Immobilier)
Friendly France
France recently introduced OPCIs as a tax-friendly way of
investing in real estate. Now, foreign investors are figuring
out if they can use this structure and still get a tax efficient
return on investment
Last year, when PERE magazine visited
MIPIM, the world’s largest property trade
show in France, we met a placement agent in a
café. Having discussed the challenging global
fundraising market, our contact suddenly
became more enthusiastic. Talking about the
future of funds in France, our source said new
rules on OPCIs or Organisme de Placement
Collectif Immobilier was a big event and that
we should expect dozens of firms to establish
themselves under this structure. He was right.
Since then, dozens of funds have adopted
the OPCI regime. These include private
equity and real estate firm Weinberg Capital
Partners, GE Real Estate’s French business,
OPCIs shift gear: an OPCI-led investor group recently
acquired a portfolio of Hotel Formule1s from Accor in one of
the first of the anticipated deals to come
the French real estate asset manager team
at Societe Generale, Invesco Real Estate and
partner Ciloger, and plenty more besides.
Now there are signs of a return to deal
activity. In September, for example, a French
investment group led by an OPCI managed
by asset manager UFG paid global hospitality
group Accor €272 million for a portfolio of
budget F1 hotels spread out across France.
It is little wonder why the new structure is
becoming popular.
Tax benefits
The structure benefits from the same tax
The French Foreign Legion
Invesco Real Estate: Dallas-based
Invesco Real Estate established a
partnership with French asset manager
Ciloger in May 2008 to launch a range
of OPCIs. Ciloger was the first fund
manager in France to transform an
existing fund into
an OPCI.
GE Real Estate France: The Connecticut
firm’s French subsidiary won approval
in June 2008 from France’s Autorite des
Marches Financiers (AMF) to set up
GE Real Estate Management (GEREM)
France so that it can create, promote
and manage OPCI funds.
Tishman Speyer: New York-based
regime as the well-known French SIIC regime
(the French equivalent of REITs) which was
replicated recently in Germany and in the
UK. But contrary to SIIC, OPCIs are not
listed vehicles. This allows private equity
real estate houses to set up their own OPCI.
They are regulated real estate funds set up in
UCI form, but with a specific simplified form
available for the real estate fund managers (the
so-called SPPICAV RFA). In tax terms they
are attractive because they are exempt from
corporate income tax, the objective of the
regime being to have a single taxation at the
level of the unit holders.
In particular, the vehicles are exempt
developer and fund manager Tishman
Speyer set up an OPCI in the first
quarter of 2008. At the time it was
among the first approved.
The Blackstone Group: The real estate
group of the New York-based private
equity firm went very far towards setting
up an OPIC in the autumn of 2008,
but did not go all the way because
it could not find a deal to make it
worthwhile.
F&C Investments: Ofi REIM Paris has
been set up as a joint venture between
French asset manager Ofi and London-
based asset manager F&C to invest in
France.
 The 2010 Global Guide to Tax

provided they fulfill distribution duties: 85
percent of the rental income, 50 percent of the
capital gains and 100 percent of the dividends
received from tax exempt subsidiaries (95
percent owned subsidiaries normally subject
to corporate income tax may also elect for
the exemption regime provided they fulfill the
distribution duties at their level as well). So, the
taxation burden falls to the unit holders and
there is no exemption relief. If the shareholders
are French corporations, the dividends received
from the OPCI will be taxed at the standard rate
of 33.3 percent. The tax advantages do not stop
only at the fund managers of OPCIs. There
is a strong incentive for real estate sellers to
dispose their real estate assets or shares in real
estate companies to an OPCI (though the same
incentive exists for the SIIC). This is because a
seller’s capital gain tax rate of 33.3 percent is
reduced to 19 percent exit tax upon the sale or
contribution of real estate assets to an OPCI
provided that the real estate assets are kept for
5 years by the OPCI. If the OPCI keeps it for
less, it must pay a 25 percent penalty.
Franck Llinas, tax manager with Taxand
France, says there are two types of OPCI – one
for club deals with few investors, and one open
to retail investors. “What we see is the real
estate players trying to implement them using
just a few investors in France,” says Llinas.
OPCIs are not a complete panacea, however.
There are challenges. As a regulated fund,
they are subject to several constraints in terms
of administrative work and communication
to investors. In brief, OPCIs must have an
independent management company approved
by the French market regulator the AMF, and
a depository that ensures assets conservation
and compliance of decisions made by the
management company. OPCIs must have
statutory auditors and must disclose their
“valeur liquidative” (share price): with a
frequency of between two weeks and six months
based on one appraisal (“expertise”) and three
updates (“evaluations”) per year carried out
by two experts acting independently from each
other.
Getting a double dip
From a tax perspective, though, the main
problem with foreign funds establishing
OPCIs is the tax withheld by France at the
time of the distribution of dividends. Indeed,
unless provided otherwise in the tax treaty
concluded between France and the state of
the dividends’ recipient, dividends are subject
to a 25 percent withholding tax. As regards
tax treaty-protected investors, the latter may
benefit from an exemption or reduction of
withholding tax (generally reduced to 10 or
even 5 percent) only in very limited cases as the
OPCI is generally a vehicle not eligible to tax
treaties based on the OECD model.
Most of the time, the country of the investors
will tax the dividend. However, that is not to
say that tax experts cannot find solutions.
The OPCI can still offer some interesting net
after tax returns compared to other traditional
fund vehicles if structured right.
Taxand’s Llinas says: “When there are sound
business reasons, we are trying to get foreign
investors routing their investments through
countries that have old tax treaties with France
that do not impose an effective taxation to invest
in a French OPCI, then apply the tax treaty
between France and the country. From a technical
point of view, the benefit of these tax treaties does
not seem to be subject to any objections but we do
not know how long it will last.”
Private equity real estate firms with
ambitions in France will be watching closely.
Taxand France
François Lugand
T. +33 1 70 38 88 21
E. francois.lugand@arsene-taxand.com

Why OPCIs have created a diplomatic row

Through the years, France has found some tough ways to
make sure investors pay its wealth tax.
The famous 3 percent annual tax on the market value of
real estate was a way to ensure individuals did not try to hide
behind complex company structures in order to escape the levy.
Though it has always had the potential to act as a brake on
foreign investment, investors do have a way around it. They can
take advantage of an exemption by disclosing the identities of
individual investors. In this way, the French authorities can go
after those shareholders to levy its wealth tax.
Revealing all shareholders for private equity real estate
funds might be an administrative burden, and it needs careful
attention from tax experts.
In 2008, the rules were reformed to make it easier, but for
certain funds – namely German open-ended real estate funds –
it is still an absolute nightmare.
By their nature, German open-ended funds have so many
investors – sometimes running into the thousands – that it is
practically impossible for a fund to identify all the shareholders
to the satisfaction of the French authorities.
Aware of this major obstacle, the 2008 reform provided for a
specific and automatic exemption for the French OPCIs (when
they are public OPCIs, not the club deal version) and foreign
funds governed by equivalent rules.
As German open-ended funds are governed by rules very
close to France’s OPCI ones, they assumed they could benefit
from the same exemption. However, officially questioned on
this issue, the French tax authorities have denied the automatic
exemption on the ground that the German rules were not
strictly the same as for OPCIs. Here is an important example
of tax hypocrisy: enacting a rule to be in line with the EU
rules (allowing the European funds to benefit from the same
exemption in theory) and refusing its applicability for obscure
reasons in practice.
This is serious. German open-ended funds are hugely
important to the French real estate market.
In normal times, they regularly invest billions of euros into
the sector. As of the end of 2007, their French investments
represented around €20 billion. Not only might the French
decision curtail future investment, the issue has also apparently
reached a diplomatic level. Here real estate tax has impinged
on relations.

November 2009 PERE 13

 Country Report: Germany
Interest deductibility
A headache in Germany
Germany has made recent changes to the deductibility of
interest, but investors are still worried about their tax bill
There is a real hunger for updates about
deductibility of interest in Germany. PERE
has spoken with one large global buyout firm
with significant assets in the country which
describes the way the German government
has limited the deductibility as being a
“headache”.
The problem is that in recent times,
Germany made moves to restrict the ability
of investors to deduct interest from debt
repayments from their corporate tax bill base.
Like some other jurisdictions, the country
wanted to limit the ability of foreign groups
to move profits out, and so it broadened
German thin-cap (thin capitalisation) rules
in the 2004 Tax Reforms Act. This was
happening at the same time as some of the
biggest private equity real estate houses
acquired mega portfolios. Goldman Sachs’
Whitehall funds, Lone Star, The Blackstone
Group and Morgan Stanley to name but
10 landmark deals in Germany
2000: Nomura International’s Principal Finance
Group signs the largest private equity deal in
Germany buying Deutsche Annington Immobilien.
It was the beginning of a string of billion-plus
privatisation plays of German residential compa-
nies. Guy Hand’s London-based firm, Terra Firma,
subsequently combined that with Viterra for €7
billion to expand the group to 230,000 flats.
four firms which acquired offices, residential
property retail and industrial assets (see box
below).
The hunger for further updates has
become intense because it is making life
tougher for investors. So when the rules
were changed in the beginning of 2008,
Taxand was quick to feed it to clients.
Taxand’s German real estate head, Ulrich
Siegemund, says: “All of our private equity
real estate clients are worried about this.”
Interest barrier rule
Siegemund explains the thin-cap rules contain
a so-called ‘interest barrier rule’ which
basically allows the deduction of interest in
the amount of 30 percent of EBITDA.
This is important as real estate investors
have been particularly hard hit in recent times
because EBITDA from investments is falling.
2004: Dallas-based Lone Star bought a $4.4 billion
book of German loans from Hypo Real Estate.
The vast majority were sub performing or non
performing loans.
2004: The Blackstone Group struck its first residen-
tial deal in Germany, buying around 31,300 rental
apartments mainly in the Northern and Western
parts of Germany for €1.39 billion. The previous
Since real estate investments were so highly
leveraged and EDITDA has been falling
because of the economic downturn, the
interest charge far exceeds the 30 percent
‘barrier’.
No wonder Taxand clients sat up when
in July this year a small exemption to the 30
percent EBITDA rule was allowed.
The change expanded full deductibility
for a tax paying entity that pays less than €1
million interest annually to a higher figure
of €3 million. This rule change increased the
threshold to €3 million for the years 2008
and 2009.
This is clearly good news for real estate
funds with smaller investments. Funds that
set up special purpose vehicles investing up
to approximately €40 million to €60 million
resulting in an annual interest charge below
€3 million due to the new rule can fully
deduct the interest from the tax base.
year the firm acquired a portfolio of office proper-
ties from Deutsche Bank for about €1 billion.
2005: Fortress Investment Group’s Eurocastle fund
bought 303 commerical properties from Dresdner
Bank in a huge €2 billion sale and leaseback trans-
action.
2006: Morgan Stanley Real Estate Investing formed
a joint venture with RREEF to acquire commercial

Larger investments
However, for firms with larger investments,
the exemption is not of benefit. Those investors
who made deals in the multi hundred million
bracket (and above) need not hurt their eyes
looking at the small print of the exemption.
Says Siegemund: “For smaller investments
it is not that big a problem because you have
this €1 million threshold. Now that has been
increased to €3 million you might be fine up
until €60 million. But for the €100 million,
€200 million bracket, it is really changing
the profitability of real estate investments.”
At its worst, players in Germany might
find they are in a loss-position but still have
to pay taxes because of the non-deductibility
of interest.
There are even problems for those who
might be exempt using the €3 million rule.
The wording of the law says the €3 million
threshold is applicable until 2009 only. Says
Siegemund, the previous €1 million threshold
is not mentioned in the law any more so it
seems that there is no threshold beginning
from 2010.
“To abolish the €1 million threshold was
not the intention of the parliament, but it
has created uncertainty and it may take
some time after the recent German election
to clarify this through another tax reform
act,” he adds.
It is of real concern to Taxand’s clients.
One is a state-owned Asia fund that invested
heavily in German real estate.
Siegemund says if a firm cannot benefit from
the €1 million to €3 million threshold, it needs to
think about structures to work the interest area.
The good news is that there are structured
solutions that Taxanders have been able to
provide and advise on that seem to work.
properties owned by Germany property company
DGAG. The deal was simultaneous to the takeover
of DGAG by RREEF and Italy’s Pirelli Real Estate.
2006: Oaktree Capital Management bought the
fiercely contested  €1 billion ‘Hercules’ portfolio
consisting of 45 assets from Deka Immobilien
Investment.
2007: Italy’s Pirelli Real Estate and Deutsche
Bank’s RREEF agreed to buy German residential
property group BauBeCon from New York private
investment firm Cerberus Capital Management for
€1.6 billion.
This involves having to negotiate with the
lending bank, explains Siegemund, and the
bank would have to accept restructuring
in order to benefit from that. That is not a
foregone conclusion, however, as anyone
dealing with a bank with a real estate problem
can attest.
Other exceptions from the 30 percent
EBITDA rule are called ‘escape clauses’
which allow the taxpayer to prove that the
leverage of the German tax-paying vehicle is
not exceeding the leverage of the consolidated
group. Not all firms will be able to use this as
an escape hatch either.
One large global private equity franchise
PERE spoke with said: “The country has
an exemption and escape clause but for an
organisation like ours with considerable
holdings it is very hard to rely on. Has it
meant we have had to pay more tax in
2007: The Blackstone Group
sold its stake in its German
residential portfolio, the Vitus
group, to a consortium of
investors including Round
Hill Capital and Morley Fund
Management in a transaction
valued at approximately €1.6
billion. The deal was made just ahead of the credit
crunch.
2008: Goldman Sachs’ Whitehall Funds
acquired a German residential company
The 2010 Global Guide to Tax
Germany? Yes.”
The firm said it would have to feed the limit
into its financial models when pricing new
investments in Germany.
Comments Siegemund: “Firms have
to consider this when modeling new
investments. It even more severely hurts
them when looking at their existing portfolio
investments because the rule applies to those
investments as well.”
They will certainly make investments in
Germany less profitable. The challenge then
is to minimise the bill and find extremely
profitable deals. That’s where the tax
adviser and the manager comes in.
Taxand Germany
Ulrich Siegemund
T. + 49 6196 592 16364
E. ulrich.siegemund@luther-lawfirm.com
LEG-Verkaufsverfahren with
an enterprise value of €3.4bn,
in one of the last remaining
deals of its kind in the country.
The company owned 93,000
apartments.
2008: Morgan Stanley
acquired the eight-building
Sony Center in Berlin along with Corpus Sireo and
an affiliate of The John Buck Company for MSREF
Fund VI International for around €600 million, one
of the largest ever single asset deals in Germany.
November 2009 PERE 15
 Country Report: INDIA
Draft Direct Taxes Code 2009
India shuts gate
Bad news for investors as India drafts
a law that would close off benefits of
a tax treaty with Mauritius
In early October, PERE’s owner, PEI Media,
hosted its second annual private equity
conference in India.
Among the burning issues raised by delegates
at Mumbai’s Taj Mahal Palace & Tower was
India’s new Draft Direct Taxes Code, 2009.
India, it should be noted, is overhauling
its entire direct tax system – something
that affects Indian corporations as well as
the ordinary man on the street. However,
if passed in its current form, the Code also
has implications for foreign private equity
and private equity real estate firms. This is
because it would curtail the tax breaks foreign
companies currently enjoy by establishing
structures in Mauritius, which is the most
popular jurisdiction used by foreign investors
into India. This is yet another example of
a country looking to install anti-avoidance
tax note: Lock-in periods
Abhishek Goenka details the new law for foreigners
India only opened up its real estate to foreign
investors in 2005. In the initial years, the
conditions for private equity investors expressed
in the so-called ‘Press Note 2’ seemed easy enough
to understand. Press Note 2, which guides foreign
direct investment in Indian townships, housing,
built-up infrastructure and development projects,
provided that the ‘original investment’ made by a
foreign investor in an Indian developer would be
locked in for three years. It seemed to be accepted
that the investment that would be subject to the
lock-in would only be the prescribed minimum
capital of $5 million for joint ventures and $10
million for wholly-owned ventures.
However, over the last few months several
issues have emerged that are giving investors
sleepless nights. One of them is that in July, the
Government contradicted the accepted view
and stated that the entire investment made by a
measures to prevent tax leakage.
There is no doubt the Code would be a major
milestone in India’s development. After all, more
than 50 years have passed since the country
passed the Income Tax Act and the Wealth
Tax Act, so a move to simplify and update the
rules broadly seems overdue. If it progresses as
planned, the Code will become law in 2011.
It is something that foreign investors would
do well to heed, for it will radically alter the
outcome of capital gains treatment.
Abhishek Goenka, a partner at Taxand
India, explains that foreign investments in
India have traditionally been made through
an offshore holding company.
The holding company would typically be in
tax havens such as the Cayman Islands and
the British Virgins Islands. Cyprus, Singapore
and The Netherlands are also often used. But
foreign investor would be subject to the lock-in
of three years. The clarification does not seem
to indicate that the revised interpretation would
apply only to new investments and this changed
position has left several investors having to
recalculate their internal rate of return. More
particularly, in cases where the investment
was made in residential developments, with an
upswing in the demand for housing, several
projects have started generating surplus cash
flows and the absence of an exit mechanism has
resulted in the capital being locked in for longer
periods. In India, the government has signaled
that it sees investment in real estate as a long term
play. There are restrictions on the use of external
debt, for example. The absence of a domestic
REIT model and the limited sources of domestic
private equity add to the problems for investors
with shorter investment horizons.
Goenka says Mauritius has been the most
popular jurisdiction because of its favourable
tax treaty.
Selling shares directly
In many cases, a foreign firm might be making
a capital gain on the direct sale of shares in
an Indian company. The treaty is clear: any
gain on the transfer of shares in an Indian
company by a Mauritius holding entity is not
taxable in India. It is taxable in Mauritius,
but capital gains are not taxable in Mauritius
either. It seems to be an easy win.
That said, there have always existed certain
hurdles to overcome in order to benefit from
the tax treaty.
In order to get the capital gains tax
exemption under the treaty, the Mauritius (or
Cyprus entity) must not have a ‘permanent
establishment’ in India. This means, it cannot
be controlled and managed from India.
This can present a specific headache for real
estate funds, because as one often hears, in
order to be successful in property an investor
needs local knowledge of the property market.
For some, having a large team on the
ground could mean that more decisions are
taken in India, and that might prevent a firm
meeting the permanent establishment rule.
In tax parlance, permanent establishment
is a ‘fact driven analysis’. This simply means
that tax authorities will look at how deal
decisions are made on behalf of a private
equity real estate fund.
But a bigger obstacle would be presented if
the new Code were introduced in its current
guise. Says Goenka: “If the Code comes
through and if the treaties are overridden, the
current benefit available under the treaties will
no longer be available.” The change could

affect the treaty with Cyprus as well as with
Mauritius, he adds.
Sale of shares of the company
outside India
The new Code would also affect tax treatment
of capital gains when a foreign investor sells
shares of a company outside India that holds
the shares in the Indian company.
This kind of offshore gain can also be a
tax trap. The way the law works is like this:
non-residents are taxable on income accruing
‘directly or indirectly’ from ‘any business
connection’ in India or through or from any
property or asset or source of income in India
or transfer of a capital asset situated in India.
Under the Indian law, the ‘situs’ of the shares is
where the company is located.
Goenka says that the Draft Code would
specifically make indirect transfers taxable.
This would at least clarify the position,
because it is not completely clear at the
moment following a recent legal case brought
by the Indian government against UK mobile
phone giant, Vodafone.
The Indian Revenue fought Vodafone over
what it saw as a failure to withhold and deposit
taxes on the capital gain that accrued from an
Indian mobile phone company it took over
in 2007 called Hutch. The capital gain arose
on the sale of shares in an offshore company
through a complex web of intermediate
offshore and onshore entities which ultimately
held shares in an Indian telecom company.
The Indian Revenue sought to tax the sale of
Cayman Island company shares as it ultimately
led to the sale of a controlling interest in the
Indian joint venture. The Supreme Court
of India effectively upheld the action of the
Indian Revenue in a follow up procedure.
The 2010 Global Guide to Tax
However, the Supreme Court did not lay out and current deputy chairman of the planning
any definitive conclusions as regards taxability commission of India, addressed concerned
of the transaction. delegates via video link.
The final outcome of this case could He said the draft was in consultation
impact the taxability of all offshore stages and that the Indian government
transactions with underlying Indian shares. would listen to the voice of foreign investors.
However, as Taxand’s Goenka explains, The message to delegates, though delivered
the new Code would make such indirect pleasantly enough at the conference, was
transfers specifically taxable. not entirely reassuring.
At PEI Media’s conference in Mumbai, the
government was keen to say that the Code was Taxand India
at present just a draft. Abhishek Goenka
Montek Singh Ahluwalia, the former T. +91 80 4032 0000
finance secretary at the Ministry of Finance E. abhishek.goenka@bmradvisors.com
Indian fundraising notes:
India has been a focus for funds of late, but some have been caught up by investor fatigue*
Firm: Axa Real Estate Investment Managers HQ: Paris
Notes: has a plan, though not immediate, for a mid tier residential property fund. Frank Khoo, head of
Asia, tells PERE magazine this month that local people are queuing up to buy new homes. “We were
visiting some mid tier residential developers recently. It was crazy. There was just a queue of people
lining up to buy stuff.”
Firm: Rutley Capital Partners HQ: London
Notes: decided to shelve a residential opportunity fund in August, blaming investor fatigue. Nick Burnell,
managing parter, said: “Clearly it was the wrong time. The supply-demand imbalance for low to
mid-range housing is still there. This was just about what international investors want to do right now.”
Firm: HSH Nordbank HQ: Hamburg
Notes: in July, Germany’s HSH Nordbank and Kuwait’s Noor Financial Investment Company
revealed a partnership to raise $500 million for the India Infrastructure Development Fund with UTI
Asset Management Company, one of India’s largest asset management companies.
Firm: Catalyst Capital HQ: London
Notes: suspended fundraising with joint venture partner Samsara Capital in March 2009. Executive
director, Jonathan Petit, said: “The mood in the market is restrained. We are not doing anything on
this right now as the confidence is just not there.”
Firm: AREA Property Partners HQ: New York
Notes: formed a fund with Indian conglomerate SUN Group in 2006. Together the joint venture raised
$630 million for the SUN Apollo Indian Real Estate Fund. It closed to investors in January 2007.
*as of October 9, 2009 Source: PereNews.com
November 2009 PERE 17
 Country Report: Luxembourg
Fund structuring
Shaping up
Current buzz words such a ‘pyramid’ and ‘rake’ are being
used in tax circles in Luxembourg – they refer to strategies
to fend off challenges from foreign jurisdictions
Are you taking the “rake” or a “pyramid”
approach to structuring your holding
company? The chances are that unless you
are a tax specialist, you will not be sure.
But maybe you should know because they
are both possible solutions for companies
that have not structured correctly. This issue
has taken on great importance recently,
because foreign jurisdictions are increasingly
cracking down on shell entities established in
a jurisdiction in order to benefit from a tax
treaty. If the foreign jurisdiction can show the
company in question is not of ‘substance’ then
it might be able to enforce local tax upon a
transaction.
Luxembourg is the main place for private
equity real estate firms to establish themselves,
so the threat of challenges to structures is
particularly acute here.
Though Luxembourg is tiny (it is only 82
kilometres long) and has a population of
less than half a million, it has grown into
the epicentre for European private equity
real estate firms. One could say that what
Luxembourg lacks in size, it makes up for
in stature.
The country has been a very good place
to site real estate funds investing across
the world for the last 15 years. It was
traditionally known as the world’s largest
domicile for cross-border mutual funds, but
real estate funds began moving in when the
asset class gained institutional credibility.
Taxand’s leader of global real estate Keith
O’Donnell, who is based in the country,
says: “When we analysed the first funds
from a tax perspective, our conclusion
was that one could achieve the same tax
result or better in many other jurisdictions.
However, the blend of the law, regulation,
infrastructure and a benign tax environment
seemed very appealing.” The biggest
real estate funds in the world flocked to
Luxembourg. Over recent years, the range of
funds has expanded. It went from European
vehicles to global funds and closed-ended
opportunistic funds to open-ended core
funds. Finally, says O’Donnell, European
property companies that looked like REITS
but were not technically so, established
themselves in the country. That included
GAGFAH, the German property portfolio
company of New York-based alternatives
firm, Fortress Investment Group.
The problem is that while investors may
have become global, the countries they invest
in remain nationalistic. Generally, they do not
want to lose tax from real estate in their own
back yard.
And so, some jurisdictions have
increasingly sought to do something about
it. They have challenged international
investment structures.
Challenged
There have been several cases where private
equity real estate firms have been heavily
challenged by a tax authority. The firms
in question were expecting to exit from
a particular investment without any tax,
but the local tax authority has challenged
the ‘substance’ of the foreign entity and
treated it like a ‘letterbox company’. It can
be high profile and borderline political. For
example, the Korean authorities publicly
announced in 2005 that five foreign firms
– The Carlyle Group, Lone Star, Goldman,
AIG Real Estate and Westbrook Partners
– had attempted to avoid taxes through
foreign entities. There have been numerous
other similar challenges across the globe,
although most haven’t involved the same
megaphone tactics.
In turn, enlightened private equity real
estate firms (admittedly with more time
on their hands) have been addressing this
structural issue in case of such a challenge by
a local authority.
PERE spoke with one global firm which
likened the issue to a “time bomb”. “We
hear from our own tax advisers that many
firms have not structured their companies
correctly,” said the firm which wanted to
remain anonymous. While today’s problem
may be dealing with loan-to-value issues
and write downs in general, tomorrow’s
issue might well be discovering that the
return on an investment is way less than
originally planned because of an unexpected
tax bill. It stands to reason that some firms
may not have correctly set up tax-efficient
structures. In 2004, 2005, 2006 and 2007
in the vortex of highly-leveraged real estate
deals and LBOs, firms allowed back office
functions to play second fiddle to the
functions of the front office deal machine
to help speed the feast on transactions. In
some cases, the back office became the front
office. One can easily imagine a prolific
private equity real estate firm operating in
Luxembourg employing 10 people spread
over five funds and 50 companies. If a tax
authority decides to challenge just one of
those companies, it might decide it has
not sufficient ‘substance’. In that case,
the unlucky firm might find the tax treaty

benefits of whatever inter-Luxembourg tax
treaty withdrawn from it. Ouch.
The trend is now for tax advisers to tell their
clients they better shape up.
House in order
Says O’Donnell: “Over the last 12 months,
firms have had a lot more time to start
examining whether some of the structures have
actually been implemented correctly. Perhaps
firms haven’t finalised accounts, or haven’t
held board meetings, or employees are still on
the payroll of the foreign firm. This is what
clients have been spending some time on.”
This where the “rake” or the “pyramid”
comes in. These are the names given to just
two approaches that tax experts can take to
structure companies so that should they be
challenged, they will pass a ‘substance’ test.
The “rake” is where say five sister companies
all individually hire a smaller number of
employees and individually occupy premises.
This is a somewhat awkward approach, but
at least one that may make the individual
companies safer from the perspective of some
foreign jurisdictions.
Alternatively, in a “Superholdco” or
“pyramid” structure, all five companies might
be bundled into a single company with all the
activities combined, which gives a more logical
operational fit and a generally better tax
answer. That said, it may also create banking
issues around cross collateralisation.
The 2010 Global Guide to Tax
A third approach would be a “service co”
where a single operational company with
employees and infrastructure may provide
services to several other companies. This is a
good operational answer, but needs careful
handling, otherwise the other companies
could lose their substance. Whatever the
solution, this is exactly the issue keeping
private equity firms and their tax advisers
occupied in Luxembourg.
Taxand Luxembourg
Keith O’Donnell
T. +352 26 940 257
E. keith.odonnell@atoz.lu
November 2009 PERE 19
Country Report: Switzerland
Collective Investment Schemes
Swiss collection
Investors are taking an interest in a pre-credit crunch
law on collective investment schemes which are more
attractive than REITs
Switzerland, it seems, is having the last laugh.
On 8 September at the World Economic
Forum’s “Summer Davos” in Dalian, China,
the country was named the most competitive
economy in the world.
For the Swiss, taking top spot was made all
the sweeter because it managed to dethrone
the US in the process. Just a few days earlier,
America won its battle to force UBS, the
Swiss banking giant, to disclose tax details
of around 4,450 wealthy American citizens.
This was a blow to Swiss credibility and to its
self esteem.
For that reason, coming first in the World
Economic Forum’s Global Competiveness
Report was important to help restore pride.
Notably, the country was placed first
for remaining stable and for its ability to
innovate.
And in a way, this is mirrored by the real
estate market.
Having spoken with real estate
professionals in the country, it is clear they
believe the country has remained steadfast.
Switzerland has not developed into either the
most distressed or the least distressed market
in the world, they argue.
In part, this is persuading some foreign
firms to take a fresh look at the country.
And what they discover is that a tax law
introduced just before the credit crunch could
potentially make the country even more
interesting in tax terms.
At the start of 2007, the Swiss government
introduced the Federal Act on Collective
Investment Schemes. Tax practitioners say
this should bring the overall tax burden
down to an average rate of approximately
12 percent for real estate investors, under
reservation of higher capital gains tax,
depending on the location of the properties in
the various Swiss cantons. Twelve percent is a
low threshold when compared with markets
around the world.
There has been so little transactional
activity since last autumn and too many
unsolved legal and tax questions related to the
new scheme that the act has not really been
on the radar of many private equity real estate
firms. However, during 2008 and 2009 the
new scheme gained transparency and clarity
due to a lot of tax questions being answered.
For this reason, and Switzerland’s apparent
ability to keep its real estate market stable,
investors are again taking note.
Taxand’s real estate leader in Switzerland,
Stephan Pfenninger, confirms clients are
beginning to rekindle interest in the real
estate market, and while few have dived back
in, they are taking note of the new tax scheme
because of its advantages.
Transactions that have occurred in
Switzerland traditionally have followed the
usual pattern to be found elsewhere in Europe.
These tended to be share deals with tax
implications for the Swiss and foreign investors.
Foreign acquirers of real estate – for
example from Israel, the Middle East and
Nordic countries – have been using single
asset entities relying on the tried and tested
holding structure in Luxembourg or the
Netherlands for example, which would
normally allow a tax efficient exit.
However, this route for many jurisdictions
– the Netherlands included – will not apply
any more due to a change of the tax treaties.
The OECD Model Tax Convention no longer
forsees that capital gains on shares in real estate

companies are taxed in the home country of the
investor but in the state where the properties
held by the company are located.
For this reason, tax structures under the
new law on collective investment vehicles
offer attractive alternative set-ups.
Better than REITs
Investors need to know that there is no
REIT structure in Switzerland because the
government decided against introducing
them earlier this decade. At the time, this
disappointed some real estate investors
and advisors. However, as Pfenninger
points out, this has put the spotlight on
the collective investment schemes, which
could turn out to be even more attractive
than REITs.
As GPs and limited partners know
very well, what all REITs have in
common is they do not pay any income tax on
their real estate income as well as on real estate
capital gains. However, profit distributions
made by the REIT to its investors may be
subject to withholding tax. [When a dividend
or interest is paid internationally, the country
from which the payment is made usually taxes
the payment as it leaves, by withholding a
proportion of it, usually between 10 percent
and 30 percent.]
Contrary to the REIT concept, though,
the Swiss real estate income is taxed at the
level of the collective investment vehicles.
Distributions of real estate income by a Swiss
collective investment vehicle to the investor
are not subject to any Swiss withholding tax.
Explains Pfenninger, Swiss investors do not
pay any income tax on the income received
from the investment vehicle. This also applies
to foreign investors depending on the local
tax law of their home country or if they hold
a fiscally transparent investment vehicle. This
is because under the Swiss double taxation
treaties the home country of the investor
should not tax the Swiss real estate income
received by the investor.
The investor will then end up with an
overall tax rate of 12 percent depending on
location of the asset.
In some countries, the investor may be
taxed for the income received from the
investment vehicle but get a tax credit for
the Swiss income tax paid by the collective
investment vehicle. Hence the overall
worldwide tax burden achieved under a
Swiss collective investment scheme on the
investment income is extremely attractive
compared to a foreign REIT concept.
Pfenninger says the above schemes are
attractive because they foresee various legal
forms for collective investment vehicles under
Swiss civil law. The investment vehicle may be an
investment fund, a corporation (comparable to a
Luxembourg SICAV “société d’investissement à
capital variable”) or a partnership (comparable
to the Anglo-Saxon Limited Partnership).
Hence, the new law leads to a great flexibility
with regard to legal form of the vehicle and the
specific needs of the investors.
Tax-wise all these types of collective
investment vehicles are treated principally in
the same way – they can all benefit from the
efficient taxation scheme for Swiss real estate
investment funds.
Pfenninger: clients are taking note
“Quite a lot of real estate clients are envisaging
setting up such a collective investment vehicle,”
says Pfenninger. “People are talking about it.
Comparable to REITs in foreign countries, the
Swiss collective investment vehicle for real estate
is a popular topic.”
Still, there are not many investors who have
The 2010 Global Guide to Tax
implemented such real estate structures yet
because a lot of legal and tax issues were only
clarified in 2008 and 2009.
Taxand has implemented it with one client,
Pfenninger says. However, he adds: “This
is still very new and we are in the planning
stages with a lot of clients.”
Old and the new
The Swiss set-up is certainly ideal for
corporate and individual investors
newly establishing a real estate
portfolio in Switzerland. However,
also pre-existing portfolios may
benefit and be converted into
a collective investment scheme.
Individual investors holding a
big portfolio of Swiss properties
in their private wealth may be
interested in changing this portfolio
into “liquid” assets, that is, tradable securities.
Also corporate investors may seek to
transform their Swiss real estate portfolio held
by a corporation into a more flexible and tax
efficient vehicle.
Says Pfenninger, the transformation of
a pre-existing real estate structure into a
collective investment vehicle legally and
tax-wise is still complex.
In this respect, legal issues, transformation
costs and tax consequences need to be looked
at carefully.
That said, there are possibilities for tax
and cost efficient transformations, and
tax advisors together with the Swiss tax
administrations are looking at ways to
smooth the way.
It is very clear in Switzerland, says
Pfenninger, that the Swiss scheme for
collective investment vehicles is important
and attractive for investors and that further
improvement of the scheme – combined
with the stable Swiss real estate market – will
attract even more investors.
This will no doubt please Switzerland as it
seeks to remain the world’s most competitive
economy next year.
Taxand Switzerland
Stephan Pfenninger
T. +41 44 215 77 03
E. stephan.pfenninger@taxpartner.ch
November 2009 PERE 21
 Country Report: UK
Debt and fund structuring

On Her Majesty’s service

You only have to look to see how much thicker the tax law books are to see how complicated
things have become in the UK. Whatever the good intentions may be behind the constant
introduction of new rules and regulations by Her Majesty’s Revenue and Customs (HMRC), they
have the potential to add administrative burden for private equity real estate funds and their
portfolio investments. In the worst case, as well as damaging the UK’s international reputation
as a location in which to hold assets and establish co-ownership vehicles for investment in real
estate, the changes might give rise to additional overall tax costs. Here are five key issues.

Rules affecting UK fund structuring:

Doubt over offshore funds

Recent changes by HMRC concerning administrative aspects of tax
compliance for UK investment partnerships have caused some concern
amongst the UK investment community. However, there has been some good
news here.
The backdrop is that English limited partnerships (“ELP”) are commonly
used co-ownership vehicles in fund structuring. Provided that they have no
source of income taxable in the UK, non-UK LPs would not historically
have been subject to any tax filing obligation. However recent changes have
meant that in order for the ELP to be capable of filing its own tax return it
would need to include a Unique Tax Reference number (“UTR”) in respect
of each of its investors. Whilst this does not seem unduly onerous, there
has been concern that the perception by non-resident investors would be
that this would constitute a UK filing requirement, and worse, that they
may consider this to be at odds with the tax treatment they were promised
when the fund was being marketed. This would potentially lead to tension
between the investors and the managers. Indeed, the partnership agreement
would probably not allow fund managers to compel their investors to apply
for UTRs.
Following the recent changes, UK investment industry representative bodies
have now reached a compromise with HMRC. The investor does not need to
apply for a UTR directly but rather the ELP can obtain a ‘dummy’ UTR on
behalf of each of the partners purely to enable it to file its own return. As the
UTR would not be issued to the non resident investor, nothing will have actually
changed from their perspective. This is a welcome move that should counter any
perceived loss of competitiveness within the investment industry arising from this
change in practice.
New offshore fund legislation has been introduced
by HMRC that is due to come into force on 1
December 2009. The offshore fund legislation
was originally introduced to prevent UK resident
investors rolling up income in offshore funds and
effectively converting it into a capital gain by
disposing of the interest in the fund. Previously
the legislation was only applicable to collective
investment schemes as defined for regulatory
purposes and so it was relatively easy for fund
managers to understand whether they were in the
regime or not. The new definition of “offshore
fund” is, however, wider ranging and the issue
now for managers of closed-ended vehicles that
would not previously have been in the regime is to
work out if they are caught.
Taking the new definition literally, commonly
used structures for offshore private equity
investment in UK real estate assets could now be
in the scope of the rules. Any UK resident investor
may face adverse tax consequences unless the
fund managers adhere to some complex reporting
requirements. Ahead of further guidance from
HMRC, Taxand’s clients are having to factor in a
consideration of the new rules into structures they
are designing and implementing at the moment.

Rules affecting the UK taxation of debt
Earlier this year, the HMRC introduced a
‘behavioural-based’ penalty regime which
could lead to a 30 percent charge or more
of any unpaid tax arising from the excessive
interest deduction of shareholder debt.
The backdrop to this is that often some
of a fund’s equity in a deal will be interest-
bearing shareholder debt. Even before the
introduction of the new behavioural-based
penalty, there were detailed rules on the tax
deductibility of such associated interest cost
against the income generated by the asset.
One rule is that no deduction is allowed for
interest that exceeds the amount of interest that
a firm would have to pay to an unconnected
third party in an ‘arm’s length’ situation.
This means that in working out the tax
return, one has to consider how much a
third party lender would have been prepared
to advance it and on what terms in today’s
market.
The problem is that given the changes
experienced in the external debt markets
Debt for equity swaps
Many senior lenders Taxand speaks to are
reluctant to foreclose on loans and enforce their
security over the underlying property assets. This
is particularly the case where there have been LTV
covenant breaches but the borrower remains able
to service interest payments on the debt.
One of the alternatives may be a partial debt
for equity swap where the lender opts to convert
some of the loan into equity in the investment.
Debt for equity swaps can contain tax traps
for the unwary which can be avoided if the
transaction is structured correctly.
It is that element of the debt effectively
‘forgiven’ that can give rise to a tax charge for
the borrowing entity. It is a similar problem to
what Taxand is dealing with in the US (see p.
6). In addition, there is a potential tax charge
when a lender wants to exit an underperforming
investment and is willing to accept a cash
amount that represents significant discount to
the face value of the loan.
Again, the borrower could be faced with a
large tax bill on the amount of the discount if
proactive steps are not taken to structure around
the problem.
since the credit crunch, investors are
finding that some of the conventional ‘rule
of thumb’ wisdom regarding how much
additional debt can be introduced into a
typical UK real estate investment structure
may no longer be appropriate.
The amount of shareholder debt that is
within the ‘arm’s length’ limit of borrowing
is likely to now be lower than previously.
The days of banks of lending 100 percent
of the value have been replaced with a more
conservative 75-80 percent LTV.
Any deduction claimed by a private equity
real estate firm in its tax returns must consider
an appropriate level of debt.
In the past, the HMRC penalty regime
was often considered to be fairly toothless
but since the new penalty regime this year
that view has changed. Were HMRC to view
that a tax return included ‘excessive’ finance
deduction on the shareholder debt it will now
look at why that adjustment is required.
It will determine whether claiming
Many of Taxand’s clients are
concerned with how these new
rules are going to affect the
tax deductibility of financing
costs. HMRC will introduce the
Worldwide Debt Cap from 1
January 2010 in what is the most
fundamental change to the taxation
of debt since 1996. In general terms,
the UK’s tax authority wants to deny
international t axpayers a deduction
for ‘excessive’ borrowing costs
allocated against their UK activities.
Bearing in mind the leveraged
nature of real estate investments
it is understandable that many of
Taxand’s clients are concerned.
However, the regime only really
bites where the UK taxpayer’s
financing costs exceed the external
borrowing costs of the taxpayers
‘group’ as a whole. Given the high
Taxand UK
Jonathan Hornby
The 2010 Global Guide to Tax
‘excessive’ finance deduction was careless
error by the taxpayer. If the taxpayer failed to
take reasonable care in determining an arm’s
length level of borrowing then this would
probably be construed by HMRC as careless
behaviour. It could then levy a penalty of up
to 30 percent of the unpaid tax arising from
the excessive interest deduction. If a taxpayer
can be shown to have deliberately claimed
a deduction for an amount they knew to be
excessive the financial penalties can be even
more severe.
For this reason, Taxand’s clients are
increasingly instructing it to perform
credit rating analyses and other economic
modelling to show that the underlying
cash-flows from a particular investment
can sustain the shareholder debt tranche.
These issues are always subjective but in
the case of a tax adjustment a fund that has
performed such a comparability analysis has
a penalty mitigation position because it can
show it acted in good faith.
amount of external debt that is
usually present in most real estate
ownership scenarios the rules may
be of limited application.
That said, the worldwide debt
cap could still be an issue because
a firm will still have to determine
what constitutes external debt. For
this, they have to work out which
entities form the ‘group’ of which
a particular investment vehicle is a
member and this is by no means a
straightforward task.
There might also be problems
for taxpayers with particular
structures in place. For example,
a UK company that is used in
order to hold non-UK investments
might have a structure in which the
investments lend cash back up the
ownership chain to enable the UK
parent to service its debt.
T. (+44) 207 715 5255
E. jhornby@alvarezandmarsal.com
November 2009 PERE 23
 TAXAND T3 RESEARCH
Tax-take around the world
Taxand has collated and analysed data from around the
world to rank the most expensive locations in terms of
tax-take from property income. Here we exclusively
present the initial findings
As value creators, private equity real estate
firms and their investors need to be aware
of how much income from investment goes
to the taxman.
With that in mind, Taxand has plugged
into its global real estate team to collect
and analyse data from all the major
jurisdictions. For the first time, we can
exclusively present the initial findings.
Readers will discover on the following
pages a comparison of non-recoverable tax
on income from office property, residential
assets and healthcare-related property in
the major markets around the world.
Comparing taxes on income from
property in multiple jurisdictions is
inevitably a tricky exercise, to say the least.
Bear in mind, for example, that laws and
tax rules can differ even depending on the
location of an asset within a certain country.
Nevertheless, Taxand has weighed all
these complicating factors and a multitude
of other factors in its “Taxand T3”
research.
Beginning with the chart on the opposite
page, Taxand concludes that in terms of
income from office property, the US is the
most expensive location in the world.
Some 43.3 percent of rental income –
taking into consideration any construction
costs – is lost to the taxman.
The reason for this is as follows: the
high rate of income tax (35 percent),
additional state taxes (6.6 percent)
and non-recoverable sales taxes on
construction, all contribute to the high rate.
On the following page, we present findings
for residential property and health-related
assets such as medical centres. There are some
differing results, as readers will discover.
Though not analysed specifically, it is
notable that the US is both the largest
developed commercial real estate market in
the world, and the country that levies the
most amount of tax on office property.
Three countries with the highest tax-take
from office property are also in the top ten
largest real estate markets: the US, UK, and
China.
At the other end of the spectrum, India
appears to have a low tax-take compared to
major markets around the world. It hardly
need be said that India requires massive
expenditure (and perhaps incentives for
investors) to develop and upgrade its office
market. Happily, at least the tax-side of
the equation seems to be in line with this
aim. Taxand’s data suggests the total
non-recoverable tax from leasing an office
building in India is just 5 percent. But this
is because of the high annual depreciation
rate, which largely wipes out income tax.
Methodology
To arrive at the figures, Taxand has taken
into account VAT (or its local equivalent),
corporate income tax, and property
taxes. The property taxes were usually
subject to country-specific assumptions
and modifications as they often differ on
a municipality basis or sometimes just
location basis. These were reviewed by
the coordinating Taxand team to assure
comparability. Administrative fees,
notary fees, court fees were excluded as
they have a relatively low impact on the
overall tax-take.
To ensure comparability of the results,
certain data has been fixed such as size
of the building, investment costs, and
100 percent non-interest bearing equity
financing.
With all of that built into the model,
each real estate team from Taxand
adapted it to the local law. For more
information about the methodology and
for further findings stemming from the
global Taxand T3 research, please contact
Abigail Tarren at atarren@taxand.com
or Lynne Sandland at lsandland@taxand.
com.
And now, without further ado, here are
the most expensive tax jurisdictions in
the world.
 The 2010 Global Guide to Tax

Tax on office income

This chart compares the tax-take on the income (the rent) from an office building depending on its location in the world.
In the US, 43.3 percent of the income from an office lease is swallowed up by tax, the highest rate in the world.

50

45

40
% tax-take from the income of an office property

35

30

25

20

15

10

0
ER AL
IL

Y
N
K

FR S

TU S

D
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Y
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SA

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Tax on office income versus size of market

$4.5
$4.0
Here is a comparison between the largest investible real estate markets in the world and the tax-take from office property income in those
$3.5
jurisdictions. The US is the largest market and also has the greatest tax on income. $3.0
$2.5
Ranking of largest real estate Ranking in terms of $2.0
markets in the world tax-take from office income ratio $1.5(%)
$1.0
1. US 1 $0.5
43.33
2. UK 4 $0.0
33.80
2001
2000

3. China 8 29.04
4. Germany 16 20.66
5. France 12 24.50 A
A
November 2009 PERE 25 A
Tax on residential property income

This graph compares the tax-take on the rent from residential property depending on location. In the US, 42 percent of the income
is absorbed by tax. The UK’s low rate is explained by the lack of VAT on construction and medium income tax rate.

50

45
% tax-take from the income of a residential property

40

35

30

25

20

15

10

0
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Tax on healthcare-related property Tax on selling a residential property

Here is a comparison of the tax-take on income from healthcare When it comes to selling a home, France is the most
related assets. Again, the US has the greatest ratio of tax-take. expensive country with 22.03 percent swallowed by tax.
Compared with office income, which is taxed at an average of 25 This is mainly caused by the high rate of income tax
percent, healthcare property is taxed more heavily at an average (33 percent) and VAT rate of 20 percent on the sale of
of 30 percent. residential units.

50 50
% tax-take from the income of a healthcare property

45 45
% tax-take from the income of a residential sale

40 40

35 35

30 30

25 25

20 20

15 15

10 10

5 5

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PR
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CH
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SW ME
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NE

ABOUT TAXAND
Taxand is a global network of leading
tax advisors from independent member
firms in more than 50 countries. Our
tax professionals – more than 300 tax
partners and 2,000 tax advisors – grasp
both the fine points of tax and the
broader strategic implications, helping
you mitigate risk, manage your tax
burden and drive the performance of
your business.
We’re passionate about tax. We
collaborate and share knowledge,
capitalising on our collective expertise to
provide you with high quality, tailored
advice that helps relieve the pressures
associated with making complex tax
decisions.
We’re also independent – ensuring that
you adhere both to best practice and to
tax law and that we remain free from time-
consuming audit-based conflict checks.
This, coupled with the compact structure
of our member firms, enables us to deliver
practical advice, responsively.
We provide services our clients seek at the
global level, on a global scale. Wherever you
face tax issues, we can help – by providing
high quality advice that addresses your
strategic concerns.
Real Estate has become an international
asset class – and real estate transactions
have become more complex than ever
before. To make sure your investments in
property achieve the best possible after-tax
performance, you need dependable, practical
cross-border tax advice throughout the entire
lifecycle of your investment.
The extreme sensitivity of real estate makes
quality tax advice paramount. The effective
tax rate on an otherwise profitable deal can
exceed 80 percent with poor counsel while
good advice can push that rate below 10
percent. The models for owning, developing
and holding real estate are changing
around the world. Increasingly, investors
require liquidity in an asset class that was
traditionally illiquid. Taxand advisors help
you profit from shifting market dynamics by
minimising the tax obstacles to real estate
transactions.
Taxand’s understanding of the tax advantages
for sellers and purchasers gives you the advantage
in negotiating prices and closing deals. Our
approach is tailored to every circumstance – for
example, we facilitate the acquisition of properties
through corporate structures to protect capital
The 2010 Global Guide to Tax
gains on disposal and optimise income flows
to owners. At every turn, our objective is to
maximise the value of your investment.
Our extensive real estate tax experience gives
you the advantage in negotiating prices and
closing deals. We draw on specialist transaction
level knowledge and create acquisition and
holding structures that make business sense and
keep tax costs down. We help you determine
the best ways to address the current market
conditions of today and in the future.
Taxand’s independence advantage means we
can act quickly to deliver the answers you need
and avoid audit-based conflict.
At Taxand we deliver:
• Tax efficient real estate structures
including investment funds and reits
• Tax advice surrounding transactions,
disposals and spin offs
• Construction and development
project related tax strategies
• Tax neutral financing arrangements
• Vat planning
• Tax due diligence
• Tax litigation
• Tax compliance
November 2009 PERE 27
 Taxand’s global
real estate team
TAXAND’s Global
Real EsTate TEam
This guide is brought to you by Taxand’s global real estate tax team comprising expert advisors from nearly 50 countries worldwide. We provide
well considered tax advice to a wide range of clients including listed and non-listed real estate companies, developers, financial institutions, pension
funds, real estate investment trusts and funds, management companies and high-net-worth individuals.
Article contributors:
CHINA
Dennis Xu
T. +86 21 6447 7878
E. dennis.xu@hendersen.com
Dennis is the key Chinese member of Taxand’s
global real estate tax team. He is also a
founding partner of Hendersen Taxand based
in Shanghai. He maintains good relationships
with Chinese state and local governments and
has been advising the government on a number
of projects.
FRANCE
François Lugand
T. +33 1 70 38 88 21
E. francois.lugand@arsene-taxand.com
François is the key French member of Taxand’s
global real estate tax team. He is also a partner
of Arsene Taxand where he set up the real estate
practice in Paris. François delivers tax advice to
key real estate entities from developers to REITs
and foreign real estate funds.
GERMANY
Ulrich Siegemund
T. + 49 6196 592 16364
E. ulrich.siegemund@luther-lawfirm.com
Ulrich is the key German member of Taxand’s
global real estate tax team and heads Taxand’s
German tax practice, Luther. He has 18 years
experience in national and international tax law,
acquisitions, structurings and restructurings. He
has served foreign multinational groups in
different industries investing in Germany, and
German groups of companies investing abroad.
INDIA
Abhishek Goenka
T. +91 80 4032 0000
E. abhishek.goenka@bmradvisors.com
Abhishek is the key Indian member of Taxand’s
global real estate tax team. He is also a partner
of BMR Advisors, Taxand India, where he heads
up the firm’s real estate and technology industry
practices. Abhishek has more than 12 years
experience advising a number of international
and domestic companies particularly in the real
estate and technology sectors.
LUXEMBOURG
Keith O’Donnell
T. +352 26 940 257
E. keith.odonnell@atoz.lu
Keith leads Taxand’s global real estate tax
team and is now the managing partner of Atoz,
Taxand Luxembourg. Keith has advised many
global groups on the design and implementation
of tax strategies and has been instrumental in
shaping legislative change in coordination with
industry groups.
SWITZERLAND
Stephan Pfenninger
T. +41 44 215 77 03
E. stephan.pfenninger@taxpartner.ch
Stephan is the key Swiss member of Taxand’s
global real estate tax team. He is also a partner
of Tax Partner AG Taxand, the leading
independent Swiss firm of tax advisors. Stephan
particularly focuses on the planning and
implementation of Swiss real estate transactions,
the creation of Swiss tax-efficient real estate
investment products and the coordination of
foreign real estate transactions.
UK
Jonathan Hornby
T: (+44) 207 715 5255
E: jhornby@alvarezandmarsal.com
Jonathan is the key UK member of Taxand’s
global real estate tax team. Jonathan is also a
Senior Director with Alvarez & Marsal Taxand
UK LLP and brings more than 13 years of
corporate and international tax experience.
Throughout his career he has worked extensively
with multinational organisations operating
across a range of industry sectors. Jonathan leads
the real estate tax practice in the UK advising
clients on all aspects of the investment life cycle
from initial structuring considerations through
ongoing operational issues and tax efficient exit
scenarios.
US
Frank Walker
T. +1 404 260 4086
E. fwalker@alvarezandmarsal.com
Frank is the key US member of Taxand’s global
real estate tax team. He is also a Managing
Director with Alvarez & Marsal Taxand LLC
and has over 35 years experience working for
clients across the real estate, hospitality and
construction industries. He has been deeply
involved in structuring and implementing
transactions for public and private companies
including delivering advice on REITs.
 The 2010 Global Guide to Tax

To discover how Taxand can deliver your global real estate tax advantage
contact your nearest Taxand real estate advisor.

ARGENTINA DENMARK JAPAN PAKISTAN SPAIN

Ezequiel Lipovetzky Anders Oreby Hansen Eiki Kawakami Dr. Ikram-ul-Haq Manel Maragall
T. +54 11 4021 2300 T. +45 72273602 T. +81 3 3222 1401 T. +9242 530 0721 T. +34 253 37 00
E. ezequiel.lipovetzky@ E. aoh@bechbruun.com E. e-kawakami@ E. ikram@huzaimaikram. E. manel.maragall@
bfmyl.com kojimalaw.jp com garrigues.com
FINLAND
AUSTRALIA Janne Juusela KOREA PERU SWEDEN
Simon Clark T. +358 9 6153 3431 Stephan Kim Pablo Sotomayor Mikael Löwhagen
T. +61 2 92 25 59 57 E. janne.juusela@borenius. T. +82 2 2112 1144 T. +511 610 4747 T. +46 8 522 441 45
E. simon.clark@ com E. sekim@sojong.com E. psotomayor@ E. mikael.lowhagen@
gf.com.au mafirma.com.pe skeppsbronskatt.se
FRANCE LUXEMBOURG
BELGIUM François Lugand Keith O’Donnell PHILIPPINES SWITZERLAND
Eric Picavet T. + 33 1 70 38 88 21 T. +352 26 940 257 Euney Mata-Perez Stephan Pfenninger
T. +32 2 761 11 32 E. francois.lugand@ E. keith.odonnell@ T. +632 811 25 00 T. +41 44 215 77 77
E. e.picavet@abtaxand. arsene-taxand.com atoz.lu E. ejmperez@ E. stephan.pfenninger@
be salvadorlaw.com taxpartner.ch
GERMANY MALAYSIA
BRAZIL Ulrich Siegemund Renuka Bhupalan POLAND THAILAND
Débora Bacellar T. +49 6196 592 16364 T. +603 2032 2799 Andrzej Puncewicz Hatasakdi Na Pombejra
T. +55 11 21 79 46 00 E. Ulrich.Siegemund@ E. rb@taxand.com.my T. +48 22 324 59 00 T. +66 (0) 2632-1800 ext 111
E. dba@bmalaw.com.br luther-lawfirm.com E. andrzej.puncewicz@ E. hatasakdi.np@
MALTA taxand.pl hnpcounsel.com
CANADA GREECE Mary Anne Inguanez
Vince Imerti Marina Allamani T. +356 2278 7700 PORTUGAL TURKEY
T. +1 416 369 7100 T. +30 210 6967 000 E. maryanne.inguanez@ Fernando Castro Silva Uluc Ozcan
E. vince.imerti@gowlings. E. m.allamani@zeya. avanzia.com.mt T. +351 21 382 12 00 T. +90 212 337 00 23
com com E. fernando.castro.silva@ E. uluc.ozcan@erdikler.com
MAURITIUS garrigues.com
CHILE INDIA Gary Gowrea UK
Fernando Barros Abhishek Goenka T. +230 405 2002 PUERTO RICO Jonathan Hornby
T. +56 2 378 8907 T. +91 80 4032 0000 E. gary.gowrea@ Edgardo Sanabria T. +44 207 715 5255
E. fbarros@bye.cl E. abhishek.goenka@ multiconsult.mu T. +787 999 4400 E. jhornby@
bmradvisors.com E. esanabria@zatax.com alvarezandmarsal.com
CHINA MEXICO
Kevin Wang Manuel Tamez ROMANIA UKRAINE
T. +86 21 6447 7878 INDONESIA T. +52 55 5201 7403 Angela Rosca Oleh Marchenko
E. kevin.wang@ Prijohandojo Kristanto E. mtamez@macf.com. T. +40 21 316 04 93 T. +380 44 492 8282
hendersen.com T. +62 21 8399 9919 mx E. angela.rosca@ E. omarchenko@
E. prijohandojo@pb-co. taxhouse.ro magisters.com
COLOMBIA com NETHERLANDS
Mauricio Piñeros Frans Duynstee RUSSIA USA
T. +573 321 02 95 ext IRELAND T. +31 10 201 05 00 Andrey Tereschenko Frank Walker
221 Brian Duffy E. frans.duynstee@ T. +7 495 967 0007 T. +1 404 260 4086
E. mpineros@gpzlegal. T. +353 1 6395 157 vmwtaxand.nl E. a.tereschenko@ E. fwalker@
com E. brian.duffy@ pgplaw.ru alvarezandmarsal.com
williamfry.ie NORWAY
CYPRUS Jon Vinje SINGAPORE VENEZUELA
Christodoulos Damianou ITALY T. +47 23 11 65 00 Sundareswara Sharma Manuel Candal
T. +357 22 699 222 Guido Arie Petraroli E. j.vinje@selmer.no T. +65 6238 3083 T. +58 212 750 00 95 ext 101
E. chris.damianou@ T. +39 02 7260591 E. sharma@khattarwong.com E. mcandal@taxand.
eurofastglobal.eu E. gpetraroli@ com.ve
fantozzieassociati.it

For general enquiries contact: Keith O’Donnell Visit www.taxand.com to access your
Luxembourg global network of more than 2,000 leading
T. +352 26 940 257
E. keith.odonnell@atoz.lu tax advisors across nearly 50 countries.
 Your global network
of leading tax advisors

REAL ESTATE TAX ADVICE

This guide is brought to you by Taxand, a global
network of leading tax advisors from independent
member firms in nearly 50 countries.

Our global real estate tax team brings together

specialists who provide cross-border tax advice
to make sure your investments and divestments DEDICATED TO TAX
in property achieve the best possible after tax
performance. LOCAL KNOWLEDGE, GLOBAL VIEW

Our independence ensures that you adhere both to

PARTNER LED FROM START TO FINISH
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