Foreign real estate company in Greece – examination of the obligation to establish a Greek branch
Regarding the examination of any obligation of a foreign real estate company to establish a branch in Greece , the issue is not sufficiently regulated by the existing provisions, as there are legislative gaps regarding various parameters.
From 1/1/2015, foreign real estate companies that do not obtain income from business activity in Greece and which build a property owned in Greece or make additions or extensions to such property, have no obligation to keep accounting books and records.
However, in case the foreign legal entities acquire income from real estate in Greece, and since from 1/1/2014 said income is considered for income tax purposes as income from business activity, then, regardless of whether the foreign legal entities acquire or not a permanent establishment in Greece, , they are obliged to keep accounting books and issue accounting records from the date they acquire the real estate income and onwards.
It is noted that if the foreign legal entity is a tax resident of a country with which Greece has concluded a Double Tax Treaty (DTT), then the income obtained from the property is taxed in Greece, as income from business activity, without examining whether said foreign legal entity acquires a permanent establishment in Greece.
Said tax is imposed in accordance with the provisions of articles 47 and 58 of the Income Tax Code and depending on the foreign legal entity’s legal form and the category of books it keeps. This means that for the determination of the profit from business activity, the relevant expenses are in principle deducted and tax depreciation is carried out, in accordance with the existing provisions.
Moreover, it is noted that there is an obligation to submit an income tax return in any case, regardless of the acquisition or not of income from real estate in Greece.
If the foreign company does not intend to use these properties for commercial exploitation (but instead for private use, which, nevertheless, has the peculiarity of being treated as a lease), the conditions for obtaining a permanent establishment for income tax purposes do not seem to be met, as the creation of a permanent establishment presupposes the existence of a fixed place of business through which the business activities of the company are carried out in whole or in part.
However, in case the foreign company starts to receive income from real estate in Greece, then, from that moment onwards, on the one hand, it will be obliged to keep accounting books and on the other hand, it will be taxed in Greece for this income, which will be considered income from business activity, regardless of whether or not it has acquired a permanent establishment in Greece for income tax purposes.
It should be noted that real estate income arises not only e.g. in case of lease of the property but also in case of free concession of the use of the property (e.g. by the company to its shareholder for private purposes) or in case of own use of the property. In these cases, the company generates imputed income from real estate (which is calculated as 3% of the objective value of the property) and which is normally taxed at the level of the company as income from business activity. In the case of own use, the imputed rent is deducted, when determining the profit from business activity of the legal entity, to the extent that it does not exceed 3% of the objective value of the property. Therefore, the result of the above treatment in the case of own use of the property is tax neutral for the legal entity.
Consequently, when the company proceeds with either a lease of the property or a free concession of its use, it will be obliged to keep accounting books and will be taxed for this income as income from business activity, regardless of whether or not it has a permanent establishment in Greece.
Although the relevant legislation in principle provides for the possibility of deduction of expenses and tax depreciation, in practice, however, there is a question as to how to ensure the implementation of these deductions / depreciation, if no accounting records were kept, on the basis of which to adequately prove these expenses or construction costs, as there was no obligation to keep accounting books for as long as the foreign legal entity did not obtain income from the property in Greece.
Whether it is possible for the Greek tax authorities e.g. to accept these tax depreciations for the cost of construction of a property on the basis of tax documents issued to a foreign tax/VAT id number (i.e. of the registered foreign head office of the legal entity) or to a Greek tax id number issued only for the purpose of acquiring a property (and not, for example, a Greek Tax/VAT number obtained for commencing a business activity) and which have not been recorded in accounting books in Greece, does not clearly arise from the legal provisions and we consider that it will create a number of problems in practice.
In terms of VAT, the costs arising from the services provided to the foreign company regarding preparatory work (architecture, law, studies, etc.) and construction work for the property, are charged with Greek VAT (24%), as they are considered as services related with immovable property located in Greece. The possibility of recovery of the VAT incurred on these expenses depends on the facts and mainly on whether these expenses have been used by the company to carry out transactions subject to VAT and provided they are incurred and evidenced based on documents that have been legally issued and recorded.
If the company does not intend to use the property for an activity subject to VAT (e.g. for a commercial lease subject to VAT following a tax election request or for the provision of accommodation services subject to VAT), then in any case it will not have the right to deduct the VAT incurred on these expenses, regardless of whether the relevant invoices have been issued to the foreign or the Greek VAT number of the company and regardless of whether they have been recorded in accounting books.
However, if the company may, ultimately or at some point, decide to commercially exploit the property and even use it in an activity subject to VAT, it will have lost the possibility to deduct the VAT on its expenses and it will not be able to take corrective action retroactively, if the proper actions have not been taken from the start (i.e. commencement of business activity, proper tax registration, proper bookkeeping etc.) .
* The information is accurate to the best of our knowledge as at the time of writing. We have no obligation to update it. We accept no responsibility against any third party who is not a client of the firm and has not signed the terms of our engagement.