Most real estate transactions in Sweden are made as direct transfers or through special purpose vehicles. For some time now, the number of transactions carried out by means of cadastral procedures have increased and in recent years, Sweden has experienced a further increase, in particular with regard to partitioning. The trend is apparent in the greater Stockholm area and the Öresund region, whilst the method is not at all common in other parts of Sweden, mainly because of lower property values there.
The reason for real estate transactions being performed by means of cadastral procedures of greater or lesser complexity is, of course, tax-driven. In Sweden, every direct transfer of real estate is subject to stamp duty. At the rate of 4.25 per cent of the purchase price or taxed value (whichever is higher) and 1.5 per cent for individuals, the amount of stamp duty levied can be significant for attractive real estate.
There are two main cadastral procedures used for commercial property transactions: reallotment and partitioning. It will come as no surprise to learn that the legislator did not create these cadastral procedures in order to facilitate the avoidance of stamp duty! On the contrary, reallotment is a method envisaged (and most commonly used) to create one plot of land out of two or more previously separate plots of land, and partitioning is merely a way of dissolving joint ownership of real estate. This article examines the two cadastral procedures and gives a brief overview of how a transaction by means of cadastral procedure may be structured.
The obvious situation in which reallotment could be carried out is where you have two parcels of real estate which would be more suitable as one unit. The two parcels must be located next to each other. The Swedish Cadastral Authority may, upon application, transfer the site of the first parcel into the second, thus creating one, larger parcel. The main requirement is that a land surveyor approves this transfer. Although the land owner giving up land is often compensated in the same way as would have been the case in a direct transfer, no stamp duty is levied on the reallotment. The cost of a cadastral procedure varies depending on its complexity, but if, for example, the Swedish Cadastral Authority charges approximately EUR 10,000 for the cadastral procedure, the value of the land in question and the compensation paid for it must exceed around EUR 235,000 in order for the transaction to benefit from a reallotment structure. Clearly then, most commercial transactions do benefit from a reallotment, should this be possible.
There are several ways of structuring a reallotment transfer. The most beneficial, and also most common, is if there can be found (or created through sub-division) a small and inexpensive parcel of real estate located next to the desired parcel. In these circumstances, the smaller parcel would be purchased by means of a direct transfer, and the bigger parcel transferred into the smaller, by means of reallotment. As many transactions today involve the purchase of large portfolios of real estate, it is always important to check whether the requirements for a reallotment could be met.
It should be stressed that there are factors other than stamp duty to consider before initiating a reallotment procedure. Risks relating to mortgage eligibility are significant (although there may be ways around that issue) and the procedure is often time consuming. An international investor is likely to be unfamiliar with the Swedish cadastral legislation and bureaucracy and there will always be a greater degree of uncertainty in such a transaction than is normally the case in a direct transfer. Therefore, it is recommended that the purchase agreement includes alternative methods of securing the sale, should the reallotment procedure fail. Specialist legal advice is essential.
Partitioning of real estate is mainly used as a means to dissolve joint ownership, often between relatives who have inherited the property, thus creating joint ownership. As noted earlier, partitioning has also become an instrument in commercial transactions, solely because the partitioning of land is exempt from stamp duty, whilst the more common method—sub-division—is not.
Partitioning of real estate should be considered when the asset involved in the transaction is a part of a larger property. Separation of the desired part of the property is most commonly achieved by means of sub-division, where an area of the property is separated from the residual property unit, and forms a new property. Sub-division is, however, subject to stamp duty. In order to partition the real estate instead, the purchaser must first enter into joint ownership of the property in question. This is accomplished by purchasing a (non-defined) share of the property, preferably as small as possible as this purchase will be subject to stamp duty. Once joint ownership has been achieved, the Swedish Cadastral Authority may, upon application from the owners of the different shares of the property (based on an agreement between them), use a partitioning procedure to divide the property into several new properties. Swedish law stipulates that the partitioning should be conducted taking into account each owner’s share of the property and that compensation should be paid, should one party not receive a new property corresponding to its previous share of the whole property. However, these rules may be set aside if the parties agree, which means that a party may purchase as little as 1 per cent of the property, and then, by means of partitioning, end up with a much larger portion of land as a new property.
The complexity of cadastral procedures in Sweden means that a structured transaction by means of partitioning will require a considerable number of agreements, in particular with regard to joint ownership, which may last for between six and twelve months. Careful consideration should be given before entering into joint ownership of property for various reasons. For instance, the potential for qualifying for a mortgage is limited during the period of the joint ownership and for a short period of time thereafter. However, if time is not a concern and the relationship with the other potential joint owners is stable, there may be significant tax savings. As usual, specialist legal advice should be sought before initiating a partitioning transaction, as the Cadastral Authority is not likely to be helpful where the real objective of the partitioning procedure is tax avoidance.
Although the potential for using cadastral procedures such as reallotment or partitioning as a method of avoiding stamp duty has been apparent for decades, the number of such transactions has been relatively low and the tax loss for the state negligible. However, the recent rise in the number of these transactions has prompted the Swedish government to announce measures to investigate whether there is a need to crack down on transactions whose sole purpose is to avoid stamp duty. It will not be an easy task to find the right legislative tools to clamp down on intended transactions without adversely affecting other cadastral procedures. It is predicted that we will continue to see transactions taking place by means of cadastral procedures and that the inherent complexity of the process will keep their numbers low enough for the legislator to deem the consequent tax loss to the state, if not negligible, then at least acceptable.
Gustaf Strom & Johan Forsling, DLA Nording, Stockholm