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Tax optimization and financial holdings

The goal of tax optimization is to reduce the amount of taxes owed by adhering to the laws and regulations that are in place in a particular country where the company is registered.

The importance of tax optimization

The following explains the necessity of tax optimization:

1. Small businesses or individuals may have difficulty accessing funding from outside sources. Saving taxes is frequently their initial defensive strategy in this case.
2. Tax planning might open up new revenue streams as well. At the conclusion of each fiscal year, the more money is available for reinvestment or profit consideration, the lower the total tax rate.

While looking for ways to reduce their total tax rates, private enterprises should take into account both the company’s and the owner’s viewpoints.

Types of financial holdings

The components of an investment portfolio are traditionally referred to as holdings. They can belong to individuals or businesses and include a variety of asset types:

• stocks;
• mutual funds;
• bonds;
• exchange-traded funds, and more.

All of these are subject to taxation ‒ and to tax optimization, as well.

Best tax optimization strategies for financial holdings

Investments are essential for increasing your wealth. The beneficial tax treatment for long-term capital gains is another advantage of investing in various types of financial holdings.

Pre-tax accounts, such as 401(k), allow you to make contributions before the taxation occurs, which lowers your overall taxable income and lowers your tax payment. Also, your tax obligation will decrease the more money you donate to your 401(k) fund.

Other programs like HSA work the same way ‒ the only difference is the goal of savings.

Common mistakes

The main mistake most investors make while expanding their wealth through investments is not diversifying their portfolios with different types of financial holdings. Each of them can have its own tax strategy, meaning diversification can optimize tax expenses even better.

Another quite common mistake is to wait too long to fill out the taxes. Piling them up will increase pressure on your income and might even destabilize your financial situation.

Tailored PERE transactions

Private Equity Real Estate refers to businesses that raise money to buy, build, run, enhance, and resell properties in order to make money for their investors. PERE is similar to traditional private equity but with buildings instead of other assets.

All PERE fund administration services can be adapted to your specific requirements ‒ including tailored transactions.

How can tailored PERE transactions benefit you?

With PERE transactions, the bank account safeguards the buyer as well as the seller. In order to continue doing thorough research on the possible acquisition and “reserve” the deal for themselves, the buyer in a PERE purchase agreement will put the monies in a deposit. Also, it gives the seller the peace of mind that the buyer will be able to make the necessary payments if all the criteria are met, and the preconditions are satisfied.

Moreover, using escrow in a purchase deal provides investors peace of mind that money will not be sent to a seller before all the requirements have been adequately satisfied.

Just like that, PERE transactions offer you confidence in your investments and their stability.

Alignment of interests

There is a term of carried interest ‒ it is a form of incentive pay for PERE managers that encourages them to align their interests with the objectives of fund investors.

It works simply: the fund manager keeps a portion of the fund’s earnings after deducting the management charge. The sum is distributed throughout the course of the fund’s existence, and a final calculation of the accumulated carried interest is performed when the fund has been fully liquidated, taking into account all returns and gains.

Tailored PERE transactions vs. standard transactions

Any pooled investment tool that enables real estate investing can be referred to as a PERE. A structure that is advantageous from a tax and regulatory standpoint and in line with the size of the typical deal in the European market and the joint ventures often attempt to buy the business that owns the subject property, too.

Standard transactions can involve a variety of investment vehicles, but they do not always take investors’ interests into consideration. Tailored PERE transactions, however, do ‒ and they ensure the completion of the transaction only after specific criteria are met.

Risks and challenges

Because PERE transactions are possible for private estate assets only, high exposure to a small number of assets can put investors at particular risk. For example, during single-asset fund restructurings, investors are exposed to just one business in a specific industry and market. This way, their options are limited, and if the real estate market goes down, the struggle for PERE investors might be feasible.

This poses another challenge ‒ difficulty in figuring out the right exit strategy. When the market is unstable, and the number of assets is limited, you need good fund management to take on these challenges.

FAQ

What are tailored PERE transactions?

A tailored PERE transaction refers to a type of private equity real estate (PERE) investment that is customized to meet the specific needs and preferences of the investor. Unlike traditional PERE investments, which often involve passive participation in pre-established funds or structures, tailored PERE transactions are designed to offer greater flexibility and alignment with the investor’s unique objectives.

How do tailored PERE transactions differ from traditional PERE investments?

Traditional PERE investments typically involve limited partnership structures or blind pool funds, where investors pool their capital together to invest in a predetermined set of assets. In contrast, tailored PERE transactions provide investors with the opportunity to customize various aspects of their investment, such as the target assets, investment strategy, holding period, and exit strategy. This customization allows investors to have more control and influence over their investment decisions.

What are the benefits of tailored PERE transactions?

Tailored PERE transactions offer several benefits to investors. Firstly, they provide the ability to align the investment strategy with the investor’s specific risk-return profile and investment horizon. Secondly, investors can have direct input in selecting the assets to be acquired, allowing them to focus on specific geographies, property types, or market sectors that align with their expertise and preferences. Additionally, tailored PERE transactions can provide investors with enhanced transparency and control over their investments, fostering a stronger sense of ownership and accountability.

What types of investors are suitable for tailored PERE transactions?

Tailored PERE transactions are well-suited for sophisticated investors or institutions that have substantial capital to invest and seek more active involvement in their real estate investments. These investors may include high-net-worth individuals, family offices, pension funds, and sovereign wealth funds. Tailored PERE transactions can cater to a wide range of investment strategies, from core to value-add or opportunistic, allowing investors to leverage their expertise and tailor their real estate portfolio to their specific goals.

PSD2 and EMD regulation

The first PSD, or Payment Services Directive, was designed and implemented in 2009. This directive regulated online payments in accordance with EU laws, also allowing non-bank institutions to accept them. A few years later, an updated version of the directive emerged ‒ PSD2.

This article will help you get a better understanding of the most important regulations that concern online payments and e-money.

What is PSD2?

PSD2’s primary objective is to mandate banks to securely send sensitive customer data to non-bank institutions while facilitating payer access to that data.

This is a primary regulation in the EU that allows e-commerce businesses and other companies to accept payments.

What is EMD regulation?

The e-money directive (EMD) establishes the guidelines for the management and oversight of e-money institutions. The directive intends to provide the groundwork for an EU-wide common market for e-money payments and services.

A consistent set of standards for getting a license as an e-money institution is put in place by the directive’s rules, which also harmonizes regulations for e-money services all over EU states.

By ensuring that prudential regulations are proportionate to the risks encountered by e-money institutions, it will be easier for new players to enter the e-money market.

The difference between PS2 and EMD regulation

For the purpose of emphasizing regulatory requirements, it is crucial to distinguish between Electronic Money Institutions and Payment Institutions in terms of the distinctions between the payment account and the e-money account.

First of all, payment and e-money institutions are regulated differently. The starting capital requirements for PIs are significantly lower than those for EMIs because of the risk the user faces.

And finally, the obvious ‒ payment and e-money require different accounts as different directives regulate them. EMD regulations exclusively oversee e-money transactions, while PSD2 governs all online payments and focuses on their security.

Impact on the banking industry

The greatest prospects in retail and corporate payments combine PSD2 features with advancements in settlement and clearing systems, including faster payments. In both retail and corporate sectors, payments and financial use applications will increasingly be incorporated into digital applications that target the whole value chain.

In e-commerce particularly, both PSD2 and EMD made it easier for smaller businesses to receive online payments for their services or products, and there is a tendency for growth in this and other economic sectors.

Compliance requirements for banks

The security goals of the directive have been confirmed by the preservation of the PSD2’s fundamental principles. To safeguard the customer, PSD2 mandates that banks adopt multi-factor authentication for all local and remote transactions made over any channel.

EU member states also mandate that electronic money institutions maintain starting capital of at least EUR 350000 at the time of licensing.

Furthermore, electronic money institutions are allowed to offer the payment services outlined in the PSD2 in addition to issuing electronic money. This way, EMD regulations fall under PSD2 while focusing on safe online payments using e-money.

Why central banks around the world are buying gold and how do the funds react

In 2022 we have observed a sharp increase in the demand for gold to fill the gold reserves of the world’s central banks. This is perfectly clear from the published review of the World Gold Council (WGC), about the world’s storage of gold over the past year, included in an analysis of the financial portal Investing.com.

World gold production in 2022 increased 2.5 times to a total of 1,135.7 tons of gold, from 450.1 tons in 2021. This is the first time that we have observed a significant increase in the number of transactions during the second half of the year. Finally, in the first quarter of 2022, the central banks of the world collected 88.5 tons of gold, in the second quarter – 185 tons, in the third quarter – 445.1 tons, and in the fourth quarter – 417.1 tons of gold.

Over the past year, central banks’ gold withdrawals were the highest since 1967. Among the main reasons for this, WGC points out the geopolitical instability and the higher inflation. In addition, large requests were made mainly by banks in developing countries, including Turkey and China.

The People’s Bank of China resumed gold mining in its reserves in 2022 for the first time since September 2019. In November and July last year, 62 tonnes of the precious metal were added to the reserves, and the amount of gold in the reserves exceeded 2,000 tonnes. The Central Bank of Turkey announced the largest increase in 2022 – the amount of gold in its reserves to increase from 148 tons to 542 tons, just for the year. Middle Eastern banks were generally active gold buyers last year, with Bank of Egypt buying 47 tons, Bаnk оf Qаtаr – 35 tons, Bаnk оf Iraq – 34 tons, Bаnk оf thе Unіtеd Agаb Emіrаtеѕ – 25 tons and Bаnk оf Omаn – 2 tons. Central Asia is also an active gold buyer. The Bank of Uzbekistan increased its reserves by 34 tons, the Bank of Kyrgyzstan – by 6 tons, the Bank of Tajikistan – by 4 tons.

The Reserve Bank (Central Bank) of India bought 33 tons of the metal, which is less than in 2021 and may be due to active monetary interventions on behalf of the rupee. Gold was also added to the central banks of Ecuador (3 tons), Czech Republic (1 ton), Serbia (1 ton), and Iceland (1 ton).

The National Bank of Kazakhstan became the largest supplier of gold in 2022, reducing gold by 51 tons of the metal, to 352 tons of the total (58% of the total reserves of the country). The Bank of Kazakhstan also announced that it intends to increase gold supplies through 2023, which may be in response to increased gold production in the country.

The Bundesbank (the central bank of Germany) has supplied 4 tons of gold in 2022 as part of its coinage program. Also, small amounts of gold were delivered to the central banks of: Sri Lanka, Poland, the Philippines, Mongolia, Bosnia and Herzegovina, Cambodia and Vietnam.

The world gold council, however, notes that there are a large number of financial operations of central banks, which have not yet been officially recorded, as far as the data is possible.

The active filling of the gold reserves of the central banks causes the depth of the current global crisis. The stability of gold prices through 2022 has once again confirmed the stability of this asset, its inherent resilience in turbulent times and its important role as a long-term asset.

The WGC sees no good reason for the world’s central banks to change (much) their attitude towards gold in 2023. They will maintain a positive net ratio of the precious metal in their reserves and remain net buyers anyway.

Why are the big central banks of the world preparing to use the gold – to form a bailout in the event of the introduction of the gold standard or a protective “cushion” for survival in the future? And maybe the auspicious metal will suddenly take off? These comments and responses are contained in an analysis of the results of experimental opinions published by Prime.

The past year 2022 was the thirteenth year of net gold purchases by central banks around the world. Moreover, these financial operations reached a 55-year peak. Although to the gains of the financial regulators we add stable “retail” investments, the global crush of gold last year was the biggest of the decade.

75% of this crowding is due to the developing countries, in which reserves the part of foreign currencies is traditionally large. The usual suspects we talk about are Turkey, China, India, Egypt, Qatar, Iraq, the United Arab Emirates (UAE) and Oman. Does this mean that they are preparing for the price of the precious metal to rise or even for a return to the “gold” standard?

The experts remind that the changes in the policy of the central banks did not start last year, but after the 2008 financial and economic crisis. It became clear to the international financial specialists even then that the world monetary system was entering a phase of collapse because it would not be able to ensure the right functioning of the existing model of the global economy”, announced a college of renowned economic professors from East and Central Europe.

According to them, this is the main reason for the financial changes, which appeared later, and not the pandemic of coronavirus and not the military operation of Russia in Ukraine.

“Since 2008, none of the world’s developed countries has sold any gold from its reserves, except Germany, which sold a minimum of 45.8 kilograms – which against its reserves of over 3,500 tons is in the range of a tithe”, signed the expert Wladimir Grygoriev. The other countries completely changed their tactics. At the beginning of the 2000s, Switzerland supplied half of the gold reserves (about 1,000 tons), and after 2008 not even a gram.

Currently, the top ten countries with the largest gold reserves are: the USA, Germany, Italy, France, Russia, China, Switzerland, Japan, India, the Netherlands. Together they hold about 70% of the world’s gold reserves. And then the developed countries ceased to sell all their gold compared to Russia, India and China which began to actively purchase.

As for Russia, “it increased its gold reserves almost 4 times to around 2,300 tons, coming very close to the Soviet Union’s time of 2,500 tons,” says Grygoriev.

The experts doubt that the countries who glorify the part of gold in their national reserves, pray for the return of the “golden” standard. As we know, the standard has not only “pluses”, but also “minuses”. The latter include limiting the flexibility of central banks in the formation of domestic policy. This is not exactly what the financial regulators are willing to do – they want to have their “hands untied” in solving the current economic and financial problems.

Namely, inflation is the most important reason that stimulates the price of gold, against the slowdown of the world economy. The situation will not change this year either – because counting only on the leading global currencies, which already showed their vulnerability and unreliability at certain moment, would be unreasonable. And the world leaders do very well understand this, according to Grygoriev.

In a very important extend in the current economic reality, most major countries and central banks do not have much confidence in the financial instruments created by the modern economy. The world’s central banks expect changes amid which gold will remain the most liquid asset, according to financial experts of Reuters.

And how do the funds investing in gold react?

Some of the best funds open to individuals offering a simplified and transparent access to gold and precious metals were created in 2012 already, without naming specific managers and promoting agencies. They are managed by dedicated and recognized management teams, benefiting from in-depth knowledge of the precious metal market, and the main factors that influence it (regulation, macroeconomic, financial and geopolitical developments, production, storage…). Some of the main actors in the banking and wealth management sectors have their ETFs offered to their clientele.

But what exactly precious metals are we talking about?

Some of them are overexposed to gold by 30-35%, but also to silver, platinum and palladium by 20-30% each. This basket shows historically highly correlated performances with those of gold, while ensuring diversification on other precious metals. Furthermore, the funds usually are not exposed to the equity risks of gold mining companies, but only replicates the performance of metals.

Isn’t gold a bad investment for the environment?

A certain portion of the said funds have their assets invested in precious metals necessary for the energy and climate transition. Nowadays it is no longer a trend, but a necessity. Silver, for example, is essential for the manufacture of solar panels. The solar industry, almost insignificant in the demand for silver 10 years ago, today represents nearly 12% of the world demand for this metal.

As for platinum and palladium, these precious metals are essential for “clean mobility”, i.e. electric mobility, another sector of the energy transition. This transition imposes in particular, at the level of transport, increasingly complex environmental standards. Thanks to their catalytic power, platinum and palladium make it possible to limit emissions from gasoline vehicles.