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UK Amongst Most Expensive Countries To Invest In Commercial Property Due To Taxes

UK Amongst Most Expensive Countries To Invest In Commercial Property Due To Taxes

Research conducted by Taxand, the world's largest global organisation of tax advisors to multinational businesses, has shown that the UK is the fourth most expensive country in the world for investing in commercial real estate.

The Taxand total tax take (T3) research into the real estate market, conducted across 23 countries across the globe, reveals that taxes on commercial property rental in the UK cost investors a massive 33.80% of total income, well ahead of most other jurisdictions.

The UK's rate was only topped by Canada (53.85%), USA (41.17%) and Norway (36.34%). The alarmingly high total tax rate in Canada is largely the combined result of high levels of both income tax, which stands at a rate of 30%, and real estate tax at 3.60%.

The research has also found that the lowest rate of tax for commercial rental income was in Finland with just 8.99% recouped by the taxman. Other jurisdictions with low levels of total tax take on commercial rent income were Cyprus (11.4%) and Switzerland (13.28%).

The Taxand T3 research, now in its second year, reveals that the total tax take on commercial property rental income across the globe has reduced by an average of 0.75% on last year. In some countries, the decrease was very notable, for example in the Netherlands where the overall rate reduced from 25.67% to 17.67% suggesting some marked changes in government policy towards commercial property. This increase is predominantly due to the effective annual depreciation on commercial centres which is deductible from the income tax basis.

Still, in six jurisdictions the overall rate increased, most notably in India where it went from 4.21% in 2009 to 24.85% in 2010, due to a decrease in the effective annual depreciation rate on commercial centres which in India fell from 10% to 5%. Elsewhere across the globe, China saw an increase of 29.04% to 32.90% and Mexico an increase of 23.90% to 25.36%. Malaysia, Poland and Portugal also recorded minor increases.

The scope of the research has this year also extended to the total tax take on the sale of commercial property and demonstrates that Norway, with a rate of 21.18%, is the most expensive country in the world for commercial sales, with India, Brazil and the USA also included in the top five.

Norway's expensive rate is predominantly due to the high rate of VAT on construction which swallows 25% of the sale value.

Cyprus is the cheapest country in the world by tax on commercial property sales with a rate of just 2.74% with Romania (4.02%) and Poland (4.28%) also amongst the cheapest jurisdictions.

Keith O'Donnell, Head of Real Estate at Taxand, said:

"Our second review of total tax take in the global real estate market has revealed some fascinating insights, with Canada now topping the rankings as the most expensive country for commercial property rental and Norway the most expensive location for commercial sales.

"Perhaps more interesting are the significant year-on-year changes in total tax take introduced on commercial rental in certain countries. The overall decrease has undoubtedly prevailed as a result of competition for inward investment in the wake of the global financial crisis. Whilst governments will undoubtedly have considered an increase to plug budgetary deficits, authorities are clearly more concerned about the potentially disastrous knock-on effect that could be caused by a depressed property market."

"Still, India's dramatic increase in the effective rate shows how the changes in something apparently banal, like tax depreciation, can significantly diminish the cash flows from a project, and thus the attractiveness of certain assets.

"Our research draws some interesting conclusions regarding the appeal of particular locations for investment in commercial real estate with a number of developed economies such as Canada, the UK and the US remaining outside the cheap bracket and less popular choices such as Cyprus, Finland and Luxembourg emerging as attractive alternatives from a tax perspective."

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Taxand T3 research methodology

Taxand has updated and expanded last year's T3 data.

To arrive at the figures, Taxand has taken into account VAT (or its local equivalent), corporate income tax, and property taxes. The property taxes were usually subject to various country-specific assumptions and modifications as they often differ on municipality basis or sometime just location basis. Those were reviewed by the coordinating Taxand team to assure comparability. Administrative fees, notary fees, court fees were excluded as having a relatively low impact on the overall tax take.

To ensure comparability of the results, certain data has been fixed such as size of the building, investment costs, and 100 percent non-interest bearing equity financing.

With all of that built into the model, Taxanders adopted it to the local law.

Your Taxand contact for further queries is:
Abigail Tarren, Global Marketing Director
T. +44 (0)207715 5243

Taxand's Take

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