1. European Real Estate Society Industry Seminar Tax efficient financing structures for real estate investments 19 October 2012 www.pwc.com/ro

2. PwC Tax efficient structures for real estate investments 2 October 2012 Shareholding structure  deployment or exit? Financing  debt (internal/external) or equity?

3. PwC Shareholding structures Typical issues to consider Type of investor (private / institutional / investment fund) and tax residence Purpose and time horizon of investment (rental / exit, asset deal / share deal) Source of funds (private investors, banks, real estate funds) Tax considerations (dividends, capital gains) 3 October 2012

4. PwC Shareholding structures Common real estate investment structure 4 Investors Holding company Project SPVs ‘Holding’ jurisdiction October 2012

5. PwC Shareholding structures Capital gain tax protection Holding structureRegular structure 5 Investors Holding company Project SPVs Investors Project SPVs October 2012

6. PwC Shareholding structures Capital gain tax protection Regular structure 6 Investors Project SPVs Capital gains (profit) taxable in Romania Profit may be substantial if property is “old” Investors receive as payout dividends from net profits Dividends may be subject to withholding tax  double taxation October 2012

7. PwC Shareholding structures Capital gain tax protection Holding structure 7 Investors Holding company Project SPVs Capital gains (profit) not taxable in Romania or holding jurisdiction (double tax treaties) Dividends usually not subject to withholding tax (if holding in EU) Suitable for share deals Substance is important! October 2012

8. PwC Financing structures How can finance be raised? 8 Group Internal financing: -Cash and cash reserves -Intra Group debt -Equity – from parent company -Hybrid financing External financing: -Equity – raised on the market (IPO) -Bank debt -Hybrid financing October 2012

9. PwC Financing structures Debt and / or equity? Debt Interest expenses Timing: as agreed Thin capitalisation Transfer pricing Withholding tax Equity Dividend payments out of net profits Timing: year-end No thin capitalisation Withholding tax (usually lower) 9 October 2012 Usually a combination between the two!

10. PwC Financing structures Thin capitalisation How does it work? Limit on deductibility of interest expenses (3:1 debt to equity ratio) Limit also applies to net foreign exchange losses Bank financing is excluded Other limits: − 6% (!) level of interest for hard currency loans − 5.25% (!) level of interest for RON loans 10 October 2012

11. PwC Financing structures Debt and / or equity? Company financed 10% equity/90% debt EBIT: 1,000 Interest expense: 200 EBT: 800 EAT: 670 Net cash to shareholder: 870 Tax burden: 130 Company financed 90% equity/10% debt EBIT: 1,000 Interest expense: 20 EBT: 980 EAT: 820 Net cash to shareholder: 820 Tax burden: 160 11 October 2012

12. PwC Financing structures Tax considerations Minimisation of the overall tax burden Tax deductibility of interest expenses and foreign exchange losses Minimise impact of thin capitalisation Taxation of interest / dividend income (including withholding tax) Tax arbitrage  tax expense in high tax jurisdiction, tax revenue in low tax jurisdiction 12 October 2012

13. PwC Financing structures General tax arbitrage 13 October 2012 Investor SPV Equity /debt Loan(s) Financing company Loan(s) 30% 16% 5-10% 30% 16%

14. PwC Financing structures Hybrid financing 14 October 2012 Investor SPV Debt 30% 16% Equity Hybrid loan From a debtor perspective, financing is seen as “debt”  deductible interest expense From a lender perspective, financing is seen as “equity”  return is considered dividend income (usually tax exempt) Hybrid loan agreement must meet certain conditions

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