The IBA’s response to the war in Ukraine  

Cracks in the bricks: disruptions in the real estate market and the tax environment

Wednesday 17 May 2023

Session Chairs

Torsten Engers, Flick Gocke Schaumburg, Frankfurt am Main

Sarah Beth Rizzo, Skadden, Arps, Slate, Meagher & Flom, Chicago


Laetitia Fracheboud, Homburger, Zürich

Lucas Giardelli, Mayer Brown, New York

Samu Lassila, Krogerus, Helsinki

Mathilde Ostertag, GSK Stockmann SA, Luxembourg

Eugenio Romita, Giovanelli e Associati, Milan


Antonio Salas, Cuatrecasas, Barcelona


The pandemic, political disruptions and increasing financing costs had and have a significant impact on the real estate market. At the same time, new tax rules have created further challenges for planning cross-border real estate investments.

The session provided an overview of the recent developments regarding the relevant tax rules and the opportunities and constraints resulting therefrom, including the latest developments under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), the upcoming third EU Anti-Tax Avoidance Directive (ATAD 3) otherwise known as the Unshell Directive and EU Pillar 2 Directive, the United States (US) Foreign Investment in Real Property Tax Act (FIRPTA) regulations, the interpretation of the Swiss Treaty Law on sales of real estate investment companies (REICs), and similar Italian and Finnish legislation related to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) transfers of real estate.

Panel discussion

The panel focused on recent disruptions in the real estate market, such as Covid-19 having as a consequence a reduction in demand for office space, the conflict in Ukraine and the increase in interest rates. On the increase in interest rates, Torsten Engers pointed out that this could have an impact on certain structures, as thresholds for tax deductibility could be exceeded unintentionally.

Sarah Beth Rizzo and Lucas Giardelli presented the US FIRPTA, which sets out the exception under which foreign investors disposing of US real estate property interests can be subject to tax and the final and proposed regulations issued in December 2022 regarding the Section 897 (I) 1 exception from the FIRPTA for qualified foreign pension funds.

Under the current FIRPTA regulations non-US investors are not subject to tax provided the real estate investment trust (REIT) is domestically controlled (ie, less than 50 per cent of its stock is held directly or indirectly by foreign persons during the test period, generally five years before the sale of the REIT stock). However, US companies investing in a REIT are considered domestic entities, regardless of whether they have non-US investors.

The draft regulations propose to assess any non-public domestic corporations to determine whether a REIT is domestically controlled if 25 per cent or more of the REIT is owned by foreign persons, thus affecting many funds which have created domestic ‘blockers’ through which to hold REIT interests. Giardelli noted the risk of retroactive application of the new regulations, as the US Internal Revenue Service (IRS) may apply the new criteria when reviewing the test period. Rizzo pointed out the possibility to take advantage of the exceptions for active trading businesses.

Eugenio Romita presented the implications of having a land rich clause included in the domestic law and the problem regarding the use of fair value or book value when assessing whether a company should be considered land rich for the purposes of a tax treaty. In this regard, Engers highlighted certain guidance in Germany under the tax treaty entered with Austria. Romita concluded his presentation with a look at the land rich clause introduced in 2023 by the Italian government.

Samu Lassila presented the new domestic legislation, from 1 March 2023, under which Finland has extended its right to tax capital gains primarily derived from the disposal of indirectly held real estate interests, closely aligned with Article 13(4) of the Organisation for Economic Co-operation and Development’s (OECD) Model Tax Convention(MC) and Article 9(4) of MLI. This measure was passed, along with the cancellation of the reservation adopted by Finland concerning the application of Article 9 of the MLI, thus resulting in a potential taxation of non-residents on capital gains derived from indirect real estate interests, unless protected by a tax treaty.

Laetitia Fracheboud presented the case in Switzerland, where most Swiss cantons provide for land rich clauses in cases where most of the shares are sold. Nevertheless, most of the tax treaties entered into by Switzerland do not contain a land rich clause and Switzerland made a reservation to Article 9 of the MLI, thus the tax treaty prevails. Fracheboud highlighted that, regardless of the above, some cantons, such as Zürich, are arguing that the sale of a real estate entity should be treated as a direct sale of the real estate interest, thus applying Article 13.1 of the OECD’s MC and subjecting the sale to capital gains in Switzerland.

Finally, Mathilde Ostertag focused on the impact of the Unshell Directive on real estate investment structures, and the fact that ATAD 3 may result in a reduction of the shareholder’s carry as a consequence of increasing the structure cost to comply with substance requirements.

Conclusion and final remarks

As a consequence of the MLI, many countries are introducing land rich clauses in their domestic legislation similar to the US FIRPTA rules, thus resulting in potential tax impacts not foreseen at the moment certain real estate structures were implemented. These laws affect not only the expected profitability of these structures, but also the covenants granted by fund sponsors, specifically in the case of US investments held by non-US investors, in light of the proposed new definition of ‘domestic control’.