Cross-border property is usually assembled by two sets of hands. One builds the structure: the acquisition vehicle, the holding chain, the financing agreements and the tax analysis that supports them. The other runs the asset: leases, capital expenditure, service charges, tenant negotiations, eventual repositioning. The two frequently never meet. The structuring adviser signs off at completion and moves on; the asset manager inherits an ownership chain whose logic nobody explained and whose constraints surface only when something has to change. Much of the value lost in European real estate, and more of the risk created, sits in that gap.
Where the structure stops being paperwork
The gap is easy to underestimate, since a structure looks inert: a chart with boxes, produced once and filed. In practice it is a standing set of constraints on how the building can be operated. If the security package requires lender consent above a capital expenditure threshold, the letting strategy is not free. If cash is swept to service debt above the property company, the asset does not fund its own works. If the entity holding legal title did not sign the management agreement, every operational contract has to be checked before anyone can vary a lease. This becomes a problem when nobody operating the asset knows why the chart looks the way it does, and nobody from the structuring side is still in the room when the asset asks for something the chart did not anticipate.
A structure is not a document delivered at completion. It is the set of constraints the asset has to live inside for the whole of the hold period, and somebody has to remember why each one is there.
Vehicle and jurisdiction: the decision that fixes everything after it
The first decision is also the least reversible. Real estate income and gains are, as a matter of near-universal treaty practice, taxable where the building stands. No holding jurisdiction changes that. What it does determine is everything above the property company: how profits are repatriated, where the financing is placed, how the eventual sale is taxed at shareholder level, and how a co-investor or a lender can be admitted without touching the asset itself.
Within that constraint the live question is whether to buy the building or the company that owns it. An asset purchase generally gives a clean start, a stepped-up base for local depreciation and no inherited history. A share purchase generally avoids transfer tax on the property but inherits the seller’s tax base, disputes, contracts and compliance record. The choice is rarely free: sellers prefer share deals for exactly the reason buyers resist them, and the price gap between the two routes is where the structuring conversation and the underwriting conversation have to become one conversation.
Financing, and whether the interest actually deducts
Leverage is where the two worlds collide most expensively, because interest is only useful where the taxable income arises. Interest booked in a holding company above a foreign property company does little if the rental profit is taxed in the country of the building and the deduction sits elsewhere, unusable. The debt has to reach the level that generates the income, and pushing it down engages a second set of rules.
Those rules operate in layers. Pricing must be defensible on arm’s length terms, both the rate and the quantum. Earnings stripping regimes cap net interest by reference to a measure of operating profit, with thresholds and group ratio tests that behave very differently for a single asset than for a portfolio. Anti-hybrid and anti-abuse provisions test whether the lender is taxed on the receipt and whether the arrangement has a purpose beyond the deduction, and local rules add their own restrictions on top. Gearing therefore cannot be set by the credit market alone: the maximum available leverage and the maximum useful leverage are different numbers, and only the second belongs in the model. The interaction of the caps is set out in our note on interest deduction limits under ATAD.
Who signs, and what that does to the ring fence
Once the boxes exist, someone has to act through them, and this is where operational reality most often departs from the chart. Property management agreements, letting mandates, construction contracts, utility supply, insurance: each has a correct counterparty, and each one signed by the wrong entity weakens the separation the structure was built for.
Two consequences follow. The first is liability: a ring fence exists so that a problem at one asset does not reach the others, and it fails quietly if a single entity has been contracting for several. The second is residence and permanent establishment. If the decisions that matter are taken by people who are not the directors, in a place that is not where the company is said to be managed, the residence position is exposed whatever the register says. Boards need real authority, real information and real meetings; delegated powers need to be written down and their limits observed. That is a governance question, not a filing question.
VAT on the way in, and the cost that never comes back
VAT is discovered late, because it looks like a timing matter and sometimes is not. Two questions decide it. First, the treatment of the property: whether the transfer falls inside or outside the VAT system, whether an option to tax is available and has been validly exercised, and whether the transaction qualifies as the transfer of a going concern. Second, and quite separately, the recovery position of the acquiring group on its own transaction costs.
The second question is where holding structures get caught. Acquisition costs on a substantial transaction are themselves substantial, and the VAT on them is recoverable only where the entity incurring them carries on an economic activity with a right to deduct. A company that does nothing but hold shares generally sits outside that; a company supplying management services to its subsidiaries on proper terms generally sits inside it, provided the arrangement is genuine, documented and priced. Deciding after completion which entity ought to have engaged the advisers is not a decision but a repair, and usually an incomplete one. Once the building is held, the capital goods adjustment mechanism keeps the question open for years, so the operating team has to understand that a change in use carries a tax consequence.
The exit, and the limits of the participation exemption
Structures are built for the sale, and the sale is where the assumption most often fails. A Dutch holding company disposing of shares in a qualifying subsidiary can, where the conditions are met, realise the gain without further corporate tax under the participation exemption. That is a real benefit at holding level, and the reason the layer exists. It is not a shield against tax in the country of the building.
Many jurisdictions tax the indirect transfer of real estate through rules that look through the company where its assets are predominantly property, and many charge transfer tax on the acquisition of shares in such a company. The exemption can therefore apply perfectly at one level while the gain is taxed at another, and the buyer may face a charge that changes his price. The exit analysis has to be run at both levels, on the structure that will exist at the time of sale rather than the one built on day one.
A hypothetical worked comparison
The arithmetic below is illustrative only. The figures are round and invented, and show the mechanics rather than any transaction, market or actual rate. Assume a building agreed at 100, sitting inside a company whose tax base in it is 60 because the seller has held and depreciated it for some years. Assume, purely for illustration, a transfer tax of 10 per cent on an asset purchase and a corporate tax rate of 25 per cent.
- Asset purchase. The buyer pays 100 plus 10 of transfer tax, so 110 of cash out. His depreciable base is 100, and he inherits no history and no legacy claims.
- Share purchase. The buyer avoids the 10, assuming no transfer tax arises at share level, but takes over a base of 60. The 40 of latent gain will be taxed at some point, worth 10 at the assumed rate, and he loses depreciation on 40 of value across the hold. He also inherits everything else in the company.
On these hypothetical numbers the two routes are close in headline terms, and the outcome turns on three things the headline does not show: how the latent tax is shared in the price, whether the buyer’s own exit will be a share sale that passes the same discount to the next buyer, and what the inherited history is worth as a risk. A discount of the full 10 makes the share deal cheaper for the buyer and unattractive to the seller; no discount at all reverses that. Where the parties land can only be negotiated by someone holding both halves of the analysis at once.
One roof
The case for keeping structuring and asset management under a single roof is not that either discipline is hard in isolation. It is that the decisions described above are joint decisions, taken once, with consequences that run for the entire hold period and land on whoever is still there at the end. The vehicle constrains the financing; the financing constrains the capital expenditure; the contracting entity constrains the liability; the VAT position constrains which companies should exist at all; and the exit tests all of it at once. Where an activity is regulated, it is carried out by separately licensed parties rather than by the structuring or operating team. Teams that hand the file over at completion are not doing anything wrong. They are simply not the ones who find out.
Montclare works as an operating partner and structuring counterparty on European real estate and asset platforms. Our approach is set out on our asset management page.
This article is informational. It does not constitute investment advice, an offer, or an invitation to invest, and it is not a financial promotion. Regulated activities are carried out only by appropriately licensed parties.