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Case study 6: Real-estate company

Updated time: Jul 28, 2018 , 12:34 (UTC+08:00)

Ferenc Kiss, a Hungarian high-net-worth individual living in Budapest, is investing substantial amounts of his wealth in real estate, both in Hungary and in other central and eastern European countries. Mr Kiss wonders how the return on his investment can be arranged in a tax-effective manner. The same question arises if he sells the property in these countries and realises a gain.

Suggested solution:

Assuming that Mr Kiss is not engaged in developing real estate, the nature of his income is rental income or, in the case of sale, a capital gain. In many countries, this is considered "passive income" for tax purposes.

The acquisition of real estate in the countries concerned can be made through local companies directly or indirectly controlled by Mr Kiss. These local companies can be wholly owned by a holding company in a country with a favourable holding-company regime. Any dividends distributed by the companies in the countries where the real estate is situated should not be subject to:

  • withholding tax on dividends (or only at a low rate)
  • corporate income tax upon receipt by the holding company
  • withholding tax on dividends paid by the holding company

Moreover, if the holding company sells the shares in the real-estate companies, any capital gains resulting therefrom should not be subject to corporate tax.

A country meeting the above conditions for the holding company regime is Luxembourg. A Cyprus company holding the Luxembourg company, and directly or indirectly owned by Mr Kiss, would be a tax-effective solution. See the diagram below.

Trust Formation & Asset Protection Case Study 6 Real Property Company