Methods of real estate ownership acquiring through joint investment institutes

Abstract

On August 15, 2022, the Verkhovna Rada of Ukraine adopted the Law of Ukraine «On guaranteeing property rights to real estate objects that will be built in the future», which entered into force in full on October 10, 2022. This law directly influenced the entire construction industry and quite disorientated developers throughout Ukraine, as the further possibility of using joint investment institutions in their business activities became unclear. This mechanism for attracting investments is popular among Ukrainian developers because of the opportunities to optimize taxation.

In accordance with subsection 141.6.1. of the Tax Code of Ukraine, joint investment funds are exempt from corporate income tax, namely: funds contributed by the founders of a corporate fund, funds and other assets raised from members of a joint investment institute, income from transactions with the assets of a joint investment institute, income accrued by assets of the joint investment institute, and other income from the activity of the joint investment institute (interest on loans, rental (leasing) payments, royalties, etc.).

Also, in accordance with subsection 196.1.1. of the Tax Code of Ukraine, is not subject to value-added tax on the transaction of issue (issue), placement in any form of management and sale (redemption, redemption) for the funds of securities issued into circulation (issued) by entities of an entrepreneurial activities, the National Bank of Ukraine, the central body of executive power, which ensures the formation and implementation of state financial policy and/or implements state budget policy in the field of management of state debt and state-guaranteed debt, local self-government bodies in accordance with the law, including investment and mortgage certificates, certificates fund of real estate operations, derivatives, as well as corporate rights expressed in forms other than securities; exchange of the specified securities and corporate rights, expressed in forms other than securities, for other securities, corporate rights expressed in forms other than securities; settlement and clearing, registrar and depository activities on the securities market, as well as asset management activities (including pension assets, bank management funds), in accordance with the law and other types of professional activities on the stock market, which are subject to licensing in accordance with the law. In this way, Ukrainian developers managed to simultaneously optimize their tax burden of two types of national taxes: corporate income tax and value added tax.

With the entry into force of the Law of Ukraine "On guaranteeing property rights to real estate objects that will be built in the future", the legislator makes changes to the Law of Ukraine "On investment activities" and excludes part 3 of article 4, which provided that in residential construction can be invested and financed, among other things, through joint investment institutions. Since then, it has been established that the direct or indirect attraction of funds from individuals and legal entities for the construction of real estate with the subsequent acquisition by such persons of the right of ownership of the relevant objects of real estate can be carried out exclusively in the following way: 1) by concluding sales contracts of indivisible objects under construction/future real estate objects (parts of an indivisible object under construction); 2) by concluding agreements on participation in the construction financing fund; 3) by issuing targeted corporate bonds.

At first glance, it seems that the legislator put an end to the old model of financing through the Joint investment institutes. However, after a careful study of the activities of entrepreneurs in the construction sector, it becomes obvious that this prohibition is not so categorical. This was facilitated not only by the reluctance to abandon the working tax optimization scheme, but also by the fact that for quite a long time after the entry into force of the Law of Ukraine »On guaranteeing property rights to real estate objects that will be built in the future» there was no real opportunity to work through the new and the first of the ways listed above, which the law establishes. Information about the first cases of registration of special property rights in the State Register of Property Rights appeared only in October 2023.