What is the difference between your company investing directly in property instead of acquiring shares in a property company? What are the benefits for you as a business owner? In this blog, we will shed light on the pros and cons of the two different ownership structures.
If you are an individual wondering whether to invest in property privately or set up your own company that buys property, then this blog is useful for you too.
In the case of a limited company's direct purchase of property, the legal title to the property is transferred from the seller to the buyer (the company). Alternatively, the buyer can acquire the property indirectly by buying the shares in a property company. In the latter case, the property remains in the same legal entity, while the shares change ownership. This means that the transaction is governed by a share purchase agreement rather than an ordinary purchase contract and deed.
Also read: Norwegian property tax for residence and commercial properties
For outright purchases of property, the purchase price is based on the value of the property, and the buyer must pay a stamp duty of 2.5 per cent of the sales value upon registration. The exception is newly constructed buildings for first-time sales, where the stamp duty is only calculated on the land value.
Purchase price = Property value + stamp
When purchasing a property company, the purchase price is based on the value of the property, with additions for other assets and deductions for the company's liabilities. A deduction is also made in relation to the property's tax depreciation basis to balance the tax disadvantages of share purchases rather than direct property purchases. There may also be other deductions and additions when calculating the purchase price, but for the sake of general presentation, we will stick to the following:
Purchase price = Property value + bank deposits + receivables - payables - tax
A key factor in the negotiation of share purchases is the tax discount. The buyer wants this discount to be as high as possible, while the seller wants it to be as low as possible. Typically, this discount is 8-10 per cent.
A tax rebate must be agreed for a deduction to be made for this. This does not follow from the background legislation.
When purchasing shares, and not property directly, the tax position, including the depreciated balance values, remains as before in the target company. The tax value of the balance of the property is often lower than the property value, precisely because the target company has owned the property over an extended period and depreciated it continuously, while the value of the property has increased. However, if the property had been purchased directly (i.e. not through shares), it would in a way be a fresh start. The buyer would then have received today's actual property value as the input value for tax purposes. In other words, the tax bill would have been lower, as there is less taxable profit. This is a disadvantage when buying shares, which is compensated for through the tax rebate.
The tax rebate is often set as a percentage (for example 8-10%) of the difference between:
When buying a property outright, the buyer can carry forward the property's tax depreciation basis, which can provide tax benefits. Depreciation is calculated based on the property's building value and distributed over time according to applicable rates.
In the case of share purchases, the depreciation basis is not carried forward in the same way. This can reduce the buyer's ability to utilise tax depreciation, which is often compensated through the tax rebate mentioned above.
Before your company invests in property, it is a clever idea to be aware of the relevant ownership structure. If you acquire shares in a property company, it is important to make sure that a tax rebate is agreed, and that debt assumption is considered. Are you unsure what the right structure is for you? Do not hesitate to get in touch!