Buying a property company instead of a property is common in Europe, and it is usually the seller’s idea. The reason is transfer tax: in several jurisdictions a share transaction can carry a materially lower cost than a transfer of the asset. That saving is real, and so is what the buyer takes on in exchange, which is everything else the company has ever done.
The buyer inherits the history
An asset purchase transfers a building. A share purchase transfers a company, and with it every tax return it has filed, every contract it has signed, every employee it has employed and every dispute it has had or may yet have. A company incorporated for a single acquisition three years ago carries little history; a company that has traded for twenty years carries a great deal, and the diligence required is correspondingly different.
The tax base usually falls
In an asset deal the buyer typically acquires the property at a new, higher base cost for future depreciation and future gains. In a share deal the company’s existing base cost usually carries over, which means the buyer inherits a latent gain that will crystallise on a future sale. That deferred cost has a present value, and a buyer accepting a share deal without pricing it has paid the seller’s transfer tax saving without receiving a share of it.
A share deal saves the seller’s tax today and hands the buyer someone else’s history and someone else’s tax base. Both belong in the price.
Anti-avoidance rules across Europe
Tax authorities anticipated this. Several jurisdictions apply rules that treat a transfer of shares in a company whose value derives principally from real estate as a transfer of the real estate itself, at least for transfer tax purposes. The Netherlands has specific rules in this area, set out in our note on Dutch real estate transfer tax and the share deal question, and Spain applies its own long-standing provision. Assuming a share deal avoids transfer tax, without checking the specific national rule, is one of the more expensive assumptions available.
Diligence has to cover the company, not the building
Share deal diligence adds corporate, tax, employment and litigation review to the property review. The tax history matters most: open periods, positions taken, deductions claimed, transfer pricing on any intragroup arrangements. A buyer should also establish whether the company has ever had other assets or activities, since those leave liabilities behind long after the assets are gone.
Protecting the buyer
The protections are warranties and indemnities, an escrow or price retention, and increasingly warranty and indemnity insurance, which allows a seller to exit cleanly while giving the buyer a claim against an insurer rather than against a distributed shareholder. Specific known risks belong in specific indemnities rather than in general warranties, because a general warranty against a disclosed risk is worth nothing.
Choosing between the two
The right structure depends on the company’s history, the size of the latent gain, the transfer tax differential and the buyer’s own position. A clean single-asset company with a recent base cost is straightforward. A long-trading company with a low base cost and an untidy history may be worth buying only as an asset, whatever the transfer tax. The debt structure over the acquisition is a related question, covered in our note on debt or equity in real estate through a Dutch BV.
Montclare manages and structures European real assets for institutional and private investors, from acquisition through to exit. Our services are set out on our services page.
This article is informational and does not constitute investment, tax or legal advice. Asset management and investment advice are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.