Taxes when buying real estate abroad: strategies and risks

Georgy Kachmazov, researcher and data expert, emphasizes the importance of of structuring transactions to optimize taxation when acquiring income-producing real estate abroad. Taxes play a key role in the costs of owning investment assets, so measures are needed to reduce them in order to maximize returns. reduction measures are needed to maximize returns.

In various countries, including Russia, there is a tightening of tax laws and requirements for financial transparency. This highlights the importance of complying with tax norms and regulations. Since 2018, the tax authorities of the Russian Federation have been automatically receiving information about citizens' foreign bank accounts.

Key aspects of taxation when investing in foreignreal estate:

• Choice of ownership form:The distinction between an individual or legal entity significantly affects the level of taxation.
• Advantages of registering as an individual:The absence of business operating expenses and lower tax liabilities upon the subsequent sale of assets.
• Benefits of registering a legal entity:Possible exemption from taxation on dividends and capital gains in the case of strategic participation.

After choosing the ownership structure, it is important to consider a number of factors, including the size of the deal. There is no universal solution here; each transaction requires an individual approach depending on the specific circumstances. The decision should take into account the current tax rules and rates in order to make the best choice and minimize losses.

It is also important to consider possible tax optimization techniques, such as the choice of country of incorporation and the use of international tax treaties. These tools can have a significant impact on the ultimate tax burden and the overall profitability of the investment.

For successful management of tax obligations, it is important to have professional advice and support from experts familiar with local and international tax legislation. This will help avoid unexpected tax risks and maximize financial benefits from investments in foreignreal estate.

In conclusion, proper planning of tax aspects is an integral part of a successful investment strategy abroad. It allows for an informed choice of structure.

For buyers of real estate priced at up to 1.25 million euros, it is often recommended to conduct transactions in the name of an individual to avoid overpaying. However, in some countries, the tax rate for individuals can be higher and increase with rising income. If the purchase price exceeds 1.25 million euros, it is usually more advantageous to establish a legal entity due to the lower corporate tax rate and the possibility of tax optimization. This is because, with an average yield of 5% on European real estate, the income from a property valued at 1.25 million euros can exceed the average tax rate.

Examples of taxation in Germany

For example, in Germany, individuals can pay up to 40% tax on income over €50,000 per year, while for companies this rate is only 15%. per year, while for companies this rate is only 15%.

Advantages of registering real estate under a company

When purchasing multiple properties, it is often better to register them through a company, despite the additional costs of maintaining it, in order to avoid high personal taxes, especially if the company and its owner are tax residents of different countries, which prevents double taxation of dividends.

Preparation for the deal

Before signing the deal, it is advisable to conduct financial modeling and consult with tax experts for the best structuring of the transaction.

Tax obligations of property owners through a company

• Tax on rental income
• Accretive value on sale
• Property and land tax

Inheritance tax is often not applied, and dividend tax can be avoided through reinvestment.

Special tax requirements for Russian investors

Additionally, for investors who are tax residents of Russia, it may be necessary to pay tax on profits from controlled foreign companies (CFC).

In Germany, the tax system for companies is a complex structure with several In Germany, the tax system for companies is a complex structure with several key aspects that influence the final tax calculation. Let's look at an example of a tax calculation for a real estate company to find out which factors and variables affect the tax liability. liabilities.

Basic taxation scenario

Let's assume that the company has real estate worth 500,000 euros and an annual rental income of 30,000 euros. To calculate the taxable base, we will consider various deductions, such as building depreciation at 2% (10,000 euros per year), mortgage interest (50% LTV, 2% per annum) with a deduction of 5,000 euros, as well as interest on the founder's loan (50% LTV, 4% per annum) with a deduction of 10,000 euros.

Thus, the company's taxable base after all deductions will amount to 20,000 euros per year.

Calculation of corporate tax

In Germany, the corporate tax rate is 15%. Therefore, the company must pay 3,000 euros of tax.

In the field of international business and investments, a key aspect is the proper declaration of income and payment of taxes. Companies registered in a specific country must comply with the laws of that country and agreements to avoid double taxation.

Tax obligations and agreements

In addition to basic taxes, there are other tax liabilities related to double taxation treaties. avoidance of double taxation. Such agreements prevent double taxation, but do not exempt from paying taxes in the country of residence.

Calculations and additional payments

A Russian citizen earning income abroad may face additional tax payments in Russia if the tax rate abroad is lower. If the tax rate abroad is higher, it is sufficient to just declare the income in Russia.

Real estate and taxation

Property abroad can affect tax obligations. For example, when registering real estate through a company, there are additional costs associated with paying dividends or loans to the founder.

• Dividend payout:the difference in income tax rates between Russia and abroad.
• Payment of the founder's loan:the difference in interest rates on loans.
• Income without dividend payments:the difference in taxes between countries.

Taxation of individuals

When registering real estate in the name of an individual, a 13% personal income tax rate applies. If the effective rate abroad is lower, the difference must be paid in Russia.

Optimization and consulting

The correct execution and declaration of foreign property plays an important role in and surcharges

A Russian citizen earning income abroad may face additional tax payments in Russia if the tax rate abroad is lower. If the tax rate abroad is higher, it is sufficient to just declare the income in Russia.

Real estate and taxation

Property abroad can affect tax obligations. For example, when registering real estate through a company, there are additional costs associated with paying dividends or loans to the founder.

• Dividend payout:the difference in income tax rates between Russia and abroad.
• Payment of the founder's loan:the difference in interest rates on loans.
• Income without dividend payments:the difference in taxes between countries.

Taxation of individuals

When registering real estate in the name of an individual, a 13% personal income tax rate applies. If the effective rate abroad is lower, the difference must be paid in Russia.

Optimization and consulting

The proper registration and declaration of foreign assets play an important role in

Conclusion

In this article, we discussed the importance of tax optimization when investing in income-generating real estate abroad. Taxes play a key role in the expense structure of investment properties, and without effective tax strategies, one can significantly lose profitability.

The tightening of tax legislation and requirements for information transparency in Russia and other countries are forcing investors to pay more attention to the selection of tax strategies.

Physical or legal entity?

One of the top priorities for an investor is the choice between registering real estate as an individual or a legal entity. This decision directly affects the amount of tax payments, as the rates and conditions of taxation differ for companies and private individuals.

• Registration for an individual:It is recommended for real estate valued at less than 1.25 million euros. This helps avoid additional costs for maintaining the company. However, it is important to consider the potential increase in tax rates with rising income.
• Registration for a legal entity:It is more preferable for transactions worth over 1.25 million euros. Here, the lower corporate tax rates offset the costs of maintaining the company and provide greater flexibility in tax planning.

It is important to consider the individual circumstances of each transaction when making a decision about tax strategy. Preparing a financial model in advance and consulting with tax specialists will help make the right choice.

The choice between an individual and a legal entity for owning real estate abroad is an important step in the tax planning of investments. The effectiveness of the tax strategy and the overall return on investment depend on the correct choice of structure.