German Immobilien-Sondervermögen are domestic open-ended real estate funds without legal personality which are managed by an investment management company on behalf of its investors. It is the investment management company that buys, sells and manages property held within the fund according to the stated investment policy. The investment management company is the civil owner acting as fiduciary on behalf of the fund and its investors. The German Sondervermögen can be compared to e.g. FCP in Luxemburg or France which cannot act as an individual legal person but are only investment asset pools to the benefit of the investors.
This concept of civil ownership by the investment management company that differs from the economic ownership by the investment fund or its investors, becomes more difficult when portfolio investments are located in foreign jurisdictions, where the concept of a German Sondervermögen and thus the role of the investment management company is sometimes unrecognised. Most foreign jurisdictions consider the fund as the owner of assets.
While, by virtue of article 38.3 of Law 35/2003, a real estate fund must be listed in the Spanish Land Registry under its own name, this requirement is relaxed if the foreign real estate fund, through proof of foreign law, evidences (i) the fund’s valid constitution and (ii) the capacity to be the civil owner of real estate under the law of where it was incorporated. As a consequence, we can conclude that the capacity for the German real estate fund to register in Spain will be determined by the fund holding a similar capacity in its country of origin.
At present, German fund vehicles are not in general registered in Spain for tax purposes, sometimes only the branch of the German investment management company. However, different interpretations are not uncommon and there are occasions when the Spanish tax administration might also request the registration of the fund with regard to Spanish corporate income tax and value added tax (VAT).
From a Spanish Civil Law perspective, German Sondervermögen are not able to own the buildings, and therefore cannot be registered as the owner in the Spanish Land Registry. As a direct consequence of that, the German fund is not able to rent the building and not able to sell real estate.
From a Spanish Tax perspective, the registered Spanish branch of the investment company, as legal owner of the real estate, files the tax declarations including the income and capital gains of real estate managed in Spain.
From a German tax point of view, the civil owner that is the investment management company as fiduciary is not decisive. Instead, the fund vehicle is treated as transparent, which means that the German tax authorities look beyond the fund to the investors themselves. Each fund investor should be treated as if he had directly invested. The fund level is exempted in Germany from corporate income and trade tax. This should be valid also for foreign jurisdictions, unless an alternative domestic Spanish real estate fund vehicle is used.
However, the new German Investment Tax Act coming into effect on January 1st 2018 will considerably change the tax system for investment funds. The investment fund will no longer be tax transparent, but will be subject to corporate and trade tax. At present it is unclear what effect this will have on German fund vehicles investing abroad but certainly the fund qualification abroad could change. After January 1st, 2018, the view of the Spanish tax authorities might find support in requesting the registration of the German Immobilien-Sondervermögen. But at present, the German Immobilien-Sondervermögen is still considered transparent.
Income tax for non-residents and VAT
As the investment management company by its permanent establishment in Spain through a registered branch is the legal owner of real estate in the fund, there are sufficient reasons to consider that it is liable to rental income as well as any capital gains from the sale of the Spanish real estate. This has been confirmed by the Spanish tax authorities in the tax ruling no. 1363-02 of 19-09-2002, which states that if a company holds a permanent establishment in Spain it must be taxed for any income it derives.
For VAT purposes, the registered branch is qualified as a VAT taxpayer as long as it leases real estate that it owns. This is regardless of whether the branch acts as the managing entity of a German investment fund. In the case where Spanish Tax Authorities have concluded that the branch is not a VAT taxpayer, the Tax Authorities should not penalise the branch, if the company acted in good faith by interpreting the VAT standard in agreement with the administrative doctrine issued by the Tax Authorities.
Both the legal and tax concept of “ownership” of an Immobilien-Sondervermögen are diverging and interpreted in a different way when the German fund acts abroad since it cannot be easily compared to similar foreign fund vehicles. The investment management company is the owner by registration in the land registry. For any transaction of real estate, the investment management company acts as seller or buyer on account of the Immobilien-Sondervermögen. The Spanish registered branch of the investment management company is a taxpayer for VAT purposes and holds the qualification of permanent establishment, and thus must be taxed for the income tax of non-residents. Different from this, the investors of the fund are the beneficial owners of real estate for tax purposes.
In any case, the set-up of the activities in Spain of foreign funds should be examined in each case. Maybe the new tendency in Spain to require the registration of German Sondervermögen for tax purposes will reach out also to other foreign fund vehicles.
Article written by Iñigo Pastor (Mazars Spain) and Sabine Leuschner (Mazars Germany).