Transfer pricing advice for the real estate sector

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Transfer pricing advice for the real estate sector

Transfer pricing

Transfer pricing is specially important in the real estate business. Please remember, terms of transactions concluded by related parties should be at arm's length i.e. should reflect conditions made on the market.

Transfer pricing is important for real estate companies

Transfer pricing is specially important in the real estate business since:

  • firms from real estate business usually operate through multiple project entities (SPVs) which are considered related parties,
  • project entities usually are provided with financing from the group,
  • various functions related with real estate projects are performed centrally,
  • external financing provided to the given SPV is usually secured by the related entity.


The following transfer pricing issues usually important for real estate companies:

Interest paid for debt financing by the project entities should reflect costs of interest that would be paid on the market. Interest rates used to calculate costs of debt financing:

  • should be determined based on the analysis of interest rates in comparable transactions concluded on the market,
  • should be validated at least every three years or every time when market situation or terms of financing change substantially – requiring analysis earlier.

Therefore, conditions of every financing provided to specific project companies should be analysed, if they reflect market terms (based on up-to-date TP study of market interest rates). The relevant TP study should take into account the specific aspects of the given financing, including e.g. credit rating of the borrower, timing when the financing is acquired, whether the financing is subordinated / secured.

In specific cases tax authorities may reclassify debt financing to equity and claim that interest for debt financing exceeding credit capacity of the project entity should not be tax deductible.

Therefore, it should be analysed, if every project entity financed with intra-group loans or bonds is able to rationally demonstrate that it is able to repay these loans or bonds (based on the analysis of market credit covenants).

The need to analyse not only the arm’s length level of the interest but also the balance of debt and equity funding has been highlighted by the OECD TP Guidelines for financial transactions published in 2020.

In real estate business it is usually hard to conclude, if project companies should pay license fees for using trademarks, know-how, etc. If any fees are not paid, tax authorities may however claim that project entities should recognize taxable revenues reflecting the fees that would be paid on the market for using comparable intangible property.

Therefore, it should be analysed if such fees should be paid and how they should be calculated.

In many cases project entities do not employ their own personnel, and corporate functions are performed centrally in the group. Fees for such corporate services should be analysed in terms of:

  • costs used to calculate charges for such services (e.g. shareholder costs should be generally excluded from the cost base),
  • allocation of these costs to project entities,
  • margins on costs of such services if they are within the range calculated based on margins of entities, who provide comparable services on the market.

Project entities should also be able to present substance of such corporate services and demonstrate value from such services related with specific projects. In this respect the tax authorities tend to perform the so-called benefit test – in practice, the burden of proof is shifted on the taxpayer. In light of the above it is recommended to gather the evidence demonstrating the benefits received by the taxpayer, including e.g. a memo summarizing the benefits related to particular services provided that could be presented during a potential TP audit.

Any guarantees regarding liabilities of the project entities should be remunerated on market terms. Such guarantee fees should reflect individual risks incurred by specific project entities. Therefore, transfer pricing studies of market guarantee fee rates should be performed.

In the real estate industry one of the solutions used are cross-guarantees, in which two or more related SPVs guarantee each other's obligations.

When there are several entities in a group that guarantee each other's financial liabilities, a model for mutual guarantees that would indicate the payment matrix of mutual guarantee fee settlements should be prepared.

In case the affiliated entities choose not to pay to the guarantor, a robust defense file should be prepared indicating rationale for such approach (e.g. analysis of the actual economic capability of the guarantor to control the guarantee risk).

Our offer:
  • Analysis of arm’s length interest rates in transactions performed by SPVs
  • Analysis of SPV’s debt capacity and risk of reclassification into capital
  • Identification of IP provided to the SPVs and determination of licence fees
  • Verification of central service costs and level of mark-up on costs
  • Support in the collection of evidence related to the benefit test performed by tax authorities
  • Analysis of arm’s-length guarantee fees
  • Support in preparation of a guarantee fee matrix for guarantee transactions among SPVs

What will you gain?
  • Support - provided by a dedicated team of real estate specialists
  • Improved efficiency - in terms of costs and taxable income
  • Minimised risk - of tax adjustment and fines, among others charged on management board members in relation to the statement on the preparation of transfer pricing documentation and the arm’s length nature of transactions

Why Deloitte?
  • We specialise in complex TP analyses for typical real estate transactions.
  • We cooperate with the sector leaders offering tailor-made solutions.
  • We have vast experience in analysing transfer pricing in real estate sector on both local and global level.
  • We cooperate with Deloitte tax and legal teams serving real estate sector companies thus providing coordinated comprehensive tax and legal support.

Contact

Tomasz Imiołczyk

Tax advisory
Partner Associate in transfer pricing team
timiolczyk@deloitteCE.com

Tomasz has extensive experience related to applying transfer pricing in the business restructuring. Moreover, he has been engaged in projects related to discussions with the relevant tax authorities of APA / MAP motions as well as participated in litigation in the field of transfer pricing. He has been also involved in projects related to preparation of transfer pricing documentations and benchmarking analyses verifying arm’s length character of various intercompany transactions.