Real Estate Investment Fund as a way to save on taxes

What a closed mutual fund is more profitable than other funds
How not to pay tax on property transferred to real estate management
What is the special regime of taxation of property and income from it in ZPIFN

Natalia Shishkina  
auditor of the audit and consulting group &ARNI »

Companies whose main activity is the receipt of income from transactions with property, often experience a serious tax burden.

At the same time, there is a legal way to reduce this load, in which revenue from leasing will be taxed only by VAT, the formation of the tax base for income tax will be deferred, and property tax will not be paid at all. These are closed-end mutual funds of real estate.

details   MUTUAL INVESTMENT FUND

A unit investment fund is a separate property complex that is not a legal entity. It includes both property transferred to the trust management of the managing company by the founder (founders) with the condition of combining this property with the property of other founders, as well as property received in the course of such management. The share in the ownership of the property of the mutual fund is certified by a security (a share) issued by the management company (Article 10 of Law No. 156-FZ).

ZPIFN – TOOL OF TAX PLANNING

Closed mutual investment funds (they are stipulated by Federal Law No. 156-FZ of 29.11.01 “About investment funds”) began to be formed in Russia only since 2003.

Their main difference from other (interval, open) unit investment funds is that, in addition to money and securities, other property provided for in the investment declaration can be transferred to the trust management of the ZPIF. The assets of closed mutual funds classified as real estate funds can include, for example, real estate, rights to real estate, real estate under construction and reconstruction, design estimates (Article 13 of Law No. 156-FZ).

Also significant differences between closed-end mutual funds are:

long-term nature of the investment of funds. ZPIF can not be established for a period of less than one year (Article 12 of Law No. 156-FZ)

less stringent in terms of liquidity of investments requirements for the composition and structure of assets. In addition to securities, investments are also allowed in other property, for example, in real estate (Articles 33, 34 of Law No. 156-FZ).

Thanks to these features, closed-end mutual funds of real estate (ZPIFN) are a convenient tool for tax planning. Having established the REIT, the owner of the income-generating real estate (for example, a supermarket) can legitimately postpone the payment of income tax and not pay property tax. In addition, the creation of a ZPIF, in addition to tax benefits, will also bring the investor an improvement in its business reputation, because of the full transparency of its activities. After all, the mutual fund management company is obliged to regularly publish the results of their work (Art. 53 of the Law № 156-FZ), the State, in accordance with Article 55 of the Law № 156-FZ provides tight control by means of the Federal Service for Financial Markets. Moreover, the Fund is required to annually audited by (vv. 49, 50 of the Law № 156-FZ), and all of the fund’s assets is taken into account in the specialized depositary (Art. 42 of the Law № 156-FZ).

OPINION PRACTICE
Arik SHABANOV , general director of the law firm « Prime legal " LLC &raquo ;:
– Advantages of managing the real estate object using the ZPIF mechanism are due to a number of tax benefits provided by the current legislation of the Russian Federation. In particular, real estate funds created by property owners to manage their property (rental funds) are not payers of income tax and property tax. The activities of such funds are aimed at obtaining income in the form of lease payments from an existing real estate object and to increase the market value of the facility. The difference of such mutual funds from other types of real estate investment funds is that rental funds are engaged in the exploitation of commercial real estate and receive income from leasing it. The introduction of real estate in ZPIFN gives owners the opportunity to increase the transparency of the business in extracting rental income, increase liquidity and investment attractiveness of their properties. However, before making a decision on the formation of the REIT owner must be aware that due to the increased attention on the part of tax authorities before it becomes necessary to abandon the underreporting of income from the property, instead of receiving tax benefits.

The inconvenience of creating a ZPIFNa is the inability at any time to withdraw money from it. So, the founders have no right to demand from the management company the termination of the contract, that is, the redemption of units before the expiration of the contract (paragraph 6 of Article 11 of Law No. 156-FZ). And the only way for a shareholder to get his money before the expiry of the contract is to sell shares in the secondary market.

However, if the REIT is created for internal purposes and only the holding companies are included, it is possible to reinvest the profit. For example, with the help of a contribution to the authorized capital of one of the founders of trust management.

OPINION PRACTICE
Arik SHABANOV , general director of the law firm « Prime legal " LLC &raquo ;:
– At the request of the owners of real estate, the income of the fund can be reinvested into existing and new projects related to the construction, reconstruction or purchase of commercial real estate. The activities of rental funds are aimed at obtaining revenues from the facility and at increasing the cost of the facility through its modernization or reconstruction. However, the fund can simply operate the building and make a profit in the form of rental payments, while saving on tax deductions. The scheme of such a fund is understandable and transparent: there is a business center belonging to shareholders on the rights of shared ownership, it brings profit in the form of lease payments minus the costs of operation, utility costs and maintenance costs of the fund’s infrastructure. The received profit (not taxed) is either distributed among the shareholders, or reinvested.

Elena GORDUKOVA , Legal Adviser of the Tax &Law Department of the company « FBK &raquo ;:
– It is necessary to take into account that the creation of a ZPIFN is connected with certain civil and legal risks. Since the division of property constituting a unit investment fund and the allocation of shares in kind are not allowed, it will not be possible to simply return the property contributed to the fund upon its establishment. Upon termination of the term of the trust agreement, the share gives only the right to receive monetary compensation. In this case, the property that constitutes the UIF is being realized. The proceeds are paid to the shareholders in proportion to the number of their shares. Thus, the shareholder, when making a real estate object in the ZPIF, is deprived of both full ownership of this property, and, in fact, of the real estate itself, receiving in exchange a security that certifies only the right to receive cash. In addition, the shareholder bears the risk of losses associated with investment activities.

TAXATION OF REAL ESTATE: SPECIAL MODE

The attractiveness of ZPIFNa primarily consists in the special taxation of real estate owned by the fund, and operations with it. So, since a unit fund is not a legal entity, it is not a payer of profit tax (Article 10 of Law No. 156-FZ, Article 246 of the Tax Code of the Russian Federation). Thus, the increase in the property of the unit investment fund, including in the form of income from the sale and lease of real estate, which makes up the assets of the fund, can not be taxed on profits.

However, the rules of trust management may provide for an interim payment to shareholders of income from trust management of property. In this case, the legal person – the shareholder is formed non-operating income, which is subject to income tax (Article 250 of the Tax Code of the Russian Federation). The date of receipt of income will be the date of receipt of funds to the settlement account of the shareholder (sub-item 2 of clause 4 of Article 271 of the Tax Code of the Russian Federation).

COMMENTARY OF THE EXPERT
Elena GORDUKOVA , Legal Adviser of the Tax &Law Department of the company « FBK &raquo ;:
– The taxation of the income received from the rental of real estate constituting the property of the ZPIF is only postponed until the moment of redemption of the units or until the interim payment to the shareholders of the income from trust management. At the same time, the redemption of the investment share is taxed according to the rules of Article 280 of the Tax Code. And the interim payment is recognized by the founder of trust management with non-operating income, taxable at a rate of 24 percent.

But the question of the obligation to pay property tax is one of the most acute and controversial in the activities of the ZPIFN. It is not clear who exactly is the payer of the property tax: a management company, shareholders or none of them. And whether the property of the mutual fund is included in the taxable composition.

Thus, Chapter 30 of the Tax Code does not separately mention mutual funds. And clause 1 of Article 373 of the Tax Code of the Russian Federation calls the payers of the property tax of the organization, that is, legal entities, to which the ZPIFN is not. The concepts “tax agent” » in Chapter 30 of the Tax Code there is no.

In addition, the object of taxation is property that is recorded on the balance sheet as a fixed asset (clause 1, Article 374 of the Tax Code). But the property transferred to the UIF is not on the balance sheet of the shareholders, but is recorded on a separate balance sheet of the management company (Article 15 of Law No. 156-FZ).

However, the tax authorities believe that the property transferred to the trust management of the mutual fund, as well as acquired under the trust management agreement of the unit investment fund, is taxed at the founder of trust management (joint letter of 10.06.04 of the Ministry of Taxes and Levies No. 01-3-03 / 666, the Ministry of Finance of Russia No. 01-СШ / 45). They are based on Article 378 of the Tax Code, which determines the specifics of taxation of property transferred to trust management. That is, according to officials, the property tax should be paid by shareholders. And the management company should notify them how much they should do it.

COMMENTARY OF THE EXPERT
Olga KHRYTININA , Counselor of the RF Tax Service of the III rd rank:
– The property constituting a unit investment fund is the common property of the owners of investment units and belongs to them on the basis of the right of common share ownership. In accordance with Chapter 30 of the Tax Code, property transferred to trust management, as well as acquired under a trust management agreement, is subject to taxation from the founder of trust management. Thus, the payer of the property tax in respect of the property constituting the UIF is the organizations recognized as founders of trust management, the owners of investment units. They calculate and pay a tax on the property transferred to a unit investment fund. In relation to property acquired and (or) created within the mutual investment fund, the owners of investment units calculate and pay the tax – in proportion to the value of their shares (a share in the common property of the shareholders).

In addition, on the basis of Law No. 156-FZ and Chapter 30 of the Tax Code, the management company that keeps records of the property of a unit investment fund is obliged to report to each taxpayer organization – the holder of investment units – information about the residual value of the property and its share in the common property of the shareholders.

However, with such arguments the tax authorities can be argued. The fact is that in the UIF the property is depersonalized and belongs to all shareholders simultaneously. The property constituting the UIF is separated from the property of the management company, the property of the owners of investment units and is accounted for by the management company on a separate balance sheet. On the specified property the separate account is conducted. The division of property constituting a unit investment fund and the allocation of a share in kind is not allowed (Article 11, 15 of Law No. 156-FZ). In exchange for the property transferred to the UIF, the shareholder receives a security (a financial investment) – a share. And he is not subject to tax on property (Article 374 of the Tax Code).

COMMENTARY OF THE EXPERT
Elena GORDUKOVA , Legal Adviser of the Tax &Law Department of the company « FBK &raquo ;:
– Property transferred to trust management, as well as acquired under a trust management agreement, is taxed on property from the founder of trust management (Article 378 of the Tax Code of the Russian Federation). But at the same time, only assets considered as fixed assets in accordance with the legislation on accounting are included in the objects subject to taxation (Article 374 of the Tax Code of the Russian Federation). The property transferred to the Treasury Department is taken into account from the trustee on a separate balance sheet, this property is independently recorded. And the founder, participating in the formation of the fund, takes into account on its balance sheet such an asset as a financial investment that is not subject to property tax. On the one hand, the legislator assigned the duty to calculate and pay the property tax on the founder of trust management (shareholder). But, on the other hand, the property transferred to the Mutual Fund is not taken into account on its balance sheet as an item of fixed assets. Thus, we can conclude that the legislation does not regulate the issue of taxation of property in trust. At the same time, it should be borne in mind that at present there is no arbitration practice with regard to the problem under consideration. Therefore, in my opinion, the exclusion by the founder of a trust management from the objects of taxation of real estate property, transferred to the ZPIF, entails serious tax risks.

As you can see, there are no formal grounds for paying the property tax on ZPIF. But most likely the company will have to argue with the tax authorities and, probably, the case can go to court.

Meanwhile, it is obvious that there is ambiguity about the issue of paying property tax on the property of the mutual fund. By the way, this is confirmed by the fact that now the position of the Ministry of Finance of Russia regarding the payment of property tax in real estate in the mutual fund (it is given in « Official position » below) does not coincide with the opinion of the tax authorities (see Official position &above). That is simultaneously there are two contradictory interpretations of this question. And, as stated in point 7 of Article 3 of the Tax Code of the Russian Federation, all of the unavoidable doubts, contradictions and ambiguities in the legislation on taxes and fees should be interpreted in favor of the taxpayer.

OFFICIAL POSITION
Alexei SOROKIN , head of the property and other taxes department of the Tax and Customs Tariff Policy Department of the Ministry of Finance of Russia:
– The issue concerning the taxation of real estate, which is part of mutual funds, is very complicated, because at present there is no unambiguous legislative regulation. And this applies not only to the real estate contributed to the UIF by its shareholder, but also acquired by the management company at the expense of the fund.
A unit investment fund is a separate property complex. Consequently, the property that makes up the fund is the common property of the owners of investment units and belongs to them on the basis of the right of common shared ownership. The rights to real estate in the unit investment fund are subject to state registration. The division of property constituting a unit investment fund and the allocation of a share in kind is not allowed. At the same time, according to Article 15 of Law No. 156-FZ, property that makes up a mutual investment fund is accounted for by the management company on a separate balance sheet and it is kept on its own account.
A unit investment fund is not a legal entity. Therefore, the payer of the property tax can only be recognized as founders of trust management – owners of investment units. At the same time, the object of taxation is property that is recorded on the balance sheet as fixed assets, and the tax base is their average annual value, defined as the residual value according to the balance sheet data. However, the organization owning the investment unit takes into account its share (and not the property itself) in the composition of financial investments as a security that certifies its share in the ownership of the property that constitutes the UIF.
It is also necessary to take into account that a very significant percentage of holders of investment shares are also individuals who are also payers of property taxes. At the same time, the tax base for calculating the tax on property of individuals is the inventory value of objects, determined by the bodies of technical inventory as of January 1 of each year. But in the real estate investment trust appraises the appraiser. Therefore, due to the fact that the amount of the tax base varies on a daily basis, it turns out that for each owner there is a need to calculate property tax on a daily basis.
Also, the Tax Code does not specify the procedure for calculating the tax base in relation to property that is part of the mutual fund. Due to the fact that the share of each individual owner changes daily, as well as the composition of the owners themselves, it is not possible to calculate the tax base within the current legislation.
I note that in the draft chapter 30 of the Tax Code of the Russian Federation, the Government of the Russian Federation provided for a norm that establishes that the property tax of a unit investment fund is paid by the management company at the expense of this property. However, at the stage of consideration of this project in the State Duma of the Russian Federation this offer of support was not found, since the said property is not the property of the management company. However, in this case it was not taken into account that the principle of levying the corporate property tax does not depend on the form of ownership, but is determined by the finding on the balance sheet of property recognized as the object of taxation under Chapter 30 of the Tax Code.
Therefore, to date, there is a legal uncertainty in the issue under consideration, which, in effect, allows you to legitimately evade taxation. Taking this into account, the Government of the Russian Federation forwarded to the State Duma of the Russian Federation a draft Federal Law No. 294450-4 on amendments to part two of the Tax Code of the Russian Federation, in which, inter alia, it is proposed to impose tax obligations on the property constituting the UIF on management company. At the moment, this project has already been adopted in the first reading.

VAT will be paid

But with VAT on the rental (sale) of real estate, which constitutes ZPIFN, there are no ambiguities – the tax should be paid by the trustee. And as a taxpayer. This follows from Article 174.1 of the Tax Code of the Russian Federation, according to which when performing transactions under the trust management agreement, the taxpayer’s duties are assigned to the trustee.

When selling goods, works, services, transfer of property rights, the trustee must display the relevant invoices on his behalf and reflect them in his sales book. Only him in the presence of invoices is granted a tax deduction. If the trustee performs other activities, the right to deduction arises in the case of separate accounting of goods (works, services).

The transfer of the same property to the ZPIF by the shareholders is not a sale (sub-item 4, clause 3, article 39 of the Tax Code of the Russian Federation). Therefore, the company, which became a participant of ZPIFN, is not subject to taxation.

WE CALCULATE THE BENEFIT

As you can see, it is more profitable for a company to transfer a building to a ZPIFN than to lease it directly. Below in « Opinion practice » this benefit is calculated on a concrete example. At the same time, we proceed from the fact that the tax on property transferred to the real estate administration is not paid.

OPINION PRACTICE
Arik SHABANOV , general director of the law firm « Prime legal " LLC &raquo ;:
– Compare the tax burden on the building when it is on the balance sheet of the company (LLC) and as part of a closed unit investment fund. Characteristics of the building: business center with an area of ​​4000 square meters. m. Leasing the building gives the owner a gross income of $ 1,920,000 annually. The market value of the building is $ 10,000,000 ($ 2,500 / sq. M., 4000 sq. M.). The book value of the building is $ 6,000,000 ($ 1,500 / sq. M., 4000 sq. M.)
When the building is transferred to the REIT, the cost of managing and maintaining the property is – $ 200,000 per year.
If the building is on the balance sheet of LLC, the income before tax is $ 1,720,000. After taxation (income tax, property tax), net income was only $ 1,127,200.
In the second case, when the property is part of the REIT, the income before taxation is $ 1,520,000 (the maintenance of the infrastructure of the fund cost $ 200,000). Due to the fact that ZPIF is not a payer of income tax and property tax, the net income of the fund amounted to all the same $ 1,520,000.
Thus, only in the first year of its operations the fund earned an additional nearly $ 400,000 only through tax incentives. In the long term, the benefit from asset management through the creation of a ZPIFN is only increased due to the possibility of reinvesting savings.

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