Based on our group’s large experience with Luxembourg corporations (LuxCo’s) investing (directly) in Real Estate located in Germany, we consider that there are accounting issues that require reflection and action.
Promoters (for regulated funds or coordinators of private deals) tend to consider GAAP accounting and tax filings as unpleasant obligations and focus on the budget and specific control reportings.
Indeed, in a process relating to relatively small real estate companies (or funds) which do not have a separate international accounting team and a global software solution offering the full scope of file extractions, the accounting of rental income and directly connected charges of the underlying property will normally be performed by a Property Manager. In a second step, the German tax adviser re-performs the accounting entries to have the entries in his accounting system, mainly to accomplish German tax compliance obligations. The third time the accounting will be (re-)performed in Luxembourg, considering the different filing obligations of a Luxembourg corporation (F/S and tax).
This triple accounting charge is normally reduced to a minimum for accounting services (which is far more complex in reality). Indeed, most clients consider the extra work required to be of no added value and avoid cost.
To reduce the cost of the LuxCo, the model process is, in practice and in a first step, reduced to an accounting of the rental income and direct charges performed by the Property Manager. In a second step, these accounting entries are then transferred into the accounting system of the German tax adviser via a specific interface. Normally, steps one and two are performed by using German GAAP. In a third step the Luxembourg accountant will have to use the data available from Germany (via special interface or based on the trial balance) and converts at the same time German GAAP into Lux-GAAP (mapping).
This has become a rather ideal and cost effective solution in the market. However, the art of having reliable financial statements lies in the communication between the German and the Luxembourg service provider- which may already be a language issue. A second issue lies in the compatibility of accounting systems between Germany and Luxembourg and the quality of the interface (where the biggest issues recognized lie in the automated VAT accounting of most German accounting systems).
Depending on the approach used, we have found that a series of financial statements look good, but are wrong. Also, there may be at least two different sets of financial statements, leading to different opening balances. The issue lies in the corrections performed in order to present financial statements for tax purposes in two jurisdictions. If the two accountants do not work in a permanent cooperation, there will be differences. Such differences continue over years and remain unexplained.
The promoter may not consider this issue relevant, as all that counts for him are the figures from his budget reports and the legal compliance (somehow) performed.
However, one day accountants in two countries may need to find the reason why 5 years ago the appropriate communication between Luxembourg and Germany did not work in the way wanted.
The effect of FAIA obligations will be reviewed in part 2 of this blog article.