Borrow money to avoid paying taxes

[Shlomo]

I want to purchase a real estate company in one EU country with a portfolio of residential buildings, where the taxes are very high, and I was wondering if it might be a viable alternative to start another company in another EU country and borrow the capital to the other company? Then interest payments could offset some of the corporate taxes, because I can deduct the interest cost from the profits of the company, in addition to amortizing on the loan. If it would be beneficial, a relative could own the real estate company, whereas I own the company that provided the loan. Another alternative could be that the company providing the loan is a holding company.

 

[Martin Everson]

You basically want to lower your tax base in the high tax country i.e tax base erosion and profit shifting ultimately referred to as BEPS. There are EU anti-BEPS measures out there and this comes under EU ATAD legislation Directive 2016/1164/EU. You want to check with accountant in country you are doing this in. There are interest deduction thresholds etc. The legislation specifically targets inter-company loans and the rate used. Arms length principle applies.

In terms of loan from a holding company then the EU parent subsidiary applies. Holding companies now need tangible structures and presence to benefit from place of residency of the holding company. The taxman will 100% scrutinize any such structure. Unfortunately your trying to do something that the EU specifically brought in legislation to prevent

 

[OffCap]

I want to purchase a real estate company in one EU country with a portfolio of residential buildings, where the taxes are very high, and I was wondering if it might be a viable alternative to start another company in another EU country and borrow the capital to the other company? Then interest payments could offset some of the corporate taxes, because I can deduct the interest cost from the profits of the company, in addition to amortizing on the loan. If it would be beneficial, a relative could own the real estate company, whereas I own the company that provided the loan. Another alternative could be that the company providing the loan is a holding company.

As @Martin Everson said there's rules to limit the benefit of this and make it tough.

First, you've got withholding taxes on interest paid.

Then, you've got transfer pricing rules.

Then, you've got thin capitalization rules.

Usually, when you do the analysis you find unless the amount of money is huge the savings aren't worth the extra overhead.

In general, it's quite difficult to do tax planning to reduce real estate profits. First, those profits are clearly taxable locally. Second, the mechanisms to move the income usually aren't massive and the scale required to benefit is substantial.

Depending on the type of real estate and rentals in addition to using interest you can use foreign marketing and management expenses to shift some income but once again the amounts are typically so low as a percentage of income that you need a truly massive portfolio for it to really pay off.

 

[CP6UJA]

If it is worth your while, here pwc to structure it for you, or another major consultant. Thats basically how most big guys do it. Even for a developed country, OECD country, it may be difficult to pursue you. Look at what an Australian politician accomplished. Barnaby Joyce, Angus Taylor, Australia and the Caribbean - Michael West