Taxation and acquisition vehiclesTypical tax issues and structuring
What are some of the typical tax issues involved in real-estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?
Tax issues arising from a real-estate investment may vary depending on the nature of the transaction, for instance whether the acquisition is implemented as a share deal, an asset qualifying as a going concern including one or more real-estate assets or as a stand-alone real-estate asset not qualifying as a going concern. In this connection, main tax issues consist of:
- the step-up of the tax basis of the transferred assets;
- the transfer of the tax losses of the seller;
- the indirect tax burden;
- the transfer of the tax liabilities; and
- the taxation upon exit from the investment.
In a share deal scenario, a step-up of the tax basis of the assets owned by the target is not recognised unless the acquisition is carried out through an Italian company acquiring and merging with the target.
In this scenario, a share deal is less attractive for the buyer than an asset deal (which entails a tax step-up), but for a non-Italian resident seller’s perspective a share deal may be more efficient, due to the possibility of obtaining exemptions from Italian taxation on capital gains. Such a mismatch of interests is generally balanced in the market via a discount on the purchase price, somehow reflecting the circumstance that no tax step-up is obtained by the buyer.
Generally, in an asset deal scenario, the transfer of assets allows the buyer to obtain the step-up of the same assets for tax purposes.
In a share deal scenario, any tax losses of the target are maintained, save for the application of certain anti-avoidance rules providing for expiration of tax losses. Anti-avoidance rules also apply in cases of merging the target, limiting the carry forward of losses by the surviving company, should certain ‘vitality’ tests not be met. In case of asset deal, none of the tax losses are transferred to the buyer.
Indirect tax regime
In a share deal scenario, the indirect tax regime is generally less burdensome than in an asset deal scenario. On transfer of stock a fixed amount registration tax of €200 applies. A financial transaction tax at 0.2 per cent rate also applies in case of joint-stock companies.
In an asset deal scenario, tax regime varies between asset qualifying as a going concern including one or more real-estate assets, or stand-alone real-estate asset not qualifying as a going concern.
In the first scenario, the transfer of assets is not subject to VAT; instead it triggers a registration tax, the rates of which depend on the nature of the assets included in the going concern (generally, 9 per cent on real-estate assets, 0.5 per cent on receivables and 3 per cent on goodwill and other assets).
In the second scenario, the indirect tax burden depends on the nature of the transferred real-estate assets (eg, buildable land, agricultural land, commercial or residential building) as well as on the nature of the seller: in particular, the transaction may trigger VAT or not and this also affects the transfer tax burden.
Transfer of tax liabilities
In a share deal, all the tax liabilities of the target company are transferred (see question 14). The buyer is jointly liable with the seller in respect of taxes and penalties connected with violations for the transferred going concern related to the fiscal year in which the sale occurs and the two preceding fiscal years, as well as for assessments notified in the aforementioned period, even if related to previous fiscal years. However, a tax certificate may be requested to limit the aforesaid joint liability.
In an asset deal, transfer of tax liabilities varies between an asset qualifying as a going concern, including one or more real-estate assets, or a stand-alone real-estate asset not qualifying as a going concern. The buyer’s tax liability is limited to certain real-estate property taxes directly attributable to the real-estate asset acquired.
In cases of transfer of shares of a real-estate company, the applicable tax regime varies depending on whether the seller is resident in Italy or not. If the seller is an Italian resident company, capital gains are fully subject to corporate income tax (IRES), currently levied at 24 per cent rate, since the transfer of shares in real-estate companies is generally not entitled to benefit from the participation exemption regime.
As for non-resident sellers, the capital gain is, in principle, subject to tax in Italy. However, certain exemptions regimes are available under Italian domestic tax law as well as tax treaties. In most of the tax treaties signed by Italy, the right to tax capital gains exclusively pertains to the country of residence of the seller.
In case of an asset deal, any capital gain is subject to 24 per cent IRES and, in cases of transfer of real estate not qualifying as a going concern, also to regional tax on productive activities (IRAP), currently levied at 3.9 per cent. IRAP rates may be increased on a regional basis.Mitigating tax risk
What measures are normally taken to mitigate typical tax risks in a real-estate business combination?
Tax risks associated to a real-estate business combination are twofold: tax liabilities transferred to the buyer and a challenge of the tax structure by the Italian tax authorities.
In order to mitigate the first risk, performance of a tax due diligence is essential. Generally speaking, tax liabilities are managed through tax warranties and tax indemnities. An insurance policy covering tax risks is also an available option that, in recent years, has become more common in the market.
The second risk can be managed by a careful structuring of the transaction, paying attention to the structure’s economic and material substance to avoid a challenge under the abuse of law principle.Types of acquisition vehicle
What form of acquisition vehicle is typically used in connection with a real-estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?
Generally the most popular acquisition vehicle used in Italy is a limited liability company (LLC). LLCs are subject to IRES and to IRAP. If certain regulatory requirements are met (see question 35) investors can also opt for an Italian real estate investment fund (REIF).
The main tax benefits of a REIF are:
- exemptions from IRES and IRAP;
- exemptions from Italian taxation on the proceeds distributed to non-Italian pension funds and collective investment vehicles resident in white-listed countries;
- exemptions from taxation on capital gains for white-listed non-resident investors;
- the contribution of several commercial real estate assets (which are leased for the prevailing part) to a REIF in exchange of the issue of its units, is outside the scope of VAT and subject to indirect taxes at fixed amount (namely, each of registration, mortgage and cadastral taxes applies at the fixed rate of €200); and
- mortgage and cadastral taxes due in connection to the transfer of commercial real estate assets reduced by half.