November 24th, 2020

Private Equity, M&A and Tax

How tax liability insurance is helping to de-risk the real estate industry

By: Dean Andrews

In this interview, head of tax at Acquinex, Paul Barnes, talks to Dean Andrews, division director and head of tax liability insurance in London at BMS Group, about the tax risks that real estate companies and funds are seeking tax insurance on.

Acquinex provides specialist insurance products for deals across Europe. Here, Paul Barnes considers the most important real estate risks which are being insured across European markets.

Dean: What proportion of your time is taken up by quoting and underwriting real estate related tax risks?

Paul: Insurance for real estate clients is consistently taking up about a third of our time, with insurance being underwritten for risks in a wide number of European countries.

Dean: Which country do you insure the most tax risks relating to real estate from?

Paul: Germany.
The most common risk we are asked to insure concerns the application of real estate transfer tax (RETT) to a current transaction. A rewrite of the German Real Estate Transfer Tax Act has been on the cards for over a year, and because there is always a time distance between signing and completion, clients are seeking protection that their contemplated transaction will not be affected by the new RETT law, if it is announced between signing and completion.

We have been issuing policies for such RETT risks in 2019, all through 2020, and we anticipate more in 2021.

Dean: Are there any other German real estate risks that you have been insuring?

Paul: The application of what is known as the ‘extended trade tax exemption’ has been common which exempts rental income from German trade tax. There are various considerations which arise on this such as the position when leasing out fixtures, or providing services such as security, maintenance, or asset management. The trade tax exemption is important, because it is not just the rental income that can be subject to German trade tax, but the capital gain, in the event of an asset sale.

Also, we are increasingly being asked to insure permanent establishment risks of non-German entities that hold German real estate, because the German tax authorities are increasingly looking at whether German companies performing ancillary services for the Propco are agents of the non-German Propco and thereby cause a permanent establishment of the Propco under the local implementation of BEPS Action 7.

Dean: What other European countries do you see the most real estate tax risks emanating from?

Paul: Poland is probably next on the list. We see a substantial number of enquiries which relate to whether the sale of real estate is treated as a sale of a going concern, or of a single asset for VAT purposes, referred to as the civil law activity tax (CLAT). This is especially relevant whereby a number of plots of land are needed to be purchased for a particular construction project.

In France, we are often asked to insure whether an SIIC or SCPI, which are French real estate investment trusts (REITs), and OPCIs, which are alternative French real estate investment funds, qualify as such, because not only does this affect corporate income tax on the French entity, but also affects the amount of French withholding tax on distributions made. We have also insured the VAT treatment on incentives offered by landlords to prospective tenants, and insured liabilities in relation to what is known as ‘office creation tax’ is payable, and the 3% French property tax which can be levied on companies which own French real estate is due.

In Spain, there is a curious piece of anti-avoidance legislation, contained not in the tax code, but in the Spanish Securities Markets Law, and which can impose Spanish transfer tax on the sale of shares of a Spanish company holding real estate.

Dean: What about UK tax risks?

Paul: There is a large number of UK real estate risks in terms of subject matter that we insure. From trading vs investment risks, transactions in land, substantial shareholding exemption qualification to insuring a minimum capital gains base cost.

We have also insured capital allowances streaming risks, and, similar to Poland, whether the transfer of a property is a transfer of a going concern for VAT purposes.

Probably the largest UK tax risk we insure, in terms of frequency, are stamp duty land tax (SDLT) risks and whether the very wide-ranging Section 75A anti-avoidance provision applies, even on what could be a fairly simple transaction such as a hive up. Other SDLT risks that we are often asked to insure are whether the property is residential or mixed use for SDLT purposes, and whether the sale of an empty building is subject to SDLT.

This article originally appeared in International Tax Review.