Europe’s real estate capital reset
The European Commission’s proposed tax simplification package could mark a turning point for real estate investment in Europe.
The package combines the direct taxation Omnibus proposal with the recast Directive on Administrative Co-operation (DAC). Its objective is to simplify direct tax rules, reduce duplicate reporting requirements and lower compliance costs for businesses operating across multiple jurisdictions.
This is particularly relevant to the real estate sector, as investment structures are frequently financed with debt, span several jurisdictions and are highly sensitive to tax-related friction.
At present, the Anti-Tax Avoidance Directive (ATAD) restricts the amount of interest expense that businesses can deduct for tax purposes. In general, deductible net borrowing costs are limited to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA), or EUR 3 million, whichever amount is higher.
Member States can currently impose stricter restrictions, including lower percentage limits or lower monetary thresholds.
In this insight, Baker Tilly’s global real estate industry group examines the proposed reforms and considers whether they could make Europe a more competitive destination for cross-border real estate investment.
Key proposed changes
- A mandatory interest deduction limitation of 30% of EBITDA would apply throughout the EU, preventing Member States from setting a lower threshold.
- Businesses could fully deduct excess borrowing costs where EBITDA has fallen by at least 50% compared with the previous year.
- Qualifying low-risk third-party financing, such as standard bank loans, could be excluded from the interest limitation rules where specified conditions are satisfied.
- Member States would be required to provide a group exemption from the interest limitation rules where certain criteria are met.
- The rules would provide greater flexibility for tax-neutral cross-border reorganisations.
The EUR 3 million safe harbour threshold would become mandatory throughout the EU and would be indexed annually, preventing Member States from applying a lower threshold.
Under the current rules, Member States must exempt dividends from tax where the recipient holds at least 10% of the company making the distribution. Member States may apply a lower threshold.
The broader withholding tax exemption would remain subject to anti-abuse provisions and safeguards designed to prevent double non-taxation.
Cross-border capital gets easier
The proposed withholding tax exemption for cross-border dividend, interest and royalty payments between EU companies could represent a significant simplification for the real estate sector.
In practice, it could make it easier and less expensive to move returns, service debt and repatriate capital through European structures.
This is particularly important for cross-border real estate platforms, where ownership, financing and operating entities may be located in different jurisdictions.
Removing withholding tax friction could reduce trapped cash, shorten tax refund cycles and give investors greater confidence in the way capital moves through a structure.
Leveraged structures become cleaner
Simplifying the ATAD interest limitation rules, including the introduction of a mandatory de minimis threshold, could also provide clear benefits for leveraged real estate investments.
Real estate is an asset class that is particularly sensitive to debt financing. Even relatively small changes in the tax treatment of interest can influence returns, refinancing decisions and the viability of acquisition or development projects.
At the same time, the proposed removal of restrictions on third-party financing could give investors greater flexibility when structuring debt across different jurisdictions.
The practical benefits are direct: lower capital costs, faster cash flows, a reduced compliance burden and fewer reasons to create complex structures simply to manage tax restrictions.
Europe-wide impact for investors
The implications are Europe-wide.
Markets such as Luxembourg, the Netherlands, Poland and Spain could experience meaningful changes, particularly where real estate investment depends on leveraged structures, holding companies, cross-border financing or multinational ownership chains.
The opportunity is not limited to a single market. It applies wherever tax-related friction has made the deployment of capital into European real estate more difficult or slower.
The proposed removal of overlaps between controlled foreign company rules and Pillar Two could further reduce complexity for multinational real estate groups and funds.
This would not eliminate the need for robust tax governance, but it could reduce duplicated analysis, conflicting obligations and unnecessary compliance pressure across jurisdictions.
Investors should plan now
The proposals still need to move through consultation and adoption, and the requirement for unanimous agreement among Member States could influence the final outcome.
However, real estate investors around the world should not wait for the final rules before assessing the potential impact.
Investors should already be reviewing where existing structures create avoidable tax costs, where cash flow is delayed by withholding tax or refund procedures, where interest limitation rules affect leverage and where restrictions on third-party financing influence debt strategy.
They should also consider whether current holding and financing models remain fit for purpose if capital is able to move more efficiently across the EU.
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