Real Estate Funds and Tax Caspar Noble Director

Real Estate Funds and Tax. Caspar Noble Director, Private Client Services 27 October 2006

Real Estate Funds Current commercial situation • Shift in real estate ownership patterns from direct to indirect ownership via professionallymanaged, diversified funds, evidenced by rapid growth of funds under management: – Globally, there was € 695 bn of real estate held in RE funds at end 2005 (€ 485 bn in 2004) of which € 405 bn in Europe (€ 310 bn in 2004) • Increase in cross-border capital flows within EU and, particularly, the eurozone: – € 54 bn in cross-border acquisitions in 2004 compared with € 18 bn in 1999 • Recent push into emerging markets – $3 bn of cross-border acquisitions in Asia-Pac (excl Japan) in 2004 • Impact of REIT regimes globally • Trends: – Increased complexity – Growing internationalisation 2 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Tax concerns 3 key levels: Investors Fund Asset 3 © 2006

The asset

Real Estate Funds Asset - acquisition • Transfer taxes / registration duties payable by purchaser? – Spain - 6%/7% depending on the location of the property – UK: stamp duty at 4% – France: 4. 8% transfer tax on the sale of shares in French real estate companies or 4. 89% registration duty on the purchase of buildings older than 5 years – Germany: 3. 5% transfer tax • Capital duty? • 6 th directive tax? • In many jurisdictions the above can be limited by acquisitions through local property holding Companies. May also be an administrative/legal requirement 5 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Asset – exit • Some jurisdictions do not tax capital gains realised by non resident investors in domestic real estate (eg UK). • Owning property through a local holding company may allow a tax free gain to be achieved by a share sale. • Commonly a separate company will be used to hold each company as this gives more options on exit. • ‘Participation Exemption’ – partial or complete exemption from tax on gains on the sale of shares (eg Netherlands, Luxembourg, Belgium). 6 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Asset – income and expenses Income recognition: Level of tax deductibility of expenses pushed down to asset level likely to be regulated: • Thin capitalisation rules: − UK – arm’s length − Germany – 60: 40 debt to equity on internal financing − Luxembourg – 85: 15 debt to equity, however 99: 1 may be permitted under a tax ruling • Transfer pricing rules: − UK – arm’s length − Germany – arm’s length − Luxembourg – arm’s length, however interest margin can be agreed in a tax ruling • Other deductions – ‘tax depreciation’ – Eg in Spain, tax depreciation is available on all tangible fixed assets (except land) at particular rates, depreciation methods and terms established by the tax regulations for various economic and industrial sectors 7 © 2006 Deloitte PCS Limited. Private and confidential

The fund

Real Estate Funds Key structuring considerations • Transparency: Investor receives share of income flow and capital value of real estate in line with percentage share of investment • Tax neutrality: Investment vehicle should be tax transparent, or at least not add material tax cost • Liquidity: Investor may be able to dispose of shares in the vehicle separately from asset itself 9 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Choice of vehicle – private structures Limited Partnership Corporate • UK, US, Guernsey, Netherlands CV, Ireland, Cayman Islands • Often tax-exempt or tax privileged through: - Domestic participation exemption • Tax transparent for most investors - Finance rulings/advance rulings • Familiar structure and tax treatment - Double tax treaties • Generally not heavily regulated - EU Directives • Flexibility: partnership laws not as strict as corporate laws eg no limits re distributable reserves • No actual tax transparency except for US investors who elect under ‘check the box’ rules • Listing possible in certain jurisdictions - eg Ireland • Greater regulation than Limited Partnership Corporate laws • Sub fund holding structure (eg Lux co) to give availability of DTR • Familiar corporate structure 10 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Choice of vehicle – public structures Real Estate Investment Trust – an alternative to listed property companies • Key = no tax at vehicle level for a REIT but investment and distribution requirements, etc • Now more than 20 jurisdictions eg: – 1960 - US REIT (Real Estate Investment Trust) – 1969 - Dutch FBI or FII (Fiscale Beleggingsinstelling) – 2003 - French SIIC (Sociétés d’Investissements Immobiliers Cotées); – 2004 - Italian FII (Fondi di Investimento Immobiliare); – 2004 - Luxembourg SICAR (Société d’Investissement à Capital Risque) – 2007 - UK REIT – 2007/2008 - German REIT (? ) • Displacing listed property companies? 11 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Real Estate Investment Trust - conditions • Should be no tax at level of Fund Advantage • Investment requirements Potential disadvantage • Distribution requirements • Recently in UK, proposed in March 2005 and to be introduced on 1 January 2007 • Closed Ended UK resident listed company − Conversion charge − 22% withholding tax on dividends − Taxable as UK property income in the hands of the investor 12 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Fund Type of Fund and refinements to the Fund maybe driven

The investors

Real Estate Funds Real estate fund investors Investor key concerns, some common to all (even non taxables), others specific eg: • Asset and Fund structured to minimise tax at those levels (as above) • No tax withholdings on distributions from Fund • Form of distribution from Fund – Capital/Income • No investor exposure to individual “CFC” rules eg US PFIC, UK s 739 issues • Ability to pick up credits for underlying taxes, if relevant - eg US • Limit or eliminate investor filings/disclosure caused by structure eg French 3% annual tax on real estate and US tax filings 15 © 2006 Deloitte PCS Limited. Private and confidential

Real Estate Funds Real Estate fund investors Addressing investor key concerns: Need to be addressed on a case by case basis: • Common issues to address in structure eg tax leakage and withholdings • Solution to specifics depends on weighting of investor concerns • Can be addressed in structure or add ons eg structure which can give capital and income returns, or feeder to give capital? • Structural solution to French 3% tax by listing or listed feeder? • Check the box on Fund structure for US taxables and for US tax exempts? 16 © 2006 Deloitte PCS Limited. Private and confidential

Contact details Caspar Noble’s contact details: Direct tel : +44 (0)20 7007 3393 Direct fax : +44 (0)20 7007 0178 Email : casparanoble@deloitte. co. uk Address : Hill House, 1 Little New Street, London, EC 4 A 3 TR 17 © 2006 Deloitte PCS Limited. Private and confidential

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