Cross-border logistics investments and their corresponding taxation: key insights essential for fund managers to understand
In the rapidly evolving digital and e-commerce landscape, cross-border logistics investments have become an intriguing frontier for fund managers. However, these investments come with a significant tax hurdle that needs to be carefully navigated.
The OECD's Two-Pillar Solution, a recent initiative aimed at addressing the tax issues of the digitalized economy, has broad implications for multinational companies, including logistics funds. Pillar One of this solution seeks to redistribute taxing rights to market jurisdictions, which may affect funds where the logistics are heavily dependent on digital or e-commerce.
The taxation issue in cross-border investments is the possibility of being taxed twice, a phenomenon known as double taxation. This can be a challenge for fund managers, especially in the property-heavy logistics industry, where taxes such as property taxes, transfer taxes, capital gains tax, and VAT/GST come into play.
To mitigate double taxation, fund managers should familiarise themselves with Double Taxation Treaties (DTTs) and their terms. DTTs can prevent double taxation by either exempting the income from tax in one country or allowing the investor to receive a tax credit in the home country. Learning about these treaties can significantly reduce withholding taxes on distributions, making them tax-efficient for fund investors.
Involving tax specialists early in the investment process can help determine the tax implications of each possible deal and structure. Fund managers must understand the difference between direct investment and portfolio investment. A direct investment involves the investor exercising a considerable level of control over the asset, while a portfolio investment is passive in nature.
The global expansion of e-commerce and supply chains has made cross-border logistics investments more attractive. The international logistics industry includes warehouses, distribution centers, ports, and transport systems. However, the Base Erosion and Profit Shifting (BEPS) project, an initiative by the OECD to reduce tax avoidance efforts, means that fund managers need to keep up with the latest developments in the international tax field.
Selecting the appropriate legal structure of the fund is another important step for fund managers. Pass-through entities, such as limited partnerships or limited liability companies, are often utilized. The goal is to select a legal structure that is tax-neutral to investors, minimizes tax leakage, and ensures adherence to all local regulations.
In light of the OECD's Two-Pillar Solution, which proposes a minimum corporate tax rate of 15 percent on large multinational companies, it is crucial for fund managers to perform adequate tax due diligence, optimize fund and investment structures, leverage tax treaties, and stay informed about international tax reform.
Identifying the risks of double taxation early, ensuring that the fund is appropriately structured, and keeping fund managers informed about developments in the international tax field will enable them to turn what could be a burden into a strategic benefit and achieve a more efficient and profitable result.
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