The main driving factors behind different kinds of structuring of real estate transactions in Sweden are: applicable tax (including VAT) rules and forms of financing.
Since 2003, the typical structure of a real estate transaction is through a sale and purchase of the shares in a limited liability special purpose vehicle (SPV) holding the real estate or property in question. In Sweden, there are, as of now, no thin capitalisation or similar rules, meaning that a dormant limited liability company (LLC) with only 50,000 Swedish krona in share capital may purchase a real estate worth 100 million Swedish krona (or more, with no limitation based on legal requirements), establishing an SPV structure for the sale of the property (ie, packaging). The background behind this structuring is that, since 2003, such share transfers have been, as a general rule, tax exempt, meaning that there will be zero income tax on the profits made on the sale of the shares. Applicable taxes will then be stamp duty - and principally income tax - on the property transfer into the SPV holding. However, the property transfer into the SPV will normally be made on a price or value equal to the tax residual value, also involving zero income tax in this step of the structuring.
Direct real estate transfers carry a stamp duty of (currently) 4.25 per cent for legal persons (less for physical and private persons and some other legal entities) based on the higher of the purchase price and the tax value of the property the year before the transfer. In the case that there is no tax value on the property - because it involves a property category that, under law, is exempt from property tax (such as certain public service properties, for instance schools, care properties) or involves a newly established property through land-parcelling measures - there will be a need for a valuation report. Currently, there is no stamp duty on the transfer of shares of real estate companies.
This means that most transactions, from a processing and documentation standpoint, are made as indirect share transfer deals, rather than direct property transfers. This also means that the typical real estate transaction is very similar in its nature to any other private merger and acquisitions (M&A) transaction, regularly including different moments of due diligence (legal, tax, financial, technical and environmental reviews), pre-agreement documentation based on an information memorandum (IM) and a letter of intent (LOI) with exclusivity, and a share sale and purchase agreement (SPA). Except for the obvious need of expert knowledge in real estate law, the main differentiating factor from general M&A work is that the asset base and real estate transactions (property SPVs) normally do not involve employees and labour law issues.
Other important structuring measures involve different kinds of land amalgamation or land-parcelling measures. In both the transfer of properties into an SPV and stand-alone transfers, many deals are concluded through different land-parcelling measures involving decision-making by the land survey authority. Except for the need to understand and comply with legal requirements for such measures under applicable legislation, this normally requires certain planning and flexibility with regard to the timing and consummation of the transaction. Again, such measures as part of a real estate transaction are typically tax driven, and are made in order to avoid stamp duty on the property transfer. Thus, such property transfers are currently exempt from stamp duty.
There has been a proposal for change in the tax legislation for packaging of real estate into SPVs, involving, among other things, proposed income taxation on the sale of shares and changes of applicable rates of stamp duty, possibly also extending stamp duty charges to property amalgamation measures and to the sale of shares. A government inquiry (Sw. SOU 2017:27, Vissa frågor inom fastighets-och stämpelskatteområdet) released its report on such issues in 2017. However, several government representatives, many market players and tax experts have criticised the suggested changes and it is commonly believed that the proposal, in its current form, will not lead to legislation.
Certain modifications to the Swedish tax legislation have been implemented as of 2019, introducing, among other things, new interest expense deduction limitations for corporations, including restrictions on interest deduction in certain cross-border transactions (as a result of the OECD BEPS Project and the European Union Anti-Tax Avoidance Directive), as well as a reduction of the corporate tax rate in two steps to 21.4 per cent from 1 January 2019 and to 20.6 per cent from 1 January 2021. These recent changes, however, have not had a significant impact on how real estate transactions are generally structured.
Further changes in tax legislation will most likely lead to variations in structuring of real estate deals and the market closely follows the legislative process.
During recent years, an extensive variety of real estate financing vehicles has evolved based on international practices and market needs. Traditional real estate asset-backed financing has been supplemented by publicly issued and traded instruments on the company holding level, such as corporate bonds and preference share structures.
From a processing and documentation standpoint, many financing structures involve the international financing market and syndications, meaning that documentation follows international standards (eg, the Loan Market Association (LMA) standards).
Most value-add real estate investments in Sweden currently involve different levels of development projects, both commercial and residential. Many such investments involve local entrepreneurs, with the need for financing also during the development phase. In such deals, involving forward purchase or forward-funding elements, structuring of transfer of ownership, security interests and project management will depend heavily on the financing structure.
Publicly traded real estate-owning companies are not treated differently from other publicly traded companies. This means, among other things, that when acquiring more than 5 per cent of the votes or share capital in such a company (with further thresholds at 10, 15, 20 (etc) per cent), a notification must be made to the Swedish Financial Supervisory Authority (FSA), and information about the acquisition must be made public.
When acquiring 30 per cent of the votes or share capital, an acquirer must make a mandatory takeover bid to all shareholders. At 90 per cent, the holder of such shares has a squeeze-out right in relation to the remaining shareholders.
In a takeover situation, the board must issue a recommendation to the shareholders regarding whether to accept the bid or not.
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