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www. pwc. com/ro European Real Estate Society Industry Seminar Tax efficient financing structures for real estate investments 19 October 2012

Tax efficient structures for real estate investments • Shareholding structure deployment or exit? • Financing debt (internal/external) or equity? Pw. C October 2012 2

Shareholding structures Typical issues to consider • Type of investor (private / institutional / investment fund) and tax residence • Purpose and time horizon of investment (rental / exit, asset deal / share deal) • Source of funds (private investors, banks, real estate funds) • Tax considerations (dividends, capital gains) Pw. C October 2012 3

Shareholding structures Common real estate investment structure Investors Holding company ‘Holding’ jurisdiction Project SPVs Pw. C October 2012 4

Shareholding structures Capital gain tax protection Holding structure Investors Regular structure Investors Holding company Pw. C Project SPVs October 2012 5

Shareholding structures Capital gain tax protection • Capital gains (profit) taxable in Romania • Profit may be substantial if property is “old” Regular structure Investors • Investors receive as payout dividends from net profits • Dividends may be subject to withholding tax double taxation Project SPVs Pw. C October 2012 6

Shareholding structures Capital gain tax protection Holding structure Investors Holding company • Capital gains (profit) not taxable in Romania or holding jurisdiction (double tax treaties) • Dividends usually not subject to withholding tax (if holding in EU) • Suitable for share deals • Substance is important! Project SPVs Pw. C October 2012 7

Financing structures How can finance be raised? • Group Internal financing: - Cash and cash reserves - Intra Group debt - Equity – from parent company - Hybrid financing • External financing: - Equity – raised on the market (IPO) - Bank debt - Hybrid financing Pw. C October 2012 8

Financing structures Debt and / or equity? Debt Equity • Interest expenses • Dividend payments out of net • Timing: as agreed • Thin capitalisation • Transfer pricing • Withholding tax profits • Timing: year-end • No thin capitalisation • Withholding tax (usually lower) Usually a combination between the two! Pw. C October 2012 9

Financing structures Thin capitalisation How does it work? • Limit on deductibility of interest expenses (3: 1 debt to equity ratio) • Limit also applies to net foreign exchange losses • Bank financing is excluded • Other limits: − 6% (!) level of interest for hard currency loans − 5. 25% (!) level of interest for RON loans Pw. C October 2012 10

Financing structures Debt and / or equity? Company financed 10% equity/90% debt Company financed 90% equity/10% debt • EBIT: 1, 000 • Interest expense: 200 • Interest expense: 20 • EBT: 800 • EBT: 980 • EAT: 670 • EAT: 820 • Net cash to shareholder: 870 • Net cash to shareholder: 820 • Tax burden: 130 • Tax burden: 160 Pw. C October 2012 11

Financing structures Tax considerations • Minimisation of the overall tax burden • Tax deductibility of interest expenses and foreign exchange losses • Minimise impact of thin capitalisation • Taxation of interest / dividend income (including withholding tax) • Tax arbitrage tax expense in high tax jurisdiction, tax revenue in low tax jurisdiction Pw. C October 2012 12

Financing structures General tax arbitrage Equity /debt Investor 30% Investor Financing company 5 -10% Loan(s) SPV Pw. C 30% 16% October 2012 13

Financing structures Hybrid financing • From a debtor perspective, financing is seen as “debt” deductible interest expense • From a lender perspective, financing is seen as “equity” return is considered dividend income (usually tax exempt) Equity Investor 30% Hybrid loan Debt SPV 16% • Hybrid loan agreement must meet certain conditions Pw. C October 2012 14

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