Investments Abroad: Calculating Taxes and Risks of REIT and Build-to-rent Projects at the Start

Ukrainian investors are actively investing in foreign real estate. In recent years, investments in REIT and Build-to-rent projects have become a popular option. The auditor and managing partner of K.A.C. Group Volodymyr Harkusha discusses the risks of such investments and taxes to be paid.

Why Ukrainians Choose REIT and Build-to-rent

Despite some differences in the organizational and legal forms of entities and the investment process, they all have a common idea: the investor becomes a co-owner of profitable real estate both at the construction stage and during operation. The investor receives income from part of the rental of the real estate object in accordance with the contract (there are some specific points to be made here). At the same time, the income is truly “passive”, professional asset management companies are engaged in real estate management, tenant search, advertising, repair or re-profiling of the object.

This business model has appeared in the USA since the 60s of the last century (currently, it makes up 60% of the global REIT market) and successfully operates today in more than forty countries around the world. Investments in REIT and Built-to-rent projects combine advantages and contain less risks than investments in financial instruments and direct investments in real estate. More precisely, they have collateral in the form of real estate objects themselves (unlike securities) and a low cash threshold for entering the project (compared to direct investments in real estate).

In addition, the investor can exit the project at any time by selling their asset on the market.

Given the many years of practice of operating REIT and Built-to-rent projects, their activities are controlled by state authorities; all documents and reports are publicly available, which ensures full transparency; they undergo an annual independent audit.

One of the first foreign REIT projects to appear in Ukraine were Georgian projects in Batumi. Later, they were joined by similar projects from Cyprus and Spain. Now there are already syndicated projects that combine investment offers in profitable real estate in Poland, the Czech Republic, and Slovakia at the same time.

How to Choose a REIT Rroject

The following factors influence the choice of a foreign REIT investment project:

• economic analysis: the amount of accrued interest, comparison of indicators with similar projects, operating costs and tax burden;

• background of the REIT project in the market, analysis of information about it in open sources;

• if possible, analysis of its reporting for recent years;

• stability of the region where the real estate is located.

Each of these factors is quite important and none of them should be neglected. For instance, the popular and well-known Cyprus is an EU member state with stable legislation, developed construction industry, and stable demand for real estate. However, this is an island with limited land plots, especially within the accessibility of the coastline.

Popular construction projects in the Paphos area border, and sometimes overlap, with land plots that belonged to the Turkish Cypriots before the division of Cyprus into Turkish and Greek parts in 1975. Therefore, in the event of the unification of the two parts of the island, these construction plots will be claimed by their former owners – the Turkish Cypriots.

The northern part of the island (the Turkish Republic of Northern Cyprus) is generally not recommended as a region for investment, since it is not recognized by any country in the world except Turkey.

Next Steps after Selecting the Project

When, based on a comprehensive analysis, the investor has decided on a priority REIT project, it is necessary to determine important points and potential risks that they should pay attention to.

The first step is a contract. The investor should pay special attention to what exactly (which instrument) they receive. This should be a security that accrues dividends, and not income that can be defined as operating (this is important from a taxation point of view).

The object should be clear to the investor as a guarantee, because in part, REIT project securities are issued for several construction projects that may not be interesting to the investor, are borrowed, or risky. Also important are the conditions for exiting the project and hidden operating costs.

Since we are talking about foreign REIT projects, the question of financial monitoring of a potential investor may arise, especially when it comes to significant investments. One must be ready to confirm the sources of origin of money, up to filing tax returns.

Method of financing. During the martial law period in Ukraine, there are currency restrictions, direct bank payment is not possible. Therefore, several options are available:

• through an international broker – for example, Interactive Brokers, Freedom Finance, XTB etc.;

• through a Ukrainian licensed investment company – some of them provide access to foreign markets;

• through the amount of money in currency allowed for export abroad;

• cryptocurrency.

Still, in any case, it is necessary to understand that all methods of financing must comply with the requirements of financial monitoring, the legislation of Ukraine and the state where the funds are invested.

Tax residence. Today, a significant part of potential investors in such projects, being citizens of Ukraine, have residence permits in other countries and have registered tax residency in these countries. They need to understand that the calculation and payment of taxes will be carried out according to the laws and, accordingly, the tax rates of these countries. This may become an unpleasant surprise for them. Even if the payer can independently determine their tax residence, in many countries dividends (namely, the main income of the investor) are taxed in the country of their origin, especially when it comes to receiving operating profit when selling a financial instrument of a REIT project on the market.

In Ukraine, domestic REIT projects are tax agents of their individual investors and pay taxes for them (9% personal income tax at a simplified rate and 5% corporate income tax). In the case of similar foreign investments, all issues of declaring, calculating and paying taxes are the responsibility of the investor themselves.

According to clause 167.5.4 of the Tax Code of Ukraine, dividends accrued by non-residents are subject to taxation in Ukraine at a rate of 9% and military levy. If tax was paid abroad, the amount of the obligation in Ukraine is subject to reduction by the appropriate amount. To do this, it is necessary to obtain a certificate of taxes paid in the country of dividend payment.

When calculating, paying and declaring dividends from a REIT project, one should not forget about exchange rate differences (and their possible additional taxation), because all amounts in the calculations are made in hryvnia at the NBU exchange rate. Moreover, for failure to submit, or untimely submission of the Declaration of Property Status and Income, the individual taxpayer bears responsibility established by the Tax Code of Ukraine.

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