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Building up an asset base with real estate investments

 

 
 

 

"The Polycon Group is now creating substantial cash reserves out of the profits achieved by the various subsidiary companies, and wishes to use these funds to invest in assets which give a firm foundation to the continued growth of the group. Mr Holmes has always felt that real estate investments are one of the best hedges against inflation and now wishes to adopt the policy of purchasing buildings occupied by the various subsidiary companies within the group, as well as investing in the commercial property market with the remaining funds available, provided that at no stage may loans secured on such real estate investments exceed fifty percent of their market value. Polycon Lens Company forms a separate subsidiary, Polycon Investments, which borrows all monies required for investment purposes via Polycon Finance. Polycon Investments charges commercial rents to the various subsidiary companies and third parties, and this rental income pays for all interest charges. Any surplus income is subject to low taxation.

 

If Polycon Investments borrows funds to make such real estate investments, it is important that the interest payable should be capable of being offset against rents receivable in the country in which the real estate is situated, so that any foreign withholding taxes are levied on a net basis, rather than on gross rental income. It is also important that the interest is allowable as a deductible item against rental income in computing its own tax liability in Country L, and that any foreign withholding taxes may also be credited against the tax liability in Country L. either through the application of unilateral tax law in Country L or through the provisions of an appropriate double tax treaty.

 

Besides the taxation of net income derived from foreign real estate, the capital gains tax consequences of a future sale should also be carefully considered. Some countries do not subject foreign investors to capital gains tax on the sale of domestic real estate; others extend capital gains tax to non-residents in such a situation, either by means of a direct assessment on a non-resident or through a withholding tax which may possibly be retained by the notary, if any, involved in the sale of the real estate.

 

Consideration should be given to the formation of a separate subsidiary company of Polycon Investments for a particular real estate transaction in order to avoid a future capital gains tax liability; the sale of the shares in the newly formed subsidiary company by Polycon Investments, rather than the underlying real estate, may enable capital gains to be made without foreign tax consequences.

Not only should foreign capital gains tax liability be avoided, but also the tax legislation of Country L should enable profits on foreign real estate to be earned without domestic .tax consequences.

Many countries subject "speculative" gains to income tax rather than capital gains tax. Such speculative gains may be earned if real estate is sold within a certain time after its acquisition, or if the intention of the investor is clearly orientated towards making such a gain rather than holding the real estate for investment purposes only, and adequate documentation should exist to clearly prove the intention of the investor at the outset. . If the investor is an individual. Then inheritance tax or estate duty consequences may arise on his death. In such cases, it would be preferable to ensure that foreign investments are made through a separate company in an appropriate jurisdiction.



 


Date: 2015-01-29; view: 797


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