Greek tax considerations on Real Estate investment 21 January 2019
Agenda Greek tax regime overview Taxes on acquisition Ongoing taxation General Deductibility of expenses Interest deduction limitation Capital gains General Direct Investment Israeli tax Considerations Rental Income Capital gains Indirect Investment Leasing of Real Estate Short-term lease via web platforms (Airbnb, Booking etc.) Greek tax considerations on investments in hotels Taxation of Operation of Hotels Case study Related Taxes Capital Controls Page 2 January 2019 Investments in Greek Real Estate
Greek Overview - Taxes on Acquisition Real estate acquisition is subject either to VAT at the standard rate of 24% or to 3% Real Estate Transfer tax ( RETT ), on the consideration paid or the objective value of the real estate, whichever higher (unless primary residence exemption applies). To the extent the building license was issued before 1/1/2006 3% RETT. If issued after 1/1/2006: The property is sold by a non-business individual 3% RETT The property is sold by the developer or a business 24% VAT. VAT on expenses in connection with the real estate are in principle deductible/ refundable subject the Greek VAT law. Page 3 January 2019 Investments in Greek Real Estate
Greek Overview General Information Registration: Any company owning real estate in Greece should hold a Greek Tax Registration Number (namely AFM ). The company should subscribe with the electronic services of the Ministry of Finance ( TaxisNet ). Basis of taxation: Greek companies are taxed on their world-wide income. Foreign business enterprises are taxed only on income derived from a permanent establishment ("PE") in Greece or profit generated in Greece and/or Greek sourced income (e.g. Real estate income). Corporate Income tax: Greek corporate income tax ( CIT ) rate: 28%. The rate will gradually be reduced by 1% per year, i.e. 27% for FY 2020, 26% for FY 2021 and 25% for FY 2022 and onwards. Individual income tax: Marginal rates Depreciation: 4% annually. Losses: Tax losses may be carried forward for five (5) years. Page 4 January 2019 Investments in Greek Real Estate
Greek Overview General Information (Cont ) WHT: 15% withholding tax rate on dividends and interest and 20% withholding rate on royalties (Greek domestic law) Under Israeli-Greek tax treaty ( the treaty ), DWHT is 15% while WHT on royalties and interest may be reduced to 10%. Management fees paid to an Israeli company may be classified by the Greek tax authorities as know-how which is subject to WHT at the rate of 10% under the treaty. Page 5 January 2019 Investments in Greek Real Estate
Greek Overview Deductibility of Expenses Interest: Net interest expenses that exceed 30% of EBITDA are not deductible. Exception up to a EUR 3M threshold Amount not deductible may be carried forward as a deductible expense with no time limitation (indefinitely). The interaction between tax losses carried forward (subject to 5-year time limitation) and interest expenses carried forward (not subject to time limitation) has been clarified: Interest expense carry forward must be declared at the first possible instance indicated by the interest expense deductibility rules. If in a particular year interest expenses are carried forward and a tax loss is also to be carried forward, then the tax loss may be forfeited (i.e. priority of interest expense carry forward over tax loss carry forward). Other Expenses: Normal business expenses are generally deductible if they are real, conducive to deriving taxable income and supported by proper documentation and provided that the following conditions are cumulatively met: They are made to the interest of the business or in the ordinary course of its business transactions; They correspond to an actual transaction (in the sense that the relevant transaction is not fictitious), whose value is not considered higher or lower than the market value, as per the information available to the tax administration; They are recorded in the accounting books of the period in which they correspond and are duly supported by proper documentation (e.g. invoice, credit note etc.). Income tax code provides a list of expenses that by way of exception from the above rule are explicitly not considered as deductible for corporate tax purposes Page 6 January 2019 Investments in Greek Real Estate
Greek Overview Anti Avoidance The tax administration may disregard any artificial arrangement or series of arrangements that aim at the evasion of taxation and lead to a tax advantage. An arrangement is considered artificial if it lacks commercial substance. For determining if an arrangement is artificial various characteristics are examined (e.g. the characterization of a transaction from a legal perspective, whether there have been any cyclical transactions etc.). Page 7 January 2019 Investments in Greek Real Estate
Greek Overview Capital Gains Greek Corporations: Capital gains derived upon the disposition of Greek real estate property should be classified as business profit and subject to Greek CIT at a 28% rate. Foreign Individuals and corporations: Individuals: Pursuant to article 42 of L. 4172/2013 and Ministerial Circular 1032/2015, nonresident individuals, resident in a treaty country are exempt from capital gains tax provided they have a tax residence certificate issued. Corporations: Pursuant to Ministerial Circular 1032/2015, where a nonresident legal entity is the beneficiary of capital gains but does not maintain a permanent establishment in Greece (e.g. has invested in shares in a Greek company), no capital gains charge should apply, irrespective of the application of a double tax treaty. Note: the direct investment (direct ownership of a Greek real property) creates a permanent establishment. Note a tax residency certificate should be obtained and kept on record in order to substantiate the exemption in case of a tax audit. Plans to introduce a 15% capital gains tax on sale of real estate property have been deferred several times and it is quite unclear if they will be applied in the future. Page 8 January 2019 Investments in Greek Real Estate
Direct investment Page 9 January 2019 Investments in Greek Real Estate
Direct Investment Greek Tax Consequences Individuals Rental income Net ongoing taxable income derived from rental income: Up to EUR 12,000 at a 15% rate. From EUR 12,001 up to EUR 35,000 at a 35% rate. Any excess at a 45% rate. The taxable income can be reduced only with the following items: 5% of the income for amounts paid for repair, maintenance, renovation or other fixed and operating costs (a deemed deduction regardless of actual expenses). Rental payments (sublease agreements). 10% of the income for amounts paid for flood protection and for draining marsh areas. Compensation paid for termination of the lease agreement. Supporting documentation essential. Expenses paid to the service company are not deductible. Special solidarity contribution / tax Individuals - Capital gain In effect exempt (domestic tax law) Israeli Individual Investors Greek Real Estate Asset Israeli LTD Page 10 January 2019 Investments in Greek Real Estate
Direct Investment Greek Tax Consequences Israeli Corporation Rental income CIT 28% Expenses / deductions as per previous slides No branch tax Israeli Individual Investors Israeli LTD Israeli Corporation - Capital gain Taxable - direct ownership of a Greek real property creates a permanent establishment. Greek Real Estate Asset Page 11 January 2019 Investments in Greek Real Estate
Direct Investment Israeli Tax Consequences Rental income: Individuals: 15% Gross (only depreciation deductible and no credit) or Marginal; Corporations: 23% CIT BUT, treaty: Taxable only in Greece Article 6(1): income derived. from immovable property..shall be taxable only in that other State. Article 6(3): the provisions of paragraph (1) shall apply to income derived from the direct use, letting, or use in any other form of immovable property Capital gains: Individuals: 25% Corporations: 23% CIT BUT, treaty: Sale of real estate (Article 13 (1)): Gains derived.. from the alienation of immovable property. taxable only in that other State Sale of shares (Article 13 (5)): Gains from the alienation of shares being shares in a company, 50% or more of the assets of which consist of immovable property situated in a Contracting State, shall be taxable only in that State Israeli Individual Investors Greek Real Estate Asset Israeli LTD Page 12 January 2019 Investments in Greek Real Estate
Direct Investment Israeli Tax Consequences - Summary Effective Tax Rate ( ETR ) Potentially: Israeli Individuals Rental (Up to 45%), Capital Gains (0%) Israeli Corporations Rental (28%), Capital Gains (28%) Multi Lateral Instrument ( MLI ) Signed by both Israel and Greece. Aim to, inter alia, to avoid double non taxation Article 6 of MLI? Does it challenge Greek sole taxation Article 9 of MLI? Reporting: Israeli tax calculation Reportable position Other issues to consider: What is considered capital gains in Greece? In Israel? Treaty exempts income from real estate what about other types of income e.g. Income from operation of a hotel / FOREX? Due to high rate of tax for corporations in Greece, it is questionable whether an actual Israeli tax payment would be due (even if treaty exemption not available). Israeli Individual Investors Greek Real Estate Asset Israeli LTD Page 13 January 2019 Investments in Greek Real Estate
Indirect investment Page 14 January 2019 Investments in Greek Real Estate
Indirect Investment Greek & Israeli Tax Consequences Greek Tax implications: CIT 28% Interest on loans deductible subject to thin cap (10% IWHT) Repatriation of loan principal tax free (stamp duty at 2,4% if not a bond) Israeli tax implications: CFC N/A Interest income: Corporation 23% Individual 25% (under certain conditions) Israeli Individual Investors Equity Greek Company Shareholder loans Israeli Corporate Investors Dividend distribution - 15% DWHT Dividend income: Corporation 23% (may apply underlying tax credit under certain conditions) Individual 25% / 30% (under certain conditions) Greek Real Estate Assets Capital gains Sale of asset as previous slides Sale of shares - exempt Capital gains sale of shares: Taxable only in Greece Page 15 January 2019 Investments in Greek Real Estate
Leasing of Real Estate Page 16 January 2019 Investments in Greek Real Estate
Leasing of Real Estate - VAT Rental income is subject to CIT 28% for legal entities. Commercial lease is charged with stamp duty at a rate of 3,6% on the consideration agreed, unless the parties opt to lay the lease payments under VAT (at the rate of 24%) instead of stamp duty (subject to conditions). In this case (exercise of option to lay the commercial lease under VAT) the input VAT on business expenses and renovation costs of the leased real estate is deducted for VAT purposes. Urban residential lease is VAT exempt with no right of deduction. Subleasing of the building to a hotel / hostel business could qualify as commercial lease eligible for VAT. Page 17 January 2019 Investments in Greek Real Estate
Short-term lease via web platforms (Airbnb, Booking etc.) Page 18 January 2019 Investments in Greek Real Estate
Short-term Lease The term short-term leasing is defined as the leasing of property concluded through online platforms for definite term (time-period) which shall be shorter than one year. The eligible property could be an apartment, an individual house, the separate rooms thereof or any other premises with structural and functional autonomy. The procedure for the online posting of the property and in general any other action required for the short-term leasing is undertaken by the Property Administrator, being either the property owner or another third party. The Property Administrator should register with the competent Register of Short-Term Leased Property of the tax administration. The registration number attributed must be included in any online posting of the property as well as in any promotion thereof. A separate registration per property is required. The Property Administrator should file a Short-term Stay Notification on the online application set up by the IAPR (Independent Authority of Public Revenues). To the extent that the Property Administrator and the owner of the property are not the same person, the property owner shall be required to submit a Declaration of Leasing Agreements' Information, through which the data of the Property Administrator will be disclosed. The income acquired from the short-term leasing following the deduction of any tax-deductible expenses, should be declared by the Individual and the Company via an income tax return filed by June the 30 th of the subsequent fiscal year. Page 19 January 2019 Investments in Greek Real Estate
Short-term Lease Any income acquired by legal persons is treated and taxed as income from business activity irrespective of the source (e.g. property). The Company, should submit via TaxisNet an N Form, disclosing the income acquired within a given fiscal year by the last day of the 6 th month from the end of the said fiscal year. The Company is obliged to keep books and to issue respective invoices for the lease fees. The Company should keep either single or double-entry books depending its legal form and turnover. Income from short-term leasing should be exempt from VAT. However, the Company should include respective income in the relevant field of the periodic VAT returns to be submitted either every one or three months depending on whether the Company will keep single or double entry books. VAT rate of 13% is imposed in short term rentals in case additional services are provided (such as cleaning services etc.), as in such a case the business is similar to a hotel / hostel business. Leasing of residence (main or vacation residence) is exempt from stamp-duty. Page 20 January 2019 Investments in Greek Real Estate
Greek tax considerations: Investments in Hotels Page 21 January 2019 Investments in Greek Real Estate
Investment in Hotels Considering that any income from real estate property situated in Greece is taxed in Greece, irrespective of the tax residence of its owner and irrespective of the application of a DTT or not, the company that would undertake the operation and management of the hotel could be Greek company (e.g. Societe Anonyme or Private Capital Company, in Greek I.K.E. ). Greek companies (IKE/SA), upon their tax registration and commencement of their activities, must declare their business purpose to the tax authorities, it being the real estate property exploitation / construction and operation of hotel. Newly established Greek companies are not subject to capital concentration tax (1%) on the injected capital upon their incorporation. 0.1% duty of the share capital in favor of Competition Committee is not imposed in the case of IKE. However, 0,1% duty is due and shall be paid in the case of an SA incorporation, so total cost will be 1,1% upon a share capital increase of an SA. VAT on Construction Construction expenses subject to VAT at the rate of 24%. The statutory time limitation for VAT refund claims is five (5) years. Deducted input VAT adjustment period is set to 5 years in the case of real estate property (meaning that the property must be used for vatable business purposes economic activity within 5 years from its acquisition). If the property is not used within 5 years, VAT deducted or refunded, must be repaid. Commencing from the year that the property is used for the first time, the Company must use the property for taxable (VAT) activities for a time-period of 5 years, in order to maintain its VAT deduction right. If not, the Company would be obliged to adjust deducted input VAT per year (1/5). Page 22 January 2019 Investments in Greek Real Estate
Hotel Operation Accommodation facilities are subject to VAT at the rate of 13% (for the Aegean islands Leros, Lesvos, Kos, Samos and Chios this rate is reduced by 30%) Hotel occupancy tax introduced as of 01.01.2018 on hotels and furnished rooms/apartments per daily use of the room, suite, apartment or single dwelling house and is borne by room/apartments guests as follows: 1-2 Stars 0,50 3 Stars 1,50 4 Stars 3,00 5 Stars 4,00 In case that apart from accommodation, other services are provided in parallel (i.e. accommodation with breakfast, half-board or full board), VAT is calculated as follows: Accommodation with breakfast: 5% of the total price is subject to the main VAT rate (24%) and the rest to the reduced VAT rate (13%). Accommodation with half-board: 15% of the total price is subject to the main VAT rate (24%) and the rest to the reduced VAT rate (13%). Accommodation with full-board: 25% of the total price is subject to the main VAT rate (24%) and the rest to the reduced VAT rate (13%). Accommodation all-inclusive: 30% of the total price is subject to the main VAT rate (24%) and the rest to the reduced VAT rate (13%). Page 23 January 2019 Investments in Greek Real Estate
Case study Page 24 January 2019 Investments in Greek Real Estate
Case Study Activity Beyond Letting (On the assumption that the activity is not tax exempt in Israel) Advantages: Israeli Individual / corporate Investors Split 2 activities (holding / operations) Consolidation of operating activity Flexibility to sell Propco s separately Currently tax free? Greek tax base reduced by arm s length interest Interest bearing loan (10% IWHT) Propco Opco CIT 28% DWHT 15% Disadvantages: Ongoing income of Opco subject to substantial ETR Reduce exposure to DWHT - Consider establishing Opco as a non-greek entity (e.g. Cypriot co) Substance requirement! Lease real estate Page 25 January 2019 Investments in Greek Real Estate
Related Taxes Page 26 January 2019 Investments in Greek Real Estate
Related Taxes - Taxes on Ownership (Acquisition) Real Estate Transfer Tax ( RETT ) Real estate transfer tax is in principle imposed upon acquisition of land, payable by the buyer of the land. Real estate transfer tax (along with municipal duties) is calculated at the rate of 3,09% of the taxable value of the land. The taxable value is the higher between the value prescribed in the transfer agreement between the parties and the objective value of each land; in case that no objective values are available, the value is determined on the basis of comparative data, e.g. from the transfer of similar real estate property. In case transfer of newly built real estate property takes place prior to its first occupation, VAT is imposed at the rate of 24% instead of RETT. Page 27 January 2019 Investments in Greek Real Estate
Related Taxes - Taxes on Ownership Special Real Estate Tax ( SRET ) Special Real Estate Tax is imposed on legal persons that have real estate rights on property located in Greece at the rate of 15% calculated on the value of the property. Greek companies (Societe Anonymes, Limited Liability Companies and Private Capital Companies) are exempt from said tax, provided that they declare their ultimate individual shareholders and the latter have obtained a Greek Tax Identification Number (TIN). Companies that their Articles of Association include in their scope the purchase, administration, exploitation of / investment in real estate property are obliged to annually file a SRET return (even if a tax exemption is applicable). Companies that are engaged in commercial activities, provided that their gross revenue from commercial activities is higher than their gross income from real estate are exempt from said tax. This exemption also includes companies who construct buildings to be used in commercial or/and tourist activities, provided that they will commence said activities within seven (7) years from the submission to the competent authorities of the documentation necessary for the issuance of construction license. Page 28 January 2019 Investments in Greek Real Estate
Related Taxes - Taxes on Ownership Unified Real Estate Ownership Tax ( ENFIA ) Ownership of Greek real estate is subject to ENFIA, which is calculated on the basis of property held as of 1 January of each year. ENFIA consists of a main tax and a supplementary tax. The main tax ranges from EUR 2 to EUR 13 per square meter and it depends on a number of factors, such as the type of the underlying property, its location, surface area, age, etc. The supplementary tax ranges from 0% to 1.15% and for legal entities to 0.55% on the corresponding objective tax value. The supplementary tax for the real estate properties which are used for the purpose of producing or carrying out any kind of business activity, regardless of the business s scope of work, is calculated at a rate of 0.1%. Main tax may be adjusted upwards or downwards based on a range of percentages depending on the year that the building was built and based on whether or not the building qualifies as a hotel or other special touristic building. An increase by 5% to 25% may apply on the main tax in case of new buildings (up to 20 years old); on the contrary, a reduction (20% to 40%) in case of old buildings (90 to 100 years old) may apply on the principal tax (main tax). In case the building qualifies as a hotel or special touristic building, main tax) may enjoy two further types of reduction: (a) a straightforward reduction by 50%, and (b) a reduction ranging from 20% to 75% depending on the surface of the building. Page 29 January 2019 Investments in Greek Real Estate
Related Taxes - Taxes on Ownership Municipal Taxes Municipal duty is charged through electric bills and is calculated by multiplying the real estate s square meters by a rate determined by the municipal or community council ranging between 0,018-0,073. The said rate can be increased every year up to 20%. Page 30 January 2019 Investments in Greek Real Estate
Capital Controls Page 31 January 2019 Investments in Greek Real Estate
Capital Controls According to the recent Decision of the Committee for the Approval of Banking Transactions, a special subcommittee was set up in Greece within each Credit Institution operating in Greece, assigned with the task to approve specific transactions which concern transfer of funds in order to: execute payments against billing documents (such as invoices, pro forma invoices, bills of lading, payroll slips, etc.); opening of new letters of credit, new credit on hold; issuance of new letters of credit; and new term liabilities from settlement of securities receivables and other money instruments related to imports, as part of their business, provided that the total amount of requests for each customer and each credit institution does not exceed three hundred and one million euro ( 1.000,000) per working day, through one or more transactions. For transactions exceeding Euro 100,000 per day, the monthly approved aggregate limit for each legal entity should not exceed the maximum monthly value of the imports and intra-community acquisitions of the period 01.07.2014-30.06.2018, through credit institutions operating in Greece, plus 60%. The maximum net amount of funds transferred abroad daily (i.e. outbound funds transferred from abroad minus inbound funds transferred from abroad) for bank institutions is set at 38.950.000 starting from the 1st February 2018 onwards. Page 32 January 2019 Investments in Greek Real Estate
Disclaimer The above is a non-comprehensive description of certain elements of Greek and Israeli tax implications. The above should not and cannot be relied upon without receiving detailed tax advice. Legal counsel should be consulted on all legal aspects. Page 33 January 2019 Investments in Greek Real Estate
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