Commercial real estate on the balance sheet of a legal entity: sale and purchase agreement or contribution to the authorized capital?

Investing in real estate is one of the most common investment options. It is the most understandable and, at first glance, the easiest way. After the difficulty of finding and choosing the right object for the business, the investor is faced with the problem of registering it: as a physical person or as a legal entity. When acquiring commercial real estate, you can buy it in your own name through a contract of sale, or you can put it on the balance of your company as part of the authorized share capital.

Today, we’ll look at both options, and give recommendations for both. Let’s elaborate on the factors that will lead to one or the other option.

Commercial Real Estate Area.

In both cases, the property can bring a good income to the owner, but there is a nuance, taking into account which the investors will choose a more favorable option for themselves. It is the area of the commercial property and the purpose of its use. 

If the area does not exceed 900 square meters, and the property is planned to be rented out, it is more profitable to register it for a physical person, and to rent it out as an entrepreneur, for example, of the 2nd Tax Group. 

If the area exceeds 900 sq.m. and the premises are planned to be used, for example, in the production activities, where there is an exemption from property tax, the choice is clearly in favor of a legal entity.

If the buyer is a legal entity.

But this is not the end of the choice. The next step is to decide on the way of putting the commercial real estate on the balance sheet of the legal entity. That is, you must decide between buying the object under the purchase agreement and entering it into the authorized share capital as a share of the founder. 

At this stage it is important to consider the owner (seller) at the start. If the real estate is originally owned by a legal entity, it makes sense to buy it directly under the contract of sale between the two legal entities in order to save on the costs of registration of the property in the ownership of a legal entity. And if you consider the system of taxation, it is possible that the buying legal entity will save on taxes, for example, if both parties are the VAT payers.

If the owner is originally a physical person, then the advantage is on the side of the option with the contribution of real estate by the founder in the authorized share capital. 

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How to determine the value of real estate, which is contributed to the share authorized capital?

It is difficult to overestimate the benefit of the option of contributing to the authorized share capital, regardless of how the real estate will be used in the future - in business activities, or it will be further sold through the sale of corporate rights. All this is due to the fact that the value of real estate as an asset is determined by the founders themselves. It can be either higher or lower than its real value. 

A higher value of assets affects the company’s image and solidity, for example, when obtaining bank loans or concluding lucrative contracts. In addition, the high value of real estate on the balance sheet of the company is one of the most important tax tools in income tax optimization.

The lower value of real estate in the books of the company will save taxes on its subsequent sale. For example, there is no requirement for legal entities operating under the simplified tax system to sell such assets at a price no lower than the appraised value. In addition, if the corporate rights in the future are sold, it will be easier for both the seller and the buyer to justify their income and expenses in the case of close monitoring by the regulatory authorities.

The conclusion: if the investor is planning a larger-scale use of commercial real estate than the lease of the area up to 900 square meters, in most cases, the most favorable option is the contribution to the authorized share capital of the legal entity. However, each situation has different initial data, in order to make the right choice, you must study and evaluate all of them.

We can find the best option for your situation and for your goals. Please see the cost of legal support services for commercial real estate transactions here.

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Publication date: 16/06/2022

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