Typical types of property transactions
If your company is considering a property transaction, the two most common transaction types are the property sale and purchase and the quota sale and purchase. The main difference between the two property transaction types is that in the first case it is the property itself that is sold and the title to the property will change, while in the case of a quota sale and purchase, quota in a company having property is sold, i.e. the direct title to the property does not change.
1. Property sale and purchase
The subject of the property sale and purchase is the property directly. It is the direct ownership structure of the property that will change as a result of the transaction. Unless agreed otherwise, the rights and obligations relating to the property (licenses, lease contracts etc.) transfer to the new owner automatically.
Beyond general legal restrictions (e.g. licenses, mortgages etc.) it is important that a written contract and a lawyer's cooperation are required for the transaction, which is typically a fast and simple legal process.
2. Sale and purchase of quota of a company having property
In the case of a quota sale and purchase, the subject of the transaction is not the title to the property directly but a participation in the legal person owning the property. Therefore, in this case, the direct ownership structure of the property remains unchanged; it is the company structure over the property that changes.
Accordingly, not only the property is transferred indirectly to the sphere of interest of the new owner but also the relating contracts, licenses, employees etc. in the target company. This way, the company owning the property may continue its economic activity without interruption. However, this also means that identification of the historical risks of the target company concerned by the transaction is essential, which may take place in the form of a preliminary legal, tax, financial, technical etc. due diligence. For this reason, a quota sale and purchase will require more lengthy preparation than a property sale and purchase that must be taken into account in the timing of the transaction.
3. Other transaction types
In addition to the two main types of property transactions described above, there are, of course, many other form in which properties can be sold. Whether the transaction is a business line transfer, a contribution in kind or a special transaction (preferential transformation, preferential exchange of shares etc.),the tax consequences that the seller of the property must calculate with must be examined specifically in each case.
Key tax aspects in the case of property sale and quota sale transactions
Property sale and corporate tax
- According to the main rule, in the case of a quota sale and purchase, the capital gain realized on the sold quota is included in the corporate tax base, unless the conditions relating to announced quotas are fulfilled.
- In the case of a property sale and purchase, the main rule is that the corporate tax base may be the difference between the price and the carrying value calculated for the property. The difference of the sales price from the book value of the property and whether the property is sold as a tangible asset or is put on inventory are not only important circumstances from the perspective of the sale and purchase but also from that of later tax payment obligations.
The future tax obligations of the buyer are also determined by whether he is buying a property or a quota. For this reason, the buyer must examine before the acquisition the tax burden that will come with a potential future sale.
Property sale and value-added tax (VAT)
- In the case of a property sale and purchase, an examination of VAT payment obligation is a must. In certain cases (e.g. building plots, new properties),the transaction is VAT-able subject to straight-line taxation and the buyer may deduct the VAT charged according to the general rules.
- In other cases, the property sale may be exempt from tax in which case the buyer will have the right to deduct tax. However, in the case of an tax exempt transaction, the seller may opt to make the transaction taxable. In this case (if the relevant statutory conditions are fulfilled) the property sale may be subject to domestic reverse taxation, which may be a very favorable arrangement for the parties from a VAT financing point of view.
While VAT payment obligation requires careful planning and assessment in the case of property sale and purchase transactions, a quota sale and purchase will be exempt from tax according to the main rule.
Duty
- In the case of a property sale and purchase, the party acquiring the property may have to calculate with a duty payment obligation in each case. The base of the duty is the market value of the property not reduced by any encumbrances.
- On the other hand, in the case of a quota sale, duty payment obligation only arises if the legal person in question qualifies as a company having domestic property.
In addition to the versatile options for exemption from duty payment obligation, we also have to mention that since 2020, the transferring party may also have duty payment obligation in the case of the sale of a property reclassified to be included within city limits or the sale of a company having a property reclassified to be included within city limits.
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Consideration of pros and cons when planning a property transaction
After a brief review of the two main types of property sales transactions, we can determine that both transaction types have their advantages and disadvantages.
The advantage of a property sale and purchase is that the transaction can be completed within shorter time and the property can be recognized in the books of the new owner at market value. The disadvantages are that only specific types of assets can be transferred to the new owner this way, special measures may be required in respect of the licenses and contracts relating to the given assets and there are fewer tax optimization options for the parties.
On the other hand, in the case of a sale and purchase of quota in a company having property the property can be operated without interruption and potential tax obligations relating to the transaction can also be planned and optimized easily. However, these types of transactions are more lengthy and past legal, operational and tax risks have to be taken into account, which can be managed through careful planning and due diligence.
