Real estate share deals: survey and assessment from a tax perspective

Real estate share deals: survey and assessment from a tax perspective

Thu 07 Jul 2022

The years between 1848 and 1918 are considered the relevant building period for the Gründerzeit-Zinshaus buildings in Vienna. In this period Viennese housing construction underwent a decisive development which shaped the city’s characteristic flair to this day: the Zinshaus buildings – so typical for Vienna – came into existence.

Viennese Gründerzeit-Zinshaus buildings have not lost their attractiveness in the course of the pandemic because of their substantial stability of value and security, just on the contrary: in 2021 the total volume of sales of EUR 2.1 billion clearly exceeded the value of 2020 and therefore is again at pre-crisis level.

In the spring 2022 edition of the Zinshaus Market Report, the transferred Zinshaus buildings were assessed and a well-founded basis for a value-based comparison was created, taking into account the sustained growth of the proportion of share deals in the total transactions.

Just to remember – while in the asset deal the ownership of the real estate to be transferred is immediately granted to the buyer, shares in the company owning the real estate are transferred in the share deal. In favour of the share deal are, in particular, a potential saving of land transfer tax and registration fee, given a corresponding structuring of the transaction, of 4.6 % of the purchase price – as well as the benefit from advantages in the turnover tax.

The number of share deals in the Zinshaus category, as defined by OTTO Immobilien, has shown a continuous upward trend in the last years – the calendar year 2021, however, shows a marginal decline with 72 realised transactions (after 74 transactions in the calendar year 2020). The share deal is still popular both in a business association and in a family. In particular, the share deal can be regarded as the appropriate approach in the anticipated inheritance and the optimisation of the structure in family businesses.

In each share deal the shares of stock corporations, like the LLC, and the shares of partnerships, like the limited partnership (LP), may be transferred. From a tax perspective, the continuously rising proportion of shares in partnerships transferred in share deals is in particular of interest. Their proportion increased in the meantime from a proportion of approx. 10 % of share deals in 2018 to 25 % of share deal transactions. The Zinshaus buildings transferred in the course of this, have a market value of approx. EUR 62 million, which corresponds to approx. 15 % of the values of all Zinshaus buildings transferred per share deal in 2021. Reason enough, to take a closer look at this construction and its tax benefits.

Real estate constructions with partnerships are usually set-up as LLC & Co LP. The LP has at least two partners – a limited partner, who has limited liability up to the amount of his investment, and a general partner, who has unlimited liability. An LLC – which most of the time is also owned by the limited partner – is set up as the general partner. The LLC has liability limiting effects for the partners. The limited partner holds all shares in the LP in the ultimate result, and may benefit from associated advantages, but eliminate completely any disadvantages with regard to liability.

The revenue tax treatment of partnerships differs fundamentally from the treatment of stock corporations. While the stock corporation has to pay corporation tax, the partnership is transparent for the revenue tax law. Revenue tax is never paid by the partnership – only by the partners behind. In the course of the purchase of real estate as well as the renovation/establishment of a construction value usually recurrent losses occur.

In the case of a partnership, these are allocated to the partners in the same way as profits are. The best example for the practical application of these rules are builder-owner models. Recurrent losses from renovation/erection can be set off against positive income and therefore the tax load is reduced.

The above-described transparency of the partnership offers another advantage for the seller in the transfer of the shares. If shares in stock corporations are sold, the value of the Zinshaus remains unchanged in the corporation. This means that the increase in value of the Zinshaus cannot be used for tax purposes – which is different for partnerships, where the increase in value of the Zinshaus can be used for tax purposes. In the revenue tax law, the share deal of shares in partnerships is equal to an asset deal. The higher the increase in value of the Zinshaus between purchase and sale, the more attractive is the construction of a partnership for the buyer.

Last but not least – even savings in the land transfer tax and registration fee are possible for share deals in partnerships.

Despite all these advantages the share deal is rather individual. If it is preferable compared to the asset deal, will not be decided exclusively on the basis of potential tax advantages. Factors like the age of the corporation, existing loans, but even subjective influences on the sides of the buyer and seller have to be considered in the decision making.

It is clear that the share deal maintains its position and penetrates the real estate market – which is in particular demonstrated by the value-based comparisons presented in this Report.

Learn more on the topic in the spring 2022 edition of “Fist Vienna Zinshaus Market Report: a comprehensive study on historic Viennese lease buildings” by OTTO Immobilien.