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Owning foreign real estate

New automatic exchange of information (“AEOI”) regime on its way by the OECD

NEW AEOI REGIME

 EXPECTED FROM 2029/30 !

  • Intended primarily to be a local authority-to-local authority matter to enable utomatic exchange of already locally gathered information.
  • Automatic exchange of information regarding “Readily Available Information” for immovable property¹ (e.g., buildings & land):
  • Holdings;
  • Acquisitions;
  • Disposals; and
  • Recurrent income.
  • Information must be electronical available. A manual intervention using e.g., paper documents incl. pdf-files are voluntary for local authorities.
  • Introduction aimed from 2029 or 2030.
  • The Competent Authority (“CA”) in a participating jurisdiction must decide on modules to implement (i.e., one or both):
  • Module 1: Holdings & Acquisitions (one-off exercise)
  • Module 2: Disposals & Recurring income (annually recurring exercise)
  • The automatic exchange of information works based on similar principles as for e.g., CRS (regarding financial accounts) and must occur by 31 January in the year following the reportable year, and can include reciprocity or not

REGULATORY REQUIREMENT

INFORMATION TO EXCHANGE

Module 1

1) Holdings of immovable property

  • Information on the immovable property asset
  • Transaction information
  • Legal ownership information (individual & entity)
  • Beneficial ownership information

2) Acquisition of immovable property

  • Information on the immovable property asset
  • Transaction information
  • Legal ownership information (individual & entity)
  • Beneficial ownership information

Module 2

3) Disposal of immovable property

  • Information on the immovable property asset
  • Transaction information
  • Legal ownership information (individual & entity)
  • Beneficial ownership information

4) Recurrent income derived from immovable property

  • Information on the income
  • Information on the immovable property asset
  • Transaction information
  • Legal ownership information (individual & entity)
  • Beneficial ownership information

THE EXCHANGE OF INFORMATION REGIMES

IPI BURDENS AND OVERLAPS WITH OTHER OECD REGULATIONS

Burdens of the IPI
  • The regulatory regime is currently structured so that local CAs can opt-in on limiting what information must be shared i.e., if only Module 1 is selected by the CA, then the information may in most cases already exist electronically at the local tax authority or within another governmental department, and which the local tax authority can access. No burdens are then put on any intermediary e.g., lawyer or real estate agent.
  • When the CA opt-in on both Module 1 and 2, then the local authorities may not have all necessary information which must be automatically exchanged. In such cases burdens may to some extent spillover to e.g., certain intermediaries that may posses the missing information. The regulations do not currently address this further
  • It should be noted that what the CA opted-in to deliver may be different from what the CA opted-in to receive e.g., depends on the agreement and if reciprocity is required.
Digital Platform Operators (“DPO”)
  • IPI overlaps with DPO in the scenario where the owner(s) rent out the immovable property via a third-party platform
  • However, the two regimes are not coordinated and therefore the same information may partly be shared more than once and theoretically could end up showing different outcomes if e.g., Module 2 is applied and requires input from intermediaries other than the DPO. 
  • The lack of coordination may lead to unnecessary extra burdens for both the owner of the immovable property (taxpayer) and the tax authority
  • As the IPI is not scheduled to start until at least 2029, it cannot be excluded that the OECD may introduce a mechanism that exempts the DPO scenario to avoid duplicative reporting and efforts in general
Common Reporting Standard (”CRS”)
  • IPI overlaps with CRS regarding Module 2 and the income or cash-flow reporting as the revenue must be paid into a bank account, and the bank account may be reported in accordance with the CRS requirements by the bank
  • The CRS reporting may indicate an activity but not necessarily confirming the rental activity nor the jurisdiction of the immovable property being rented out
  • The overlap between IPI and CRS may therefore be more of a cross-verification available for the local tax authority when performing their daily duties of reviewing and challenging a taxpayer’s tax return

CLOSING THE GAP

THE IPI CLOSES THE GAP OF DPO

From an automatic exchange of information point of view, IPI will close the information gap left by the DPO which is focused on digital or gig economy.

Immovable property abroad may represent a significant asset value and, in some cases, also a taxable income stream which then raises questions depending on (1) the tax laws where the owner is tax resident, and (2) for the jurisdiction in which the immovable property is situated in

  • Jurisdiction of owner’s tax residence (examples):
    • Taxable income
    • Tax deductions
    • Capital gains/losses
    • Wealth tax
    • Inheritance tax
  • Jurisdiction of immovable property (examples):
    • Taxable income
    • Tax deductions
    • Capital gains/losses
    • Property (incl. land) tax
    • Stamp duty

  • Immovable property is according to the FATF task force an AML risk for e.g., undeclared income invested into real estate abroad (viewed as a possible money laundering scheme).
  • Immovable property is met by transparency measures on two fronts – tax and AML with each their purpose, and non-compliance may therefore be subject to penalties governed by both regulatory regimes.
  • For tax purposes, this means income and wealth that may not have been appropriately reported to the tax authorities. Reporting is typically governed as a self-declaration obligation for the taxpayer and exchange of information required a formal request by the relevant tax authority (note, phishing expeditions not allowed by requesting authority).
  • With IPI, the OECD addresses a long-debated lack of transparency for immovable property. The OECD’s objective of keeping it simple and to be implemented quickly is achieved through the chosen two-module structure. IPI is expected to strengthen the safeguards for tax and AML purposes from 2029 or 2030 leaving sufficient time for participating jurisdictions and if or when necessary, the relevant intermediaries to implement the IPI requirements.

OBSERVATIONS

MORE TAX TRANSPARENCY

  • Possible for participating jurisdictions to opt-in for Model 1 only which allows a quicker implementation as the local tax authority likely has access to the relevant information without involving intermediaries or owners of the immovable property.
  • It is a requirement that the information is accessible electronically.
  • Beneficial owner (“BO”) equals that under AML and is therefore consistent with other AEOI regimes e.g., the controlling persons definition under CRS.
  • All immovable property abroad is captured when situated in a participating jurisdiction, and exchange is based on signed Multilateral Competent Authority Agreement (“MCAA”).
  • Indirect ownership of immovable property abroad is captured when the BO threshold is exceeded (note the look-through approach applied on the intermediary structure). 
  • Like the effect of other AEOI regimes owners of immovable property will in the future have to navigate in an even more complex world of evolving tax transparency based on automatic exchange of information. 

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