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Compare and contrast: Worldwide Real Estate Investment Trust (REIT) Regimes This booklet will keep you up to speed and allow you to compare the various global REIT regimes May 2013
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Compare and contrast: Worldwide Real Estate Investment Trust (REIT) Regimes This booklet will keep you up to speed and allow you to compare the various global REIT regimes May 2013 Contents Introduction 1 Australia 2 Belgium 4 Bulgaria 7 Canada 10 Finland 13 France 16 Germany 19 Greece 22 Hong Kong 26 Italy 29 Japan 32 Malaysia 35 Mexico 38 Singapore 41 South Korea 44 Spain 47 The Netherlands 50 Turkey 53 United Kingdom 56 United States 60 1 PwC Worldwide Real Estate Investment Trust (REIT) Regimes Introduction Introduction During the past year Real Estate Investment Trusts (REITs) have come back from the financial crisis showing an impressive upswing. The REIT regimes respond to the ever changing market environment and are continuously evolving. PwC has a global team of real estate tax and legal professionals who have conceived this booklet to keep you up to speed and allow you to compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes. Since the last update of the publication some amendments have been made to REIT regulations in most of the described countries. Significant changes have been introduced to the Spanish SOCIMI and the UK REIT regimes. Several measures, such as the reduction of the Spanish corporate income tax rate, simplification of existing requirements or abolition of the entry charge for the UK REIT, aim at making the REIT regime even more attractive for potential investors. The REIT contacts listed within each country section will be delighted to assist you with any further requests on the local REIT model. Otherwise, please don't hesitate to contact me or your usual PwC contact directly. Uwe Stoschek Global Real Estate Tax Leader PwC (Germany) 2 PwC Worldwide Real Estate Investment Trust (REIT) Regimes Australia Australia The Australian REIT market has a history dating back to 1971, when the first REIT was listed on the Australian Stock Exchange (ASX). The Australian REIT market is now very large, well established and sophisticated with approximately 70% of Australian investment grade properties securitised. As of 31 March 2013, there were 46 listed REITs on the ASX with a market capitalisation of over AUD 90bn. Manuel Makas PwC (Australia) Legal form There are no specific REIT rules in Australia. Australian REITs are trusts that can be listed or unlisted. Australian REITs can be sector specific (e.g. industrial, office, etc.) or diversified funds. In 1998, the Managed Investment Scheme (MIS) rules were introduced into the Corporations Law. The MIS rules govern investment vehicles in Australia, including REITs. The rules deal with regulatory issues such as licensing and board composition for the manager rather than specific tests that must be satisfied to qualify as a REIT. Australia is, however, going through a period of tax reform. One of the areas that is being proposed is to introduce a specific tax regime for a form of MIS referred to as a managed investment trust (MIT). This paper assumes that the REIT is a MIT. The new rules for MITs are expected to apply from 1 July At this stage, it is not known what the outcome of this reform will be. Capital requirements There are no capital requirements for a REIT (if listed, however, it must meet ASX requirements). There are, however, capital requirements for the manager. Listing requirements There are no listing requirements. A REIT can be listed or unlisted. Restrictions on investors There are no investment restrictions on investors. Asset/income/activity tests Public unit trusts investing in land must do so for the purpose, or primarily for the purpose, of deriving rental income ( eligible investment business ). Public unit trusts that carry on a trading business such as developing land for sale, will not receive flow through treatment. Eligible investment business includes other passive, investment-type activities such as loans, portfolio share investment, derivatives, etc. Restrictions on foreign assets There are no restrictions on foreign assets. Distribution requirements Undistributed income or gains are taxed at 46.5%. Full distribution of income and gains by REITs generally occurs. Withholding tax on Distributions Domestic: None Foreign: 30% or reduced amount of 15% if invest via certain countries. Treaty access: Yes, depending upon exact treaty wording. Limitations can arise if treaty requires beneficial ownership (due to trust legal form). Note REIT distributions are not dividends and not covered under dividend articles. 3 PwC Worldwide Real Estate Investment Trust (REIT) Regimes Australia Tax treatment at the investor level Resident investors Resident unitholders are liable to pay tax on the full amount of their share of the taxable income (including capital gains) of a REIT in the year in which they are presently entitled to the income of the REIT. This applies, irrespective of whether the actual distribution of the income from the REIT is paid in a subsequent year. Distributions from the REIT retain their character and therefore the tax treatment of the various components may differ. For example a distribution from a REIT may include both foreign sourced income and gains (e.g. from properties located overseas) and Australian sourced income and gains. Distributions from an Australian REIT may also include a tax deferred component, capital gains tax ( CGT ) concession component, a capital gain component and a foreign tax credit component. Tax deferred amounts are generally attributable to returns of capital, building allowances, depreciation allowances and other tax timing differences. It is the practice of the commissioner of taxation to treat tax deferred amounts as not assessable when received, unless and until the total tax deferred amounts received by a unitholder exceed the unitholder s cost base of the REIT units. For CGT purposes, tax deferred amounts received reduce the unitholder s cost base of the REIT units and therefore affect the unitholder s capital gain/loss on disposal of those units. of that asset. The CGT concession component of a distribution by the REIT will represent the CGT discount claimed by the trust in respect of asset disposals. The CGT concession component is not assessable when received by unitholders (and no CGT cost base adjustment is required). The capital gain component of a REIT distribution must be included in the unitholder s net capital gain calculation. Unitholders may be entitled to a foreign tax credit for foreign taxes paid by a REIT. The credit is applied against the Australian tax payable on foreign sourced income. The disposal of REIT units will have CGT implications. Non-resident investors Non-resident unitholders are subject to Australian tax on their share of the REITs taxable income that is attributable to Australian sources. Foreign sourced income can flow through an Australian REIT to a nonresident unitholder, tax-free. Distributions to non-residents of Australian sourced taxable income are subject to withholding tax (refer above). The disposal of REIT units can have CGT implications for foreign investors owning 10% or more of the REIT units. Transition to REIT/Tax privileges None Where a capital asset that is owned by the Australian REIT for at least 12 months is disposed of, the trust may claim a 50% CGT discount on the capital gain realised upon disposal 4 PwC Worldwide Real Estate Investment Trust (REIT) Regimes Belgium Belgium The Belgian closed ended real estate collective investment company (SICAFI or SICAFI or Société d Investissement à Capital Fixe Immobilière ) was created by the Law of 4 December However, it took until the Royal Decree of 10 April 1995 to put in place a regulatory framework whereby a balance was sought between allowing investment flexibility to the SICAFI and providing security to the investor. A new Royal Decree was issued on 7 December 2010, replacing the aforementioned Decree and amending the regulatory framework of public SICAFIs. The most important new change is the introduction of the regulatory framework for institutional SICAFIs allowing a public SICAFI to realise specific projects with third parties, i.e. other institutional or professional investors (including public partners under PPP). The regulatory framework of the institutional SICAFI is aimed at protecting the underlying investors in the public SICAFI. SICAFIs are subject to the standard corporate income tax rate at 33.99%, be it on a very limited lump-sum basis. Currently, there are 17 public SICAFIs and 3 institutional SICAFIs acknowledged by the Financial Services and Markets Authority (FSMA). Belgian public SICAFIs represent a total market capitalisation of approximately EUR 6.1bn. Maarten Tas PwC (Belgium) Legal form Only a public limited liability company and a partnership limited by shares governed by Belgian law are eligible for the SICAFI status. Both of these entities are corporate bodies and have a separate legal personality according to Belgian company law. Capital requirements In principle, a SICAFI must have a fully paid-up share capital of at least EUR 1.2m. However, to obtain authorisation in practice, the required share capital for a public SICAFI is much higher (e.g. the quotation on the Euronext Stock Exchange requires a market capitalisation of EUR 15m). Furthermore, the SICAFI must prepare a financial plan for the first three financial years as from registration, containing prospective balance sheets and profit and loss accounts as well as a minimum investment budget to meet the risk diversification criteria within 2 years. Moreover, a public SICAFI s debts on a statutory and a consolidated level cannot exceed 65% of its assets and the relating financial charge cannot be higher than 80% of total operational and financial income. Listing requirements The Royal Decree of 7 December 2010 imposes on the promoters to permanently ensure a free float of at least 30% as from the first year after having obtained the public SICAFI status. In addition, the regular market rules of Euronext Brussels should be met by a public SICAFI, so that a sufficient number of shares would be available to the public. Restrictions on investors For public SICAFIs, there are no restrictions as to the type of investors or their country of residence, or any minimum or maximum shareholder requirements. The institutional SICAFI's investors need to be professional or institutional 5 PwC Worldwide Real Estate Investment Trust (REIT) Regimes Belgium investors and the institutional SICAFI needs to be exclusively or jointly controlled by a public SICAFI. There are no minimum or maximum shareholder requirements (except for the promoters of the public SICAFI controlling the institutional SICAFI). Asset/income/activity tests In principle, the exclusive purpose of a SICAFI is the collective investment in real estate. This is, however, broadly defined and includes among others: real estate as such as well as rights in rem thereon, shares with voting rights issued by affiliated real estate companies, etc. Subsidiaries of a public SICAFI can apply for the SICAFI status, but it is an all or nothing approach: a public SICAFI may not control at the same time an institutional SICAFI and a real estate company that is not subject to the SICAFI regime. To ensure a relatively safe investment environment, in principle a maximum of 20% of the public SICAFI s consolidated assets can be invested in the same project. As of June 2006, this risk diversification requirement no longer applies to properties subject to long-term commitments of a Member State of the European Economic Area (EEA) or international organisations in which one or more EEA Member States participate. Investments in moveable property are allowed to a very limited extent (as to the duration and the amount of such investment) and provided that such business is authorised by the articles of association of a SICAFI. Some activities are, however, not allowed. A SICAFI (as well as real estate companies, if any, controlled by the latter) may not act as a mere property developer, i.e. its activity (excluding occasional transactions) may not consist in constructing buildings itself or having them constructed in view of selling them prior, after or within a period of 5 years after construction. Furthermore, a SICAFI may not grant loans to or provide guarantees to companies other than its subsidiaries (third-party companies). Restrictions on foreign assets There are no restrictions on foreign assets. Distribution requirements The SICAFI is obliged to distribute at least 80% of its corrected net result as defined in the Royal Decree, reduced by the amounts corresponding to the net decrease of their debts during the financial year. Tax treatment at REIT level Both public and institutional SICAFIs are Belgian tax resident companies and are subject to the standard corporate income tax at a rate of 33.99%. The taxable basis however is limited to non-deductible expenses (other than reductions in the value of shares and capital losses realised on shares), abnormal or gratuitous benefits received and so-called secret commissions. The capital gains and the recurring income from the property are hence tax-exempt. SICAFIs are subject to an annual tax on their net asset value. The tax rate is 0.08% for public SICAFIs (draft legislation provides for an increase of the tax rate to % as from 1 January 2013 and to % as from 1 January 2014) and 0.01% for institutional SICAFIs. Withholding tax on distributions In principle, dividends distributed by public and institutional SICAFIs are subject to 25% withholding tax. However, provided that at least 80% (there are some transitional measures) of the public SICAFI s assets invested in immoveable property located in the EEA are allocated to residential use, a 15% withholding tax is applicable. The public SICAFI receiving dividends distributed by an institutional SICAFI may however apply for a withholding tax exemption based on the parent subsidiary directive as implemented into Belgian law. Tax treatment at the investor level Resident investors Private individuals and legal entities In principle, the Belgian withholding tax, if any, on the dividends received by private individuals or by legal entities is the final tax so that no dividend income should be declared. Capital gains realised by Belgian resident individuals on shares that are not held for business purposes are in principle tax-exempt, unless the transfer of the shares cannot be regarded as falling within the scope of the normal management of one s private estate. If the transfer of the shares cannot be regarded as falling within the scope of the normal management of one s private estate, any capital gain will be taxable at 33% (to be increased by municipal taxes). Also, the capital gain realised upon the transfer of shares will be taxable 6 PwC Worldwide Real Estate Investment Trust (REIT) Regimes Belgium at 16.5% (+ municipal taxes) if the following cumulative conditions are met: (i) the transferor owned, at any time during the five years preceding the transfer, alone or with close family members, more than 25% of the shares of the Belgian company of which the shares are sold; (ii) the transfer is for a consideration; and (iii) the transfer is made to a company or an association that does not have its registered seat or principal place of business in a country located within the EEA. Capital gains realised by individuals on the sale of shares held for business purposes are normally taxed at the general progressive income tax rate. However, in specific cases, a separate tax rate of 16.5% (to be increased by municipal taxes) can be applied. Corporate investors Since a SICAFI is an investment company which, although subject to corporate income tax, benefits from a regime that deviates from the common rules, the dividend distributed by a SICAFI cannot benefit from the participation exemption and will in principle be taxable at 33.99%. However, provided the bylaws of the SICAFI state that annually at least 90% of the net revenue will be distributed to the shareholders, the participation exemption can be applied to the extent that said revenue stems from dividends meeting the subject-to-tax condition or from capital gains on shares. For a SICAFI, the latter exception is less relevant as the majority of the income would consist of real estate income. Any withholding tax levied on the dividend payments can be credited (and is refundable), provided that the dividend is included in the taxable basis of the beneficiary company and to the extent that the dividend distribution does not cause a reduction in value or a capital loss on the shares. As a SICAFI does not meet the socalled subject-to-tax condition, the capital gains realised on the disposal of the shares would in principle be fully taxable. Non-resident investors Based on article 4 of the OECD Model Tax Treaty, a SICAFI should be eligible for treaty protection as it can be considered to be a resident for tax treaty purposes. After all, a SICAFI is subject to corporate income tax in Belgium, albeit the taxable basis is significantly reduced (notional tax basis). Note however that treaty access should be determined on a case-by-case basis. Private individuals and legal entities As mentioned above, dividends distributed by SICAFIs are in principle subject to 25% withholding tax (15% case of a qualifying residential SICAFI). However, Belgian tax law also provides for an exemption from withholding tax on dividends distributed by a SICAFI to non-resident investors to the extent that the dividends distributed do not stem from Belgian-source dividends. Corporate investors The same withholding tax exemption as for private individuals and legal entities applies. Transition to REIT/Tax privileges In case of transformation into a SICAFI or a merger, split or partial split involving a SICAFI, the unrealised capital gains and the hidden reserves are not taxed at the standard corporate income tax rate of 33.99%, but at % (half the normal rate). There is, however, no such reduced rate for capital gains realised upon contribution into, or sale to, a SICAFI. The contributions in cash or in kind (e.g. real estate) made to a SICAFI benefit from an exemption from proportional registration duties. Only the fixed duty of EUR 25 will be due. 7 PwC Worldwide Real Estate Investment Trust (REIT) Regimes Bulgaria Bulgaria The Real Estate Investment Companies in Bulgaria ( BG-REITs ) are regulated by the Special Purpose Investment Companies Act (the Act ). The Act was published on 20 May 2003 and has been amended several times since. Orlin Hadjiiski PwC (Bulgaria) Blagomir Minov PwC (Bulgaria) BG-REITs are public joint-stock companies which, in compliance with the Act, invest in real estates and raise funds by issuing securities. BG- REITs can carry out their activities lawfully only if licensed by the Bulgarian Financial Supervision Commission ( FSC ). BG-REITs established under the Act are exempt from corporate income taxation. The adoption of the Act in 2003 was aimed at stimulating the real estate and investment markets. By April 2013 there were 58 active REITs licensed by the FSC. The great majority of them were incorporated in 2005 and 2006 and some established in 2007 and The crisis put a hold on the development of Bulgarian REITs and since 2011 only one new REIT has been registered till present. The market capitalisation of the REITs in the beginning of April 2013 was about BGN 1,966,530,000. The majority of the BG-REITs are diversified, i.e. they are designed for investment in a broad variety of real estate. There are also specialised funds, e.g. eight BG-REITs specialise in agricultural land investments. Some of the BG-REITs are established for an indefinite period of time and some are term funds. Legal form A BG-REIT can be established only as a public joint-stock company. A BG- REIT c
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