Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will...

44
Compare and contrast: Worldwide Real Estate Investment Trust (REIT) Regimes www.pwc.com/assetmanagement / m o c . c w p . w w w t en em g a n ma t e s s a / /a m i eg R m t s e v n nv I w d l r o W Wo p m mp o C Co s e m R t ( s u r t T Tr n e m s l E a e e R d i w d co n re a a p ) T I E R e t a t s : t s a r ra t n d co 1 1 0 y 2 l l u J u s e m i g T re I E E R u o i r a e v h re t a p om c o l l a d n a d e e p s s o t p u u e l k l i t w e l k o o s b i h T l a b o s gl u o t u o y w o u o p y e e e

Transcript of Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will...

Page 1: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Compare and contrast:Worldwide Real EstateInvestment Trust (REIT) Regimes

www.pwc.com/assetmanagement

/moc.cwp.www

tenemganmatessa//a

miegR

mtsevnnvIwdlroWWo

pmmpoCCo

sem

Rt (surt T Trnemsl Eaee Rdiw

d conre aap

)TIERetats

:tsarratnd co

110y 2lly 2uJJu

semigT reIEEIRuoirae vhre tapomcollad nad eepsspo tp uup el klit welkoos bihT

l abos gluo tu oyw o

u op yeep ye

Page 2: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Contents

Introduction 1

Australia 2

Belgium 4

Bulgaria 6

Canada 8

Finland 10

France 12

Germany 14

Greece 16

Hong Kong 18

Italy 20

Japan 22

Malaysia 24

Mexico 26

Singapore 28

South Korea 30

Spain 32

The Netherlands 34

Turkey 36

United Kingdom 38

United States 40

Page 3: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

1 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

PwC’s Asset Management practice has a global team of real estate tax and legalprofessionals who have conceived this booklet to keep you up to speed and allow you tocompare the various regimes. As you will notice, it is a high level comparison of keyattributes of selected REIT regimes. In this year’s booklet, we have included Finland as anadditional country. We trust that you will find it a useful reference and source ofinformation.

The REIT contacts listed within each country section will be delighted to assist you with anyfurther requests on the local REIT model. Otherwise, please don't hesitate to contact me oryour usual PwC contact directly.

During the past few months Real Estate Investment Trusts (REITs) have come back from the financial crisisshowing an impressive upswing. The REIT regimes respond to the ever changing market environment and arecontinuously evolving.

Introduction

Uwe StoschekGlobal Real Estate Tax LeaderPwC (Germany)+49 30 2636 [email protected]

Page 4: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Brian LawrencePwC (Australia)+61 2 8266-5221 [email protected]

Manuel MakasPwC (Australia) +61 2 [email protected]

Legal formThere are no specific REIT rules in Australia.Australian REITs are trusts that can be listedor unlisted. Australian REITs can be sectorspecific (e.g. industrial, office, etc.) ordiversified funds. In 1998, the ManagedInvestment Scheme (MIS) rules wereintroduced into the Corporations Law.The MIS rules govern investment vehicles inAustralia, including REITs. The rules dealwith regulatory issues such as licensing andboard composition for the manager ratherthan specific tests that must be satisfied toqualify as a REIT.

Australia is, however, going through aperiod of tax reform. One of the areas that isbeing proposed is to introduce a specifictax regime for an MIS. At this stage, it is notknown what the outcome of this reformwill be.

Capital requirementsThere are no capital requirements for aREIT (if listed, however, it must meet ASXrequirements). There are, however, capitalrequirements for the manager.

Listing requirementsThere are no listing requirements. A REITcan be listed or unlisted.

Restrictions on investorsThere are no investment restrictions oninvestors.

Asset/income/activity testsPublic unit trusts investing in land mustdo so for the purpose, or primarily forthe purpose, of deriving rental income(“eligible investment business”). Public unittrusts that carry on a trading business suchas developing land for sale, will not receiveflow through treatment. Eligible investmentbusiness includes other passive, investment-type activities such as loans, portfolio shareinvestment, derivatives, etc.

Restrictions onforeign assetsThere are no restrictions on foreign assets.

Distribution requirementsUndistributed income or gains are taxed at46.5%. Full distribution of income and gainsby REITs generally occurs.

Tax treatment at REIT levelFlow through, provided all unitholdersare entitled to the income of the REIT.A REIT is responsible for withholding taxon distributions to non-residents. Sometreaties deal specifically with REITs, e.g.US/Australia, Japan/Australia.

Withholding tax ondistributions

• Domestic: None

• Foreign: 30% or reduced amount of 7.5%if invest via certain countries

• Treaty access: Yes, depending upon exacttreaty wording. Limitations can arise iftreaty requires beneficial ownership(due to trust legal form). Note REITdistributions are not dividends and notcovered under dividend articles.

The Australian REIT market has a history dating back to 1971, when the first REIT was listed on the AustralianStock Exchange (ASX). The Australian REIT market is now very large, well established and sophisticated withapproximately 70% of Australian investment grade properties securitised. As of 28 February 2011, there were57listed REITs on the ASX with a market capitalisation of over AU$80 billion.

2 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Australia

Page 5: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Tax treatment at theinvestor level

Resident investorsResident unitholders are liable to pay tax onthe full amount of their share of the taxableincome (including capital gains) of a REITin the year in which they are presentlyentitled to the income of the REIT. Thisapplies, irrespective of whether the actualdistribution of the income from the REIT ispaid in a subsequent year.

Distributions from the REIT retain theircharacter and therefore the tax treatmentof the various components may differ. Forexample a distribution from a REIT mayinclude both foreign sourced income andgains (e.g. from properties located overseas)and Australian sourced income and gains.Distributions from an Australian REIT mayalso include a tax deferred component,capital gains tax (“CGT”) concessioncomponent, a capital gain component anda foreign tax credit component.

Tax deferred amounts are generallyattributable to returns of capital, buildingallowances, depreciation allowances andother tax timing differences. It is thepractice of the commissioner of taxation totreat tax deferred amounts as not assessablewhen received, unless and until the total taxdeferred amounts received by a unitholderexceed the unitholder’s cost base of theREIT units. For CGT purposes, tax deferredamounts received reduce the unitholder’scost base of the REIT units and thereforeaffect the unitholder’s capital gain/loss ondisposal of those units.

Where a capital asset that is owned by theAustralian REIT for at least 12 months isdisposed of, the trust may claim a 50% CGTdiscount on the capital gain realised upondisposal of that asset. The CGT concessioncomponent of a distribution by the REIT willrepresent the CGT discount claimed by thetrust in respect of asset disposals. The CGTconcession component is not assessablewhen received by unitholders (and no CGTcost base adjustment is required).

The capital gain component of a REITdistribution must be included in theunitholder’s net capital gain calculation.

Unitholders may be entitled to a foreigntax credit for foreign taxes paid by a REIT.The credit is applied against the Australiantax payable on foreign sourced income.

The disposal of REIT units will have CGTimplications.

Non-resident investorsNon-resident unitholders are subject toAustralian tax on their share of the REITstaxable income that is attributable toAustralian sources. Foreign sourced incomecan flow through an Australian REIT toa non-resident unitholder, tax-free.Distributions to non-residents of Australiansourced taxable income are subject towithholding tax (refer above).

The disposal of REIT units can have CGTimplications for foreign investors owning10% or more of the REIT units.

Transition to REIT/Tax privilegesNone

3 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 6: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Legal formOnly a public limited liability company anda partnership limited by shares governed byBelgian law are eligible for the SICAFIstatus. Both of these entities are corporatebodies and have a separate legal personalityaccording to Belgian company law.

Capital requirementsIn principle, a SICAFI must have a fullypaid-up share capital of at least EUR1.2million. However, to obtain authorisation inpractice, the required share capital for apublic SICAFI is much higher (e.g. thequotation on the Euronext Stock Exchangerequires a market capitalisation of EUR15million).

Furthermore, the SICAFI must prepare afinancial plan for the first three financialyears as from registration, containing

prospective balance sheets and profit andloss accounts as well as a minimuminvestment budget to meet the riskdiversification criteria within 2 years.

Moreover, a public SICAFI’s debts on astatutory and a consolidated level cannotexceed 65% of its assets and the relatingfinancial charge cannot be higher than 80%of total operational and financial income.

Listing requirementsThe Royal Decree of 7 December 2010imposes on the promoters to permanentlyensure a free float of at least 30% as fromthe first year after having obtained thepublic SICAFI status.

In addition, the regular market rules ofEuronext Brussels should be met by a publicSICAFI, so that a sufficient number of shareswould be available to the public.

Restrictions on investors For public SICAFIs, there are no restrictionsas to the type of investors or their country ofresidence, or any minimum or maximumshareholder requirements. The institutionalSICAFI's investors need to be professional orinstitutional investors and the institutionalSICAFI needs to be exclusively or jointlycontrolled by a public SICAFI. There are nominimum or maximum shareholderrequirements (except for the promoters ofthe public SICAFI controlling theinstitutional SICAFI).

Asset/income/activity testsIn principle, the exclusive purpose of aSICAFI is the collective investment in ‘realestate’. This is, however, broadly definedand includes among others: real estate assuch as well as rights in rem thereon, shareswith voting rights issued by affiliated realestate companies, etc. Subsidiaries of apublic SICAFI can apply for the SICAFIstatus, but it is an all or nothing approach: apublic SICAFI may not control at the sametime an institutional SICAFI and a realestate company that is not subject to theSICAFI regime.

To ensure a relatively safe investmentenvironment, in principle a maximum of20% of the public SICAFI’s consolidatedassets can be invested in the same project.As of June 2006, this risk diversificationrequirement no longer applies to propertiessubject to long-term commitments of aMember State of the European EconomicArea (EEA) or international organisations inwhich one or more EEA Member Statesparticipate.

Investments in moveable property areallowed to a very limited extent (as to theduration and the amount of suchinvestment) and provided that suchbusiness is authorised by the articles ofassociation 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 actas a mere property developer, i.e. its activity(excluding occasional transactions) may not

The Belgian closed ended real estate collective investment company (SICAFI or ‘SICAFI or ‘Société d’Investissementà Capital Fixe Immobilière’) was created by the Law of 4 December 1990. However, it took until the Royal Decreeof 10 April 1995 to put in place a regulatory framework whereby a balance was sought between allowinginvestment flexibility to the SICAFI and providing security to the investor. A new Royal Decree was issued on 7December 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 SICAFIsallowing a public SICAFI to realise specific projects with third parties, i.e. other institutional or professionalinvestors (including public partners under PPP). The regulatory framework of the institutional SICAFI is aimed atprotecting 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 15 SICAFIs acknowledged by the Banking Commission, with a total market capitalisation ofapproximately EUR5.4 billion.

4 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Belgium

Laurens NarrainaPwC (Belgium)+32 2 710 [email protected]

Maarten TasPwC (Belgium)+32 2 710 [email protected]

Page 7: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

consist in constructing buildings itself orhaving them constructed in view of sellingthem prior, after or within a period of 5years after construction.

Furthermore, a SICAFI may not grant loansto or provide guarantees to companies otherthan its subsidiaries (third-partycompanies).

Restrictions onforeign assetsThere are no restrictions on foreign assets.

Distribution requirementsThe SICAFI is obliged to distribute at least80% of its corrected net result as defined inthe Royal Decree, reduced by the amountscorresponding to the net decrease of theirdebts during the financial year.

Tax treatment at REIT levelBoth public and institutional SICAFIs areBelgian tax resident companies and aresubject to the standard corporate incometax at a rate of 33.99%. The taxable basishowever is limited to non-deductibleexpenses (other than reductions in the valueof shares and capital losses realised onshares), abnormal or gratuitous benefitsreceived and so-called secret commissions.The capital gains and the recurring incomefrom the property are hence tax-exempt.

SICAFIs are subject to an annual tax on theirnet asset value. The tax rate is 0.08% forpublic SICAFIs and 0.01% for institutionalSICAFIs.

Withholding tax ondistributionsIn principle, dividends distributed by publicSICAFIs are subject to 15% withholding tax.However, provided that at least 60% of thepublic SICAFI’s assets are invested inBelgian immoveable property allocated toresidential use, a withholding tax exemptionis available. The dividends distributed by aninstitutional SICAFI are subject to a25%/15% withholding tax. The publicSICAFI receiving such dividends mayhowever apply for a withholding taxexemption based on the parent subsidiarydirective as implemented into Belgian law.

Tax treatment at theinvestor level

Resident investors

Private individuals and legal entitiesIn principle, the Belgian withholding tax, ifany, on the dividends received by private

individuals or by legal entities is the finaltax so that no dividend income should bedeclared.

Capital gains realised by Belgian residentindividuals on shares that are not held forbusiness purposes are in principle tax-exempt, unless the transfer of the sharescannot be regarded as falling within thescope of the normal management of one’sprivate estate. If the transfer of the sharescannot be regarded as falling within thescope of the normal management of one’sprivate estate, any capital gain will betaxable at 33% (to be increased bymunicipal taxes).

Also, the capital gain realised upon thetransfer of shares will be taxable at 16.5% (+ municipal taxes) if the followingcumulative conditions are met: (i) thetransferor owned, at any time during thefive years preceding the transfer, alone orwith close family members, more than 25%of the shares of the Belgian company ofwhich the shares are sold; (ii) the transfer isfor a consideration; and (iii) the transfer ismade to a company or an association thatdoes not have its registered seat or principalplace of business in a country located withinthe European Economic Area (EEA).

Capital gains realised by individuals on thesale of shares held for business purposes arenormally taxed at the general progressiveincome tax rate. However, in specific cases,a separate tax rate of 16.5% (to be increasedby municipal taxes) can be applied.

Corporate investorsSince a SICAFI is an investment companywhich, although subject to corporateincome tax, benefits from a regime thatdeviates from the common rules, thedividend distributed by a SICAFI cannotbenefit from the participation exemptionand will in principle be taxable at 33.99%.However, provided the bylaws of the SICAFIstate that annually at least 90% of the netrevenue will be distributed to theshareholders, the participation exemptioncan be applied to the extent that saidrevenue stems from dividends meeting thesubject-to-tax condition or from capitalgains on shares. For a SICAFI, the latterexception is less relevant as the majority ofthe income would consist of real estateincome.

Any withholding tax levied on thedividend payments can be credited (andis refundable), provided that the dividendis included in the taxable basis of thebeneficiary company and to the extent thatthe dividend distribution does not cause

a reduction in value or a capital loss onthe shares.

As a SICAFI does not meet the so-calledsubject-to-tax condition, the capital gainsrealised on the disposal of the shares wouldin principle be fully taxable.

Non-resident investorsBased on article 4 of the OECD Model TaxTreaty, a SICAFI should be eligible for treatyprotection as it can be considered to be aresident for tax treaty purposes. After all,a SICAFI is subject to corporate income taxin Belgium, albeit the taxable basis issignificantly reduced (notional tax basis).Note however that treaty access should bedetermined on a case-by-case basis.

Private individuals and legal entitiesAs mentioned above, dividends distributedby SICAFIs are in principle subject to 15%withholding tax (0% in case of a residentialSICAFI). However, Belgian tax law alsoprovides for an exemption from withholdingtax on dividends paid to non-Belgianresidents who do not run any business or arenot involved in profit making transactions orwho are exempt from income tax in theircountry of residence.

Corporate investorsAs the SICAFI is subject to Belgian corporateincome tax – albeit on a limited basis –it can be defended that corporate investorsowning a minimum participation (10%)during an uninterrupted period of one year,can benefit from a 0% dividend withholdingtax under the Parent-Subsidiary directive.

Transition to REIT/TaxprivilegesIn case of transformation into a SICAFIor a merger, split or partial split involving aSICAFI, the unrealised capital gains and thehidden reserves are not taxed at thestandard corporate income tax rate of33.99%, but at 16.995% (half the normalrate). There is, however, no such reducedrate for capital gains realised uponcontribution into, or sale to, a SICAFI.The contributions in cash or in kind (e.g.real estate) made to a SICAFI benefit froman exemption from proportional registrationduties. Only the fixed duty of EUR25 willbe due.

5 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 8: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Orlin HadjiiskiPwC (Bulgaria)+359 2 9355 [email protected]

Blagomir MinovPwC (Bulgaria)+359 2 9355 [email protected]

BG-REITs are public joint-stock companieswhich, in compliance with the Act, invest inreal estates and raise funds by issuingsecurities. BG-REITs can carry out theiractivities lawfully only if licensed by theBulgarian Financial SupervisionCommission (“FSC”). BG-REITs establishedunder the Act are exempt from corporateincome taxation.

The adoption of the Act in 2003 was aimedat stimulating the real estate and investmentmarkets. By April 2011 there were 67 activeREITS licensed by the FSC. The greatmajority of them were incorporated in2005 and 2006 and some established in2007 and 2008. The crisis put a hold on thedevelopment of Bulgarian REITS and noneof them were registered in 2009 or 2010.For the first half of 2010 (latest dataavailable), the total asset value of the BG-REITs was about BGN1 450 thousand.1

The majority of the BG-REITs arediversified, i.e. they are designed forinvestment in a broad variety of real estate.There are also specialised funds, e.g. eightBG-REITs specialise in agricultural landinvestments. Some of the BG-REITs areestablished for an indefinite period of timeand some are term funds.

Legal formA BG-REIT can be established only as apublic joint-stock company. A BG-REIT canneither reorganise itself into another type ofcompany nor change its scope of business.

Capital requirementsThe registered capital of a BG-REIT mustamount to at least BGN500,000. It must bepaid in full before the BG-REIT is registeredand no contributions in kind are permitted.

Upon the incorporation of a BG-REIT, theconstituent meeting is obliged to pass aresolution for an initial capital increase upto at least 30% of the initial share capital.This first capital increase can be performedonly on the basis of a prospectus authorisedby the FSC. The increase is to be effected

through the issuance of rights entitling theholders to take part in the subscription ofthe increase. The founding shareholders donot have pre-emption rights in the initialcapital increase.

In order to operate legitimately, REITsshould receive a licence from the FSC. If aREIT does not commence operations within12 months of issuing the licence, its licencewould be revoked.

Listing requirementsBG-REITs are required to obtain a listingon a regulated market at the time of theobligatory share capital increase (referto the previous section). It is the rightsrelated to the capital increase that must belisted first.

Restrictions on investorsThere are no restrictions on investors.

Asset/income/activity testsBG-REITs are entitled to invest in real estateand limited property rights in real estate,construction works and improvements,mortgage-backed bonds (up to 10% of theirown funds), and service companies for theirown needs (up to 10% of their own funds).BG-REITs may not acquire real estate that issubject to a legal dispute and may notguarantee obligations of other persons orprovide loans.

Moreover, a BG-REIT may not performdirectly the activities relating to themanagement and maintenance of acquiredreal estates, performance of constructionsand improvements thereon, or, respectively,the collection of amounts resulting fromacquired receivables. These have to beoutsourced to one or more companies(“service companies”). BG-REITs maythemselves invest in service companiesunder certain restrictions and withincertain limitations.

The Real Estate Investment Companies in Bulgaria (“BG-REITs”) are regulated by the Special Purpose InvestmentCompanies Act (the “Act”). The Act was published on 20 May 2003 and has been amended several times since.

6 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Bulgaria

1 This is calculated as the asset value of non-REITSpecial Purpose Investment Companies and isdeducted from the total asset value of all SpecialPurpose Investment Companies reported onthe website of the FSC – http://www.fsc.bg.Nostatistical information on the market capitalisationof the licensed companies is disclosed.

Page 9: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Restrictions onforeign assetsThe real estate acquired must be located inthe territory of Bulgaria.

Distribution requirementsBG-REITs must distribute at least 90% oftheir adjusted accounting profits for therespective financial year as dividends, whichare payable within 12 months as from theend of the financial year.

Tax treatment at REIT levelThe profits of the BG-REITs are not subjectto corporate taxation. However, BG-REITsare legally obliged to distribute at least 90%of their profits (so called distributionprofits) as dividends. The income fromdividends distributed by the BG-REIT issubject to taxation at the level of theshareholder. There is no flow throughtreatment of the income of the BG-REIT forBulgarian tax purposes.

Local taxes and fees apply for BG-REITs.The transfer of real estate is subject totransfer tax of 0.1%–3% on the higher of thepurchase price or the tax value (statutorydetermined value) of the real estate.The tax is paid by the buyer unless agreedotherwise. Further, there is a 0.01%–0.45%annual real estate tax levied on the higherbetween the gross book value and the taxvalue of the real estate (except agriculturalland and forests) held by the BG-REIT.The tax value is determined by themunicipal authority where the real estateis situated. Garbage collection fee is alsocollected. The exact rates of these localtaxes and fees are determined by themunicipality in which the property issituated.

Withholding tax ondistributionsDividends distributed by a BG-REIT toindividuals are subject to a 5% withholdingtax.

The 5% withholding tax applies todividends distributed to non-residentcorporate entities, unless these entities areresidents of EU/EEA.

No withholding tax is levied if the dividendsare distributed to a corporate shareholder inBulgaria or an EU/EEA country.

Non-resident individuals and corporateentities could lower or eliminate thewithholding tax on dividends under theprovisions of an applicable DTT.

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends derived from BG-REIT shares aresubject to a final withholding tax of 5%.

Capital gains from the sale of the shares inthe BG-REIT are exempt from tax if the salewas made on a regulated market ofsecurities in the EU/EEA. If the sale wasmade off a regulated market in the EU/EEA,the capital gains are subject to 10% tax.The gain is determined as the differencebetween the acquisition price and the salesprice of the shares.

Corporate investorsDividends distributed by the BG-REIT wouldbe included in the taxable result of thecorporate shareholder subject to corporateincome tax at a rate of 10%.

Capital gains from the disposal of shares inthe BG-REIT (i.e. the difference between theacquisition price and the sales price of theshares) would be exempt from taxation ifthe disposal of the shares was done on aregulated market in the EU/EEA. If the salewas made off a regulated market in theEU/EEA, the capital gains would beincluded in the taxable result of thecompany and would be subject to 10%corporate income tax.

Non-resident investors

Individual investorsA withholding tax of 5% is levied on thegross amount of dividends distributed bythe BG-REIT to a foreign individual.

Capital gains from the sale of the shares inthe BG-REIT by foreign individuals areexempt from tax if the sale was made ona regulated market of securities in theEU/EEA. If the sale was made off aregulated market in the EU/EEA the capitalgains are subject to 10% tax. The gain isdetermined as the difference betweenthe acquisition price and the sales priceof the shares.

Corporate investorsUnder Bulgarian tax legislation, thereis a 5% withholding tax on dividendsdistributed by the BG-REIT to a non-residentcorporate entity. No withholding tax appliesfor EU/EEA shareholders.

Capital gains from the disposal of sharesin the BG-REIT by a foreign corporate entitywould be exempt from taxation if thedisposal of the shares was done on aregulated market in the EU/EEA. If the salewas made off a regulated market in theEU/EEA the capital gains would be subjectto 10% withholding tax on the differencebetween the acquisition price and the salesprice of the shares.

Transition to REIT/Tax privilegesThere are no specific exit tax regulations inrespect of REITs.

7 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 10: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Those that qualify as REITs under theREIT Rules are subject to the flow throughtax regime applicable to MFTs, providedthey meet certain requirements. Mostimportantly, the REIT must distribute allof its income annually and the activities ofthe REIT must be passive in nature. Themajority of REITs are sector specific (e.g.residential, office, retail, etc.). Others areinvolved in more than one sector. There arealso unlisted or private REITs that are notsubject to the REIT Rules and that can beinvolved in a broader range of activitiesthrough controlled partnerships andcorporations. Private REITs, which usuallyhave at least 150 investors, are generally notsubject to tax so long as they distribute100% of their taxable income annually.This chapter only considers REITs that aresubject to the REIT Rules – i.e. listed REITs.

The first modern Canadian public REIT wasformed in 1993 with the REIT marketreaching a reasonable size in the late 1990s.Prior to that time, there had been a fewpublicly traded REITs, but the vast majorityof listed real estate enterprises werestructured as taxable corporations.As discussed in more detail below, theREIT Rules that became law in 2007severely restrict the nature of activities thata qualifying REIT may carry on eitherdirectly or indirectly. As of 1 January, 2011,the SIFT Rules apply to all listed MFTs.The initial application of the SIFT Ruleswas deferred, in general, until 2011 forlisted MFTs that were in existence on 31October 2006, the day that the intention tointroduce the SIFT Rules was announced bythe Federal Government. A number of thelisted MFTs that prior to 2011, referred tothemselves as REITs will not qualify forexemption from SIFT tax under the REITRules, due to the nature of the activitiesthat they carry on.

However, some non-qualifying REITsrestructured before 2011 to bringthemselves onside the REIT Rules. The listedREIT market in Canada is small whencompared to the total market capitalisationof the TSX, Canada’s principal stockexchange. On 12 April 2011, there were29 listed MFTs that referred to themselvesas REITs with a market capitalisation ofapproximately CA$35 billion. Listed realestate corporations had a marketcapitalisation of approximately CA$16billion at the same date.1 Similar to listedREITs in other countries, Canada’s REITsgenerally provide predictable cashdistributions and opportunities for capitalappreciation.

Legal formAs noted above, REITs are formedas MFTs). MFTs may be closed-end or open-end funds.

Capital requirementsIn order to list on the TSX, a REIT must haveat least CA$1 million free trading publicshares, CA$4 million held by publicshareholders and 300 public shareholders,each holding a board lot. If the operationsof the REIT have a track record, theminimum NTA requirement is CA$2 million.If the REIT is merely forecastingprofitability, it will require a minimumNTA of CA$7.5 million.

Listing requirementsClosed-end funds must be listed on adesignated stock exchange. Open-end fundsare generally listed but there is norequirement to do so.

Since 2007, Canada’s income tax legislation has contained a specific set of rules that apply to listed REITs (the“REIT Rules”). The REIT Rules were introduced as an exception to new provisions dealing with specifiedinvestment flow-through entities (i.e. certain publicly traded trusts and partnerships) (the “SIFT Rules”). Entities

subject to the SIFT Rules are subject to tax (“SIFT tax”) in a manner similar to that of public corporations and arenot entitled to the flow through tax treatment that is generally available to trusts and partnerships. In their legalform, REITs are mutual fund trusts (“MFTs”).

8 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Canada

Chris PotterPwC (Canada)+1 416 [email protected]

Chris VangouPwC (Canada)+1 416 228-1087 [email protected]

David GlicksmanPwC (Canada)+1 416 947-8988 [email protected]

1 Source of date at 12 April 2011 is derived from the13 April 2011 version of the Daily Market Indicator,produced by RBC Capital Markets.

Page 11: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Restrictions on investors

Minimum number of investorsThere must be at least 150 unitholders inorder to qualify as an MFT. However, seelisting requirements above.

Restrictions on non-residentinvestorsA REIT cannot be established or maintainedprimarily for the benefit ofnon-residents (ownership must be lessthan 50%).

Asset/income/activity testsa)If an open-end or closed-end REIT:

• Cannot hold non-portfolio property (e.g.equity and debt of certain Canadianresident corporations, trusts orpartnerships, and property used incarrying on a business), other thanqualified REIT property. However,subsidiary entities can be used, providedcertain tests are satisfied.

• The fair market value of real properties,cash, bankers’ acceptances, debt or otherCanadian government obligations mustbe at least 75% of the REITs equity value.

• At least 75% of revenues must beattributable to rents from, mortgages on,or capital gains from the disposition of,real properties.

• At least 95% of revenues must be fromany combination of rent from realproperties, capital gains from dispositionsof real properties, interest, dividendsand royalties.

• Real property excludes depreciableproperty, other than buildings andancillary property, and leasehold interestsin such property.

• Must acquire, hold, maintain, improve,lease or manage real property (orinterests therein) that is capital property,or invest its funds in other property. Otheractivities can be carried on throughsubsidiary entities, subject to asset andincome tests.

Proposed amendments to the REIT Ruleswere announced on 16 December 2010,which would have the effect of making iteasier to comply with some of therequirements to qualify as a REIT. Thesechanges are generally proposed to apply,beginning in January 2011. At a high level,the proposed amendments:

• permit a REIT to hold non-portfolioproperty that is not qualified REITproperty up to an amount equal to 10%of the total fair market value of all of theREITs non-portfolio property;

• reduce the 95% revenue test discussedabove to 90%;

• provide rules that specifically deal with certain types of properties held for resale; and

• clarify that, for the purposes of therevenue tests, amounts paid by subsidiaryentities that are trusts, includingdistributions of capital gains, retain thecharacter that the underlying revenue hadwhen those trusts earned or received it.

In addition, the proposed amendmentsintroduce a definition of ‘gross REITrevenue’, which will apply for the purposesof both the 90% and 75% revenue tests.Gross REIT revenue will mean the totalof (i) all amounts that are received orreceivable in a taxation year by the entityother than amounts that are, or are onaccount of, capital, and (ii) capital gainsof the entity for the year. Accordingly, anyproceeds of disposition, such as recaptureddepreciation, which are not included incapital gains, will be excluded from thisdefinition.

While these proposed amendments providesome welcome changes to the REIT Rules,they are subject to further publicconsultation and, at the time of printing,it is not certain when they may be enacted.

b)In addition, if a closed-end REIT, amongother things:

• At least 80% of its properties must consistof real properties situated in Canada,cash, shares, marketable securities,bonds, debentures and certain otherassets

• At least 95% of its income must bederived from, or from the disposition of,real properties situated in Canada, cash,shares, marketable securities, bonds,debentures and certain other assets.

Restrictions onforeign assetsClosed-end REITs are subject to therestrictions described above. There are norestrictions for open-ended REITs.

Distribution requirementsThere is no minimum distributionrequirement. However, in order to avoid taxliability at the REIT level, all of its taxableincome, including taxable capital gains,must be paid or become payable to itsunitholders each year.

Tax treatment at REIT levelREITs must be resident in Canada.

Taxable income of a REIT that is not paid orpayable to unitholders is subject to tax at acombined federal and provincial rateranging from approximately 42% to 50%.If asset/income tests set out above inparagraph (a) under asset/income/activitytests are not satisfied, certain types ofincome addressed by the SIFT Rules (seeBackground) will be subject to tax atcombined federal and provincial generalcorporate rates ranging from approximately26.5% to 32.5% in 2011.

Withholding tax onDistributionsThere is no withholding tax on REITdistributions to Canadian residents.Non- resident unitholders are subject to a25% withholding tax (may be reduced to15% by treaty) on distributions of incomeand capital gains, and a 15% withholdingtax on distributions in excessof income and capital gains.

Tax treatment at theinvestor level

Resident investorsUnitholders are subject to tax on incomeand taxable capital gains paid or payableto them by the REIT. Returns of capitalare not taxable but reduce the tax cost ofthe units.

Non-resident investorsNon-resident unitholders are subject towithholding tax as described above. Capitalgains realised on a disposition of REIT unitsare generally not subject to tax in Canadaunless such units are characterised as“taxable Canadian property”.

9 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 12: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Samuli MakkonenPwC (Finland)+358 9 [email protected]

Legal formThe REIT must be incorporated as a Finnishpublic limited company.

Capital requirementsThe minimum capital requirement for aREIT is EUR5 million.

Listing requirementsThe shares of a REIT must be admitted totrading in a regulated stock exchange or in amultilateral trading facility within theEuropean Economic Area. However, a REITmay be excused from this requirement forthe first two years.

Restrictions on investorsAny one shareholder’s shareholding in aREIT must be less than 10% of the REITsshare capital (however, a 30% threshold isapplied until the end of 2013).

Asset/income/activity testsAs mentioned above, only companiesqualifying as REFs under the REF Act mayapply to become REITs in accordance withthe FIN-REIT Act. Therefore, a REIT mustcomply with both Acts.

Activities• A REIT is only allowed to carry on

activities relating to owning and rentingof residential real property and certainancillary activities, such as propertymanagement and maintenance. Propertydevelopment on own account is alsopermissible. The REIT is allowed tomanage cash needed to carry onpermissible activities.

Assets• A minimum of 80% of the REITs assets

must consist of residential real property,as defined in the FIN-REIT Act, or ofshares in mutual residential real estatecompanies (“MRECs”), i.e. companies,shares of which render the shareholder aright to possess and lease out certaindefined premises owned by the MREC,and the right to rental income on a leaseof the said premises) or comparableentities. In addition to these assets, theREIT is allowed to own certain otherliquid assets as defined in the FIN-REITAct and the REF Act. However, a REIT isnot allowed to hold shares in subsidiarycompanies other than MRECs andcomparable entities.

Finnish legislation provided a framework for collective investments in real property (“REFs”) as early as 1997(Act on Real Estate Funds (“REF Act”)). However, no funds were set up under the REF Act, mostly due tounattractive taxation: no tax exemptions were available for the REFs, which consequently were subject to regularcorporate income tax on all income.

However, after a lengthy lobbying effort by the industry, a tax exemption for such real estate fund, governed by thesaid REF Act, was introduced with effect from 1 January 2009 by the Finnish Act on Tax Incentives for certainLimited Companies Carrying on Residential Renting Activities (24.4.2009/299, “FIN-REIT Act”). Despite theobjections from the market participants, the tax exemption was only extended to real estate funds investing inresidential property.

The introduction of the FIN-REIT Act was however subject to a state aid notification to the European Commission.On 12 May 2010, the Commission announced that the said tax exemption is not regarded as illegal state aid(subject to a minor adjustment in the legislation). Due to the notification procedure and the consequentamendments made to the FIN-REIT Act as a result, the FIN-REIT Act entered into force on 17 November 2010 withretroactive effect from 1 January 2010.

Under the new REIT regime, qualifying REFs engaged in owning and renting of residential real property maymake an application to be treated as REITs. A REIT is a tax-exempt entity in Finland. The REIT must, in order toclaim the tax-exempt status, comply with requirements set out both in the REF Act and the FIN-REIT Act.

10 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Finland

Page 13: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

• Furthermore, there are notablerestrictions on asset disposals (see belowin “penalties”).

Other requirements• The total debt of a REIT must not exceed

80% of the value of the REITs assets (aspresented in the financial statements).

• The REIT must derive at least 80% of itsnet profits (excluding capital gains) fromits rental activities. In case the REIT failsto satisfy this rule, a penalty charge maybecome payable (see below).

• After achieving the REIT status, thecompany must also:

– have its shares traded in a regulatedmarket (see above); and

– distribute as dividends at least 90% ofits net profits (see below). Distributionsin other form than dividends are notpermitted.

• Furthermore, any subsidiaries of the REITmust not become involved in businessrearrangements deemed to have a taxavoidance purpose or other transactionsof similar nature.

Restrictions onforeign assetsAny MRECs or comparable entities the REITholds shares in must be resident in theEuropean Economic Area.

Distribution requirementsThe REIT must distribute at least 90% of itsnet profits, excluding unrealised gains,subject to restrictions set out in the FinnishCompanies Act.

Tax treatment at REIT levelAs mentioned above, a Finnish REIT is atax-exempt entity. Subsidiaries of a REIT donot benefit from the REIT status and arehence subject to general taxation. However,the REIT is only allowed to hold shares inresidential MRECs and comparable entities.Such entities are typically not in a tax payingposition.

In respect to foreign income, a REIT is not(as a tax-exempt entity) able to receivecredit in Finland from any withholding taxespaid at source.

The tax exemption of a REIT does not covertaxes other than corporate income tax.Therefore, for example, transfer taxes andreal property taxes (where REIT holds realproperty directly) would be payable.Transfer tax is a percentage of thetransaction price of equities and realproperty (1.6% regarding equities and 4%regarding real property).

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends are fully taxable capital incomeat a rate of 28%. Capital gains fromdisposals of REIT shares are similarly fullytaxable capital income (at a rate of 28%).

Corporate investorsDividends are fully taxable income at thegeneral corporate income tax rate (currently26%). Also capital gains from disposal ofREIT shares are fully taxable income.

Non-resident investors

Individual investorsDividends from a REIT are subject to awithholding tax at the domestic rate of 28%or at a lower treaty rate, if applicable.

Capital gains from disposals of REIT sharescould be subject to Finnish tax in case morethan 50% of the REITs assets would directlyconsist of Finnish real property. However, inpractice it is more likely that the REIT wouldown the real property via MRECs, in whichcase disposals of REIT shares should beexempt from Finnish tax.

Corporate investorsDividends from a REIT would be subject to awithholding tax at the domestic rate of 28%or at a lower treaty rate, if applicable.

Capital gains from disposals of REIT sharescould be subject to withholding tax in casemore than 50% of the REITs assets woulddirectly consist of Finnish real property.However, in practice it is more likely that theREIT would own the real property viaMRECs, in which case disposals of REITshares should be, as a starting point, exemptfrom Finnish withholding tax.

Transition to REIT/tax privileges

Conversion taxWhere an existing company carrying onresidential activities converts into a REIT, itsassets are valued to their fair market valueand any unrealised gains will be subject totax at general corporate tax rate (currently26%). Upon REITs application, the chargemay be spread to be paid over a period ofthree years.

Penalty charges and cancellationof REIT statusIn case the REIT fails to satisfy certaincriteria mentioned above, tax authoritiesmay impose penalty charges or cancel theREIT status.

• As mentioned above, a REIT must deriveat least 80% of its income from its rentalactivities. If a REIT fails on this, a penaltycharge of 20% will be levied on theshortfall.

• In certain cases, capital gains (calculatedseparately for tax purposes) upondisposals of real property assets will besubject to tax at the general corporateincome tax rate, currently 26%. Capitalgains are taxable if:

– the real property assets are held for lessthan 5 years, or,

– less than 5 years have elapsed fromcompletion of a “comprehensiverenovation” of premises, where the costof the renovation exceed 30% of thepremises’ acquisition cost for taxpurposes, or,

– the company disposes of more than10% of its real property assets.

• If a REIT fails to satisfy the conditions forthe applicability of the FIN-REIT Actdiscussed above, its tax-exempt statusmay be cancelled. The tax authoritiesmust give the company a reasonableopportunity to correct the failings, unlessit is obvious that the conditions for theapplicability of the FIN-REIT Act will notbe fulfilled. However, if a REIT has actedintentionally or with the intent forsignificant gain, its REIT status will becancelled in all cases.

11 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 14: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Legal formThe company must be incorporated underthe legal form of a joint stock company.

Capital requirementsThe share capital of a listed SIIC mustamount to at least EUR15 million.

Listing requirementsThe shares of a SIIC must be listed on aFrench regulated stock market or on aforeign stock market that respects theprovisions of Directive 2004/39/CE, dated21 April 2004.

Restrictions on investors

Minimum number of investorsThe financial and voting rights of a companyat the time of its entry into the SIIC regimemust be held by at least 15% ofshareholders, each of which holds, directly

or indirectly, less than 2% of the financialand voting rights of the company.

The financial and voting rights of a listedSIIC must not be held, directly or indirectly,and at any moment during the applicationof the SIIC regime, at 60% or more by oneshareholder or by several shareholdersacting in “concert”.

Restrictions on non-residentinvestorsThere are no restrictions on non-residentinvestors.

Asset/income/activity testsThe SIIC regime is available to companies

(subject to corporate income tax) whosemain activity is to acquire or to build,directly or indirectly (i.e. throughintermediary companies) real estateproperties for the purposes of renting them.The SIIC regime is also available (uponelection) to French subsidiaries (carryingout an above-mentioned eligible activity),subject to corporate income tax, which are95% or more held by one or several listedSIICs or jointly by several SPPICAV or jointlyby one SPPICAV and one SIIC.

Companies benefiting from the SIIC regimecan carry out other activities provided theyremain ancillary. The income deriving fromthese activities remains subject to corporateincome tax at the standard rate of 34.43%.

Restrictions onforeign assetsThere are no restrictions on foreign assets.

Distribution requirementsA SIIC is obliged to distribute at least 85% ofits rental income, 50% of the capital gainsrealised and 100% of the dividends itreceived from its 95%-or-more-held Frenchsubsidiaries, which elected for the

SIIC regime or from another listed SIIC orfrom SPPICAV (provided certain conditionsare met). The above distributionrequirements apply only with respect to theincome and the capital gains deriving fromthe tax-exempt sector.

Tax treatment at REIT levelA company that benefits from the SIICregime is exempt from corporate income taxon the following items:

France was one of the first (in 2003) European countries to introduce a REIT regime, which is known by itsFrench acronym “SIIC” for “Sociétés d’Investissements Immobiliers Cotées”. The so-called SIIC regime is anoptional (i.e. an election is required by the company to benefit from that regime) tax regime.

Since its introduction in 2003, the SIIC regime has been modified several times. Some of these changes aimed toclose certain existing loopholes and some others to broaden the scope of this regime. The SIIC regime has nowreached stability and maturity.

Thanks to the SIIC regime and also to the provisions of Article 210 E of the French tax code (allowing SIICs topurchase real estate assets from sellers, which will benefit from a reduced taxation rate on their capital gains),listed SIICs have become key players on the French real estate market.

12 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

France

Bruno LunghiPwC (France)+33 1 56 57 82 [email protected]

Philippe EmielPwC (France)+33 1 56 57 41 [email protected]

Page 15: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

• Income deriving from the rental of realestate properties;

• Income deriving from the sub-rental ofreal estate properties, which are financedthrough a real estate financial leaseagreement concluded or acquired as from1 January 2005;

• Capital gains realised on the disposalof real estate assets;

• Capital gains realised on the disposal ofrights in real estate financial leaseagreements concluded or acquired asfrom 1 January 2005;

• Capital gains on the disposal of shares inpass-through entities carrying out anactivity similar to a listed SIIC;

• Capital gains on the disposal of shares in95%-or-more-held French subsidiaries,which elected for the SIIC regime;

• Dividends received by a listed SIIC fromits 95%-or-more-held French subsidiaries,which elected for the SIIC regime; and

• Dividends received by a listed SIIC fromanother listed SIIC or from SPPICAV(provided certain conditions are met).

All the other income and capital gainsrealised belong to the taxable sector and aresubject to corporate income tax at thestandard rate of 34.43%. These otherincome and capital gains are not subject toany dividend distribution requirements.

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends from listed SIICs received byindividual shareholders are either subject,on 60% of their amount, to personal incometax at progressive rates or, upon option fromthe taxpayer, to a 19% flat rate (plus 12.3%of social contributions).

Capital gains realised on the disposal ofshares in a listed SIIC are subject to a flatrate of 19% (plus 12.3% of socialcontributions), whatever the global valueof securities sold.

Corporate investorsDividends from listed SIICs deriving fromthe tax-exempt sector received by corporateshareholders are subject to corporateincome tax at the standard rate of 34.43%.On the other hand, dividends from listedSIICs deriving from the taxable sector

benefit from the domestic parent-subsidiaryregime if certain conditions are met (5%shareholding requirement).

Capital gains realised on the disposalof shares in a listed SIIC are subject tocorporate income tax either at the standardrate of 34.43% or at the reduced rateof 19.6%, if certain conditions are met(5% shareholding requirement for at leasttwo years).

Non-resident investors

Individual investorsDividends from listed SIICs received by anindividual shareholder are subject to Frenchwithholding tax either at the rate of 19% ifs/he is a tax resident from an EU country,from Iceland and from Norway, or at therate of 25% (subject to a reduction under anapplicable tax treaty) in all the other cases.

Dividends received by a tax resident locatedin a Non-Cooperative State or Territory(“NCST”) is subject to French withholdingtax at the rate of 50%.

Capital gains realised on the disposal ofshares in a listed SIIC are tax-exempt if theindividual shareholder holds, directly orindirectly, less than 10% in the listed SIIC.

If the individual shareholder holds, directlyor indirectly, 10% or more of the listed SIIC,the capital gains realised are then subject toFrench withholding tax, either at the rate of19% (if the individual is a tax resident froman EU country, from Iceland and fromNorway) or at the rate of 33.33% (in allother cases).

Corporate investorsDividends from listed SIICs are subject toFrench withholding tax at the rate of 25%(subject to reduction under applicable taxtreaty) or 50% if the shareholder is locatedin an NCST.

A 20% special levy is payable when a listedSIIC pays a dividend out of its tax-exemptsector to a foreign corporate shareholderwhen the two following conditions are met:(a) the foreign corporate shareholder holds,directly or indirectly, 10% or more of thefinancial rights in the listed SIIC; and (b)the foreign corporate shareholder is eitherexempt from corporate income tax on thedividend received or is subject to corporateincome tax at a rate lower than 2/3 ofstandard CIT rate (i.e. circa 11%).

Capital gains realised on the disposal ofshares in a listed SIIC are tax-exempt if thecorporate shareholder holds, directly orindirectly, less than 10% of the listed SIIC.

If the corporate shareholder holds, directlyor indirectly, 10% or more in the listed SIIC,the capital gains are then subject to Frenchwithholding tax either at the rate of 19% (ifthe corporate shareholder is established inan EU country, in Iceland and in Norway) orat the rate of 33.33% in all the other cases.

Transition to REIT/Tax privilegesExisting listed real estate companies, whichelect for the SIIC regime, must pay an exittax at the rate of 19.6%. This tax is assessedon the amount of the latent capital gainsexisting on the eligible SIIC assets at thetime of entry into the SIIC regime. Thisprovision is also applicable when a 95%-or-more-held French subsidiary (subject tocorporate income tax) of a listed SIIC electsfor the SIIC regime.

According to Article 210 E of the French taxcode, capital gains realised by sellers(subject to French corporate income tax) onthe disposal (or on the contribution inexchange for shares) of real estateproperties or on shares in real estatecompanies are taxed at the reduced rateof 19.6% (and not at the standard rate of34.43%) if the purchasing (or thebeneficiary) entity is a listed SIIC (or one ofits 95%-or-more-held French subsidiaries,which elected for the SIIC regime), providedthat the listed SIIC (or its 95%-or-more-heldFrench subsidiary) takes the commitment tokeep the asset purchased (or received) forat least five years. This favourable taxprovision applies for the time being until theend of 2011. The Rectificative Finance Billfor 2010 extends this favorable tax regime tothe sale of real estate properties/rights toreal estate leasing companies (under certainconditions).

Suspension and exit from theSIIC regimeThe SIIC regime is suspended when the60% above-mentioned threshold isexceeded at any moment during a financialyear and that the situation is not regularisedat the end of that financial year.

In that case, the SIIC regime is suspendedwith respect to that financial year. Specifictax provisions apply when the SIIC regime issuspended.

There are various situations under whicha listed SIIC exits from the SIIC regime.Adverse tax consequences apply in that case.

13 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 16: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Uwe StoschekPwC (Germany)+49 30 2636 [email protected]

Helge DammannPwC (Germany)+49 30 2636 [email protected]

The initial phase of the newly introducedinvestment vehicle has been difficult due tothe weak market environment. So far, threereal estate companies have opted for theG-REIT status. The companies' marketcapitalisation amounts to EUR957 millionat a net asset value of EUR1,087 million asof 31 December 2010.

About a dozen real estate companies havedeclared plans to become G-REITs, whichwould significantly increase the G-REITmarket.

Legal formThe only legal form that is permissible for aG-REIT is a joint stock corporation (AG -Aktiengesellschaft).

Capital requirementsThe nominal capital of a G-REIT mustamount to at least EUR15 million.

The G-REITs equity must not fall below45% of the immovable property value asshown in the consolidated or the individualfinancial statements under IFRS (leverageprovision).

Listing requirementsG-REITs must be listed on an organisedstock market in Germany, the E U or theEuropean Economic Area.

Restrictions on investors

Minimum number of investorsAt least 15% of the shares must be freelyavailable to the public (free float), with thefurther provision that the holders of theseshares each hold less than 3%.

In regard to the remaining 85% of theshares, a single shareholder is not allowed tohold 10% or more in the G-REIT, directly.The shareholding requirement does notapply to indirect shareholdings.

Restrictions on non-residentinvestorsThere are no restrictions on non-residentinvestors.

Asset/income/activity testsAt least 75% of the assets and earnings(held/derived by the G-REIT and itssubsidiaries) must relate to real estateassets.

Side-line occupations (such as facilitymanagement) rendered to third parties mayonly be performed through wholly ownedservice corporations. Their assets andearnings must not exceed 20% of theG-REITs total assets/earnings.

The G-REIT may not trade in real estate, i.e.the G-REITs and its subsidiaries’ proceedsfrom the disposal of immovable property inthe last five fiscal years must not exceed halfof the value of immovable property held onaverage during that period.

The aforementioned tests are carried out,based on the consolidated or the individualfinancial statements under IFRS.

Restrictions onforeign assetsThere are no restrictions on foreign assets.

Distribution requirementsThe G-REIT is obliged to distribute at least90% of its profits (determined underGerman Commercial Code).

Tax treatment at REIT levelThe G-REIT must be a German tax resident.G-REITs are income and trade tax-exempt(irrespective of whether the income isderived from real estate or non-real estateassets). The tax exemption appliesretroactively from the start of the financialyear in which the G-REIT is registered in thecommercial register.

The German REIT Act (“REITA”) was introduced in 2007. The introduction followed intensive lobbying by theGerman real estate industry, which felt that Germany needed to keep up with developments in other EuropeanUnion (EU) countries.

German REITs (“G-REITs”) are income tax-exempt stock corporations that must be listed on an organisedstock market.

14 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Germany

Page 17: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

The G-REITs subsidiaries do not benefitfrom the tax exemption. They are subject tothe general taxation rules.

Withholding tax ondistributionsDividend distributions by the G-REIT aresubject to a 26.4% withholding tax(including solidarity surcharge).

If the G-REIT shares are held by residentindividual shareholders, the withholdingtax is final.

Resident corporate shareholders may creditwithholding taxes or claim it back.

In case of non-resident shareholders, mostGerman double tax treaties provide for areduced withholding tax rate of 15%. TheREIT Act stipulates that foreign corporateshareholders may not exercise their rights toa further reduction under a double taxtreaty if the restrictive treaty requires ashareholding of 10% or more. Therefore,the international affiliation privilege, whichgrants further reduction to foreigncorporate shareholders is regularly notapplicable. Moreover, the EU ParentSubsidiary Directive does not apply, due tothe G-REITs tax exemption.

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends derived from G-REIT shares heldas private assets are subject to a finalwithholding tax of 26.4%.

In regard to capital gains derived from thedisposal of G-REIT shares held as privateassets, the following applies:

• if the shareholder did not hold 1% ormore of the shares at any time during afive-year period prior to the disposal andthe shares were acquired before 1 January2009, capital gains are only taxable (atthe personal income tax rate of up to47.5% including solidarity surcharge) ifthe shares are disposed of within one yearafter acquisition;

• if the shareholder did not hold 1% ormore of the shares at any time during afive-year period prior to the disposal andthe shares were acquired after 1 January2009, capital gains are subject to a finaltax of 26.4% (irrespective of the holdingperiod);

• if the shareholder held 1% or more ofthe shares at any time during a five-yearperiod prior to the disposal, capital gainsfrom shares are fully subject to personalincome tax, irrespective of whetherthe shares were acquired before or after1 January 2009.

Dividends and capital gains derived byresident shareholders from shares held as abusiness asset are fully subject to personalincome tax.

Corporate investorsDividends and capital gains derived fromthe disposal of G-REIT shares are fullysubject to corporate income tax at a rate of15.8% (including solidarity surcharge).

Tax relief in order to avoiddouble taxationREITs are obliged to distribute 90% of theirprofits. Dividends distributed may stemfrom non-taxed German properties held bythe G-REIT itself, or from taxed incomefrom foreign properties, or taxablesubsidiaries.

In order to avoid double taxation, dividenddistributions of a G-REIT are entitled to thesame tax privileges that apply to ordinarydividends, to the extent that the REITdistributions stem from pre-taxed income(by definition of the REIT Act, income thathas been taxed with German corporateincome tax or a comparable foreign tax).

As a result, pre-taxed dividends will be 95%tax-exempt if received by a corporatetaxpayer and 40% exempt in the hands ofprivate individuals holding the REIT shareas a business asset. In regard to individualshareholders holding the REIT shares asprivate assets, dividends are subject to thefinal withholding tax of only 26.4%.Therefore, a further relief does not apply.

Non-resident investors

Individual investorsDividends are subject to Germanwithholding tax.

Capital gains from the disposal of G-REITshares are only subject to personal incometax (on the total German source income) ifthe shareholder has held at least 1% of theshares in the G-REIT at any time within afive-year period preceding the disposal.Most German double tax treaties, however,usually provide for a tax exemption ofcapital gains in Germany.

Corporate investorsThe same applies as for non-residentindividual investors. If a taxable disposal isat hand (see above), corporate income taxat 15.8% (including solidarity surcharge)applies.

15 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 18: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Vassilis VizasPwC (Greece)+30 210 [email protected]

Legal formThe Greek REIT law provides for two typesof REITs:

• Those having a corporate legal form (RealEstate Investment Companies or REICs).The REIC is a special type of societeanonyme company, which has theexclusive purpose of engaging in themanagement of an asset portfoliocomposed of real estate (mainly),securities and cash. REICs must obtain alisting on a recognised stock exchange.

• Those having a legal form similar to a unittrust (Real Estate Mutual Funds orREMFs). The REMF is actually a pool ofassets composed of real estate and liquidfinancial instruments. REMFs are jointlyowned by a number of investors andmanaged by a management company,which must have the form of a societeanonyme and is also a special purposecompany. REMFs are not listed vehicles.

Capital requirementsFor the establishment of a REIC, thecompany must hold a share capital of atleast EUR29.35 million, fully payable uponincorporation.

The share capital of a REMF managementcompany must be at least EUR2.93 million,fully payable upon incorporation. Its sharecapital, divided into registered shares,should be at least 51% owned by one ormore financial institutions and/or insurancecompanies and/or companies offeringinvestment services with a minimum sharecapital of at least EUR2.93 million.

Listing requirementsFor REICs, a listing must be sought withinone year from formation on a recognisedstock exchange, provided that by the time of

the listing at least 50% of the share capitalof the company will be invested in realestate property.

The costs with respect to the initial listing ofshares, assuming this is performed on theAthens Stock Exchange, will depend on thevalue of shares, multiplied by a rate rangingbetween 0.02% and 0.08%.

Restrictions on investorsThere are no restrictions on the identity ofinvestors in a REIT. However, there aresignificant restrictions on the investmentsthat the REIT itself may carry out.

Asset/income/activity testsThe available funds of a REIC or a REMFmust be invested in only:

• Real estate property located in Greece oranother European Economic Area (EEA)Member State. In the case of a REIC, thispercentage must exceed 80% of theREIC’s funds. The concept of real estateproperty includes subsidiaries that are atleast 90% owned, provided that suchsubsidiaries are engaged exclusively inreal estate activities and invest in realestate property in which a REMF or REICmay also invest directly.

• Real estate property is defined as propertythat may be used for commercial andgenerally business purposes: thedefinition seems to exclude residentialprojects and ownership of bare land.

• Money market instruments. Especially forREMF, this investment should not exceed10% of the minimum share capital of themanagement company.

• Investments in real estate property in non-EEA Member States may not exceed 10%of total real estate investments.

Greek REITs are special purpose entities whose main activity is investment in real estate assets prescribed by theGreek REIT law.

The Greek REIT law was introduced in December 1999 by L.2778/1999. However, as the initial version of the lawproved to be ill-adapted to the needs of the market, and as a result no REITs were established, the Greek REIT lawwas amended a few years after.

Subsequent amendments of the law are expected to encourage the establishment of many more such structures.

16 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Greece

Page 19: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

A REIC can also invest in other moveableassets that serve the company’s operationalneeds, provided that such assets, togetherwith the value of any real estate propertyacquired for the same purpose, do notexceed 10% of the total property value.

Furthermore, the law provides for a numberof restrictions on the nature of assets inwhich a REIT may invest, such as:

• Each individual property in which fundsare invested may not exceed 25% of thetotal investment value.

• Property under development is allowedonly to the extent that it is expected to becompleted within a reasonable amount oftime and that the budgeted remainingcosts do not exceed 25% of the value ofthe property, which will be evaluatedonce works are completed.

• The REIT may not invest more than 25%of its net equity in properties acquiredunder financial leasing contracts,provided that each contract individuallydoes not exceed 10% of the net equity aswell. Furthermore, no more than 10% ofthe total investments in real estateproperty may consist of properties forwhich the REIT does not hold fullownership.

• Properties acquired may not be sold inless than 12 months from the acquisitiondate.

• It should be noted that both theacquisition or disposal of real estateproperty must be preceded by a valuationthereof by a certified evaluator, and theprice paid may not deviate (upwards foracquisition or downwards for disposal)more than 5% from their value, asdetermined by the certified evaluator.

• Finally, there are several restrictions andrules as to the investment in otherfinancial assets.

Restrictions onforeign assetsNo specific restrictions, provided that theabove asset tests are met.

Distribution requirementsThe REIC company is obliged to distributeon an annual basis at least 35% of its annualnet profits. Exceptionally, and if so providedin the Articles of Association, the dividenddistribution may be waived following aresolution of the General Assembly for thepurposes of either:

• forming a special reserve from profitsother than gains, or

• converting profits into share capital andissuing free shares to shareholders.

Furthermore, the General Assembly maydecide on creating reserves from capitalgains for the purposes of offsetting lossesincurred from the sale of securities withvalues lower than the acquisition cost.However, capital gains may not be booked insuch a reserve if the reserve has alreadyexceeded 300% of the total value ofinvestments in securities of the REIC.

The net profits of the REMF are distributedfollowing the procedure as specified in theregulation of the REMF.

Tax treatment at REIT levelREITs are exempt from any income tax.Therefore, the tax accounting rules are notthat relevant.

However, REITs are subject to a tax imposedon their average net asset value. The tax rateis 10% of the respective intervention interestrate as determined by the European CentralBank, increased by 1 percentage point.

The tax is payable by the REIC, within thefirst 15 days of the month following the endof the respective semester.

Withholding tax ondistributionsNo withholding tax is levied on dividendsdistributed by REICs.

Tax treatment at theinvestor level

Private InvestorsTaxation of current income (all incomederived from REIT in holding phase)

Dividends distributed by REITs are tax-freein the hands of private investors.

However, if the owner is a Greek company,further distribution of the relevant dividendincome by such company mayresult intaxation imposed at the CIT rate (20%).Moreover, a WHT shall be imposed at therate of 25% (21% for distributions within2011) on dividends distributed (unless theprovisions of a more favourable DTT or theEU Parent – Subsidiary Directive apply), bysuch (normally taxable) company. Taxationof capital gains (from disposal of REITshares)

Individuals: Capital gains from the disposalof REIC shares, before listing are exemptfrom taxation. Once listed, the disposal ofREIC listed shares are exempt from taxationif the shares have been initially acquireduntil 31 December 2011 and fully taxable ifthe shares have been acquired as of 1January 2012 onwards. Redemption ofREMF units is exempt from taxation forindividuals.

If the owner is a Greek company, the profitfrom disposal of a REIC is subject to CIT aspart of its annual taxable profits. Anexemption may apply under certainconditions only for shares initially acquiredprior to 1 January 2012.If the listed shareshave been acquired prior to 1 January 2012there is a chance that the income will befurther exempt if booked in a special tax-free reserve and not distributed to itsshareholders. Furthermore, the redemptiongains from a REMF unit is exempt only untilsuch company distributes such gain to itsown shareholders, in which case it is taxedat the CIT rate (20%) Moreover, a WHTshall be imposed at the rate of 25% (21% fordistributions within 2011) on dividendsdistributed (unless the provisions of a morefavorable DTT or the EU Parent – SubsidiaryDirective apply).

Institutional Investors

Taxation of current income (all incomederived from REIT in holding phase)There are no special tax rules for thetaxation of institutional investors on incomefrom a REIT. Therefore, the provisionsmentioned above in the private investorssection equally applies in this respect, unlessinstitutional investors enjoy a differentiatedtax treatment themselves, depending ontheir legal form and residence.

Taxation of capital gains (fromdisposal of REIT shares)There are no special tax rules for thetaxation of institutional investors on incomefrom a REIT. Therefore, the provisionsmentioned above in the private investorssection equally applies in this respect, unlessinstitutional investors enjoy a differentiatedtax treatment themselves, depending ontheir legal form and residence.

Transition to REIT/Tax privilegesNo special rules apply in this respect.

17 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 20: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

KK SoPwC (Hong Kong)+852 2289 [email protected]

Legal formAn SFC-authorised REIT is required to bestructured in the form of a trust.

The REIT may hold real estate, directly orindirectly, through special purpose vehiclesthat are legally and beneficially owned bythe REIT.

Capital requirementsThere are no specific requirements as to theminimum capital, market capitalisation, etc.

Listing requirementsThe REIT has to be listed on the StockExchange of Hong Kong Limited (SEHK)within a period acceptable to the SFC. TheREITs in Hong Kong are subject to the listingrules of SEHK.

Restrictions on investorsThe Code does not impose any specificrestrictions that apply to the investors in aREIT. Both Hong Kong and overseasinvestors may invest in a REIT.

There are no requirements on the minimumnumber of investors under the Code.Moreover, there are no restrictions onforeign investors.

Asset/income/activity testsThe REIT should only invest in real estate.The real estate may be located in Hong Kongor overseas. At least 90% of the assets mustbe income generating properties. Where theREIT invests in hotels, recreation parks orserviced apartments, the Code requires thatsuch investments be held by special purposevehicles.

The REIT is prohibited from investing invacant land or engaging in or participatingin property development activities(refurbishment, retrofitting and renovationsexcepted).

The REIT should hold its interest in eachproperty for a period of at least two years,unless consent for an earlier disposal isobtained from the investors by way of aspecial resolution at a general meeting.

If the REIT indicates a particular type of realestate in its name, the REIT should invest atleast 70% of its non-cash assets in such typeof real estate.

Restrictions onforeign assetsThere are no restrictions on foreign assets.

Distribution requirementsThe REIT is obligated to distribute to unitholders as dividends each year an amountnot less than 90% of its audited annual netincome after tax.

Tax treatment at REIT levelAn authorised REIT is exempt from HongKong profits tax under the Inland RevenueOrdinance of Hong Kong. However, wherethe REIT holds real estate in Hong Kongdirectly and derives rental income fromthat, such rental income will be subject toHong Kong property tax.

Where the REIT holds real estate in HongKong indirectly via special purpose vehicles,such special purpose vehicles will be subjectto profits tax at 16.5% (i.e. the tax rate forthe year of assessment 2011/12) in respectof the profits derived from the real estate.Such special purpose vehicles wouldgenerally be exempt from property tax.

In Hong Kong, REITs generally refer to real estate investment trusts authorised by the Securities and FuturesCommission (SFC) under the Code on Real Estate Investment Trust (the “Code”), which was published inAugust 2003.

There are currently eight REITs with a total market capitalisation of approximately US$16.74 billion in May2011. These REITs invested in different types of real estate, including office buildings, shopping malls, and hotels.Six of these REITs hold real estate exclusively in Hong Kong, while the other two hold real estate exclusively inMainland China. The first RMB-denominated REIT, with major assets in Mainland China, was listed in HongKong in April 2011.

18 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Hong Kong

Page 21: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Income derived from real estate situatedoutside Hong Kong and capital gains aregenerally exempt from property tax andprofits tax.

Dividends paid by a special purpose vehicleto another special purpose vehicle aregenerally exempt from profits tax.

Stamp dutyHong Kong stamp duty is charged ontransfers of real estate in Hong Kong. Themaximum rate of 4.25% applies where thetransfer consideration or value of real estateexceeds HK$21,739,120. Where shares in aHong Kong company are transferred, HongKong stamp duty at the rate of 0.2% appliesto the higher of the transfer consideration orthe value of the shares.

Hong Kong stamp duty also applies to alease of real estate in Hong Kong, generallyat a rate of 0.25% to 1% of the averageyearly rent, depending on the term ofthe lease.

The Financial Secretary in Hong Kongannounced on 19 November 2010 that hehad proposed to introduce Special StampDuty (“SSD”) on disposal of residentialproperties. Any residential propertyacquired on or after 20 November 2010 andresold within 24 months will be subject tothe proposed SSD at a rate up to 15%.The implementation of the new measures issubject to the enactment of the proposedlegislative amendments.

Withholding tax ondistributionsThere is no withholding tax on interest,dividends or distributions from a REIT inHong Kong.

Tax treatment at theinvestor level

Taxation of current incomeDistributions received from a REIT are notsubject to any Hong Kong tax.

Taxation of capital gains

Profits taxGains on disposal of units in a REIT areexempt from Hong Kong profits tax if suchgains are capital gains. An investor carryingon a trade or business in Hong Kongconsisting of acquisition and disposal ofunits in a REIT is subject to Hong Kongprofits tax in respect of any gains derivedfrom disposal of the units in Hong Kong.

Stamp dutyHong Kong stamp duty is chargeable inrespect of the transfer of the REIT units at0.2% of the transfer consideration (payableby the transferor and transferee at 0.1%each). In addition, a fixed duty of HK$5 iscurrently payable on any instrument oftransfer of units.

Transition to REIT/Tax privilegesThere are no specific tax privileges andconcessions during exit. However, there is aterritorial concept of taxation and no capitalgains tax generally. In addition, certaintransactions undertaken by genuine foreignfunds are exempt from Hong Kong tax.

19 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 22: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Legal formThe SIIQ is a stock corporation (i.e. acompany limited by shares), resident in Italyfor tax purposes, mainly carrying on realestate rental activity and fulfilling certainrequirements.

Rather than a new type of entity, the SIIQ isa special civil and tax law regime, whichapplies upon an irrevocable option (to beexercised before the beginning of the firsttax period under the SIIQ status).

The SIIQ regime has been afterwardsextended to Italian permanentestablishments (PE) of companies residentin the countries of the European Union orthe European Economic Area included inthe white-list (i.e. non-tax-haven countrieswith information exchange procedures withItaly), if the PE’s main business consists ofreal estate rental activity.

Capital requirementsThe capital requirement to obtain the SIIQstatus varies according to the listing market.The minimum market capitalisation forlisting on specific segments of the Italianmarket is equal to EUR40 million.

Listing requirementsThe SIIQ must be listed on an organisedstock market in the European Union or inthe European Economic Area.

The special regime may be extended tounlisted stock companies (SIINQ), providedthat they are tax resident in Italy, mainlycarry on real estate rental activity, areowned at least 95% by SIIQs (in terms ofvoting rights and profit participation) andopt for the national tax consolidationregime with the controlling SIIQ.

SIIQs (and SIINQs) are required to applyIAS/IFRS.

Restrictions on investors

Minimum number of investorsThe following shareholding requirements inthe SIIQ must be met:

• No shareholder shall hold, directly orindirectly, more than 51% of the votingrights in the general meeting and noshareholder shall participate in more than51% in the profits;

• At least 35% of the SIIQ shares have to beowned by shareholders, each one notholding, directly or indirectly, more than2% of the voting rights in the generalmeeting and not more than 2% ofparticipation in the profits (free float).

Restrictions on non-residentinvestorsThere are no restrictions on non-residentinvestors.

Asset/income/activity testsThe SIIQ’s prevalent activity should be realestate rental, which occurs if both thefollowing tests are met:

(i) Asset Test: at least 80% of the assets arereal estate properties and rights referredto the exempt business (i.e. the realestate rental business) or shareholdingsin other SIIQs or SIINQs booked asfixed assets;

(ii) Profit Test: at least 80% of the SIIQ’sannual proceeds are derived from theaforementioned properties (dividendsreceived from other SIIQs or SIINQspaid out from their profits from theexempt business are taken into account).

Restrictions onforeign assetsThere are no restrictions on foreign assets.

Distribution requirementsSIIQs are required to annually distribute atleast 85% of the net profit available fordistribution derived from the exemptbusiness (since capital gains are included inthe taxable business, even if derived fromassets belonging to the exempt business, theminimum annual distribution requirementshould not refer to capital gains).

If the net profit available for distribution islower than the accounting net profit fromthe exempt business, up to the amount of

Following the positive experience of other countries, Italy has introduced a real estate investment vehicle similarto the better known REITs in force in other countries: the SIIQ, “Società di Investimento Immobiliare Quotata”(i.e. “Listed Real Estate Investment Company”).

The SIIQ is a listed stock corporation, which has real estate rental activity as its main business and as a resultbenefits from income tax exemption with regard to this activity (directly or indirectly performed) and toinvestments in other SIIQs (and in SIINQs).

The SIIQ regime was introduced by the 2007 Budget Law, with effect from the first tax period starting after30 June 2007, and certain implementation rules were issued only at the end of 2007. But, as of today, the SIIQmarket in Italy is still at a very early stage.

20 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Italy

Fabrizio AcerbisPwC (Italy)+39 2 [email protected]

Daniele Di MichelePwC (Italy)+39 2 [email protected]

Page 23: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

this difference, the subsequent years’accounting net profit from the taxablebusinesses is deemed to be earned from theexempt business, thus subject to the 85%minimum distribution obligation.

Tax treatment at REIT levelFor Italian stock corporations that opt forthe SIIQ status, any income associated withrental business activity is exempt fromcorporate income tax (IRES) and fromregional tax (IRAP).

Income from the other activities is subject toordinary taxation.

For permanent establishments (PEs) offoreign companies that elect for the SIIQregime, the annual income derived from therental activity is subject to a 20% substitutetax (this tax replaces the withholding tax tobe levied on SIIQ’s dividend distributions).

Withholding tax ondistributionsDividends distributed by the SIIQ (orSIINQ) out of profit derived from theexempt business are subject to withholdingtax (WHT) at source at a rate of 20% (thenet profit related to particular residentialbuilding lease contracts may benefit from areduced WHT tax rate of 15%).

The WHT is applied as advance payment inthe case of resident individualentrepreneurs and resident entities subjectto the business income tax rules, includinglimited liability companies and Italian PEs offoreign entities.

In other circumstances, such as the case ofnon-resident shareholders, the WHT isapplied as a definitive payment.

The WHT is not applied for distributions to:other SIIQs, Italian pension funds, Italianundertakings for collective investments, andprivate wealth management subject tosubstitute tax regime.

In addition, WHT does not apply to profitrepatriations executed by PEs of foreigncompanies that opted for the SIIQ regime(because already subject to substitute tax atPE level).

Dividends distributed out of profit from thetaxable businesses are subject to theordinary rules.

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends distributed out of profit derivedfrom the exempt business are subject to a20% definite WHT (potentially reduced to15% under certain circumstances). Nofurther income taxation applies at the levelof the individual shareholders.

Capital gains are subject to tax at 12.5%,provided the interest does not exceed 2% ofthe voting rights or 5% of the SIIQ’s capital –tested on a 12-month basis (i.e. “non-qualified” shareholding). Otherwise, capitalgains are subject to individual income taxwith progressive rates, up to 43%(participation exemption does not apply).

Dividends out of the exempt profit collectedby resident individual shareholders acting intheir business capacity are fully included inthe business income (dividend exemptiondoes not apply) and subject to individualincome tax with progressive rates, up to 43%.

The 20% (or 15%) WHT applied at source iscredited against the income tax due.

Capital gains should also be fully includedin the business income (participationexemption does not apply) and taxedaccordingly.

Corporate investorsDividends out of the exempt profit collectedby resident companies and Italian PEs offoreign entities are fully subject to IRES, at27.5% (dividend exemption does not apply).The 20% (or 15%) WHT applied at sourceis credited against IRES due. In certaincircumstances, IRAP is also due, with a rateranging from 3.9% to about 4.9%.

Capital gains are fully subject to IRES(participation exemption does not apply).In certain circumstances, IRAP is alsodue, with a rate ranging from 3.9% toabout 4.9%.

Non-resident investors

Individual investorsDividends out of the exempt profit are taxedin Italy by way of the mentioned 20% (or15%) definite WHT. DTTs should apply.

Capital gains on “non-qualified”shareholdings into: (a) SIIQs (listedcompanies) are not taxable in Italy for thelack of the territoriality requirement; (b)SIINQs (non-listed companies) are subject

to a 12.5% taxation, which may be reducedto nil for residents in the white-listedcountries or most Treaty countries.Otherwise, capital gains are taxed accordingto the individual income tax rates of up to43% (participation exemption does notapply), unless DTTs provide for lowertaxation.

Corporate investorsDividends out of the exempt profit paidto non-residents (without PE in Italy) aresubject to Italian definite WHT of 20%(or 15%). The WHT rate should be reducedunder the applicable DTTs. The benefits ofthe EU Parent-Subsidiary Directive are notavailable.

Capital gains on “non-qualified”shareholdings into: (a) SIIQs (listedcompanies) are not taxable in Italy for thelack of the territoriality requirement; (b)SIINQs (non-listed companies) are subjectto a 12.5% taxation, which may be reducedto nil for residents in the white-listedcountries or most Treaty countries.Otherwise, capital gains are subject to IRES,at 27.5% (participation exemption does notapply), unless DTTs provide for lowertaxation.

Transition to REIT/Tax privilegesElection for SIIQ status implies the step-upat fair market value of the real estateproperties and rights held and relating tothe real estate rental business. Any net built-in gain, in lieu of the ordinary taxation,may be taxed with a 20% substitute tax,potentially payable over a five-year period(with interest). This favourable taxtreatment applies only if the SIIQ retainsthe assets for at least three years.

This favourable 20% substitute taxation isalso provided, in lieu of the ordinarytaxation, for capital gains realised uponcontribution of real estate properties andrights to SIIQs (and to SIINQs), to the extentthat these assets will be held for at leastthree years. The substitute tax is payableover five years (with interest).

Contributions to SIIQs (and to SIINQs) ofpluralities of real estate properties, rentedfor their majority, should not be subject toother material tax costs other than theabove-mentioned taxation in the hands ofthe contributing entity (i.e. no proportionalVAT and transfer taxes).

For other contributions and sales of realestate properties to SIIQs (and to SIINQs),several reductions are provided for indirecttax purposes.

21 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 24: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Raymond KahnPwC (Japan)+81 3 5251 [email protected]

Hiroshi TakagiPwC (Japan)+81 3 5251 [email protected]

Legal formUnder the ITL, there are two different typesof investment vehicles: investment trustsand investment corporations. To date, alllisted J-REITs have been formed asinvestment corporations.

Capital requirementsUnder the ITL, the minimum share capital ofa J-REIT is JPY100 million.

Listing requirementsJ-REITs are not required to be listed on astock exchange, but most J-REITs are listedin Japan. J-REITs that are listed on theTokyo Stock Exchange are subject to TokyoStock Exchange Listing Standards (the “TSERules”).

Restrictions on investors

Minimum number of investorsThe TSE Rules require that the number ofunits held by the lead investor at listing isexpected to be 75% or less of the total andthat there are expected to be at least 1,000investors other than the lead investor.

Restrictions on non-residentinvestorsUnder the Special Taxation Measure Law(STML), an offer of an investment in theunits of the J-REIT has to be made mainly inthe domestic market (the “DomesticOffering Test”).

Asset/income/activity testsUnder the TSE Rules, the following listingscreening standards are required to be metin relation to the J-REITs assets:

• The ratio of real estate, etc. in the fund’smanaged assets is expected to be 70% ormore;

• The ratio of real estate, etc., real estate-related assets and liquid assets summedtogether is expected to be 95% or more ofthe total assets under management;

• Net assets are expected to be at least JPY1billion;

• Total assets are expected to be at leastJPY5 billion; and

• Net asset per unit is expected to be at leastJPY50,000.

In addition, under the STML the activities ofa J-REIT are subject to the followingrestrictions (the “Activity Test”).

• The J-REIT does not engage in anybusiness other than asset management,has not opened any place of businessother than its head office and has nothired any employees;

• The J-REIT has outsourced the assetmanagement function to an assetmanagement corporation; and

• The J-REIT has outsourced custody of theassets to a custodian.

Restrictions onforeign assetsThe restrictions on investment in foreignassets by J-REITs were lifted on 12 May2008. However, in practice, foreign assetshave not yet been acquired.

Distribution requirementsUnder the STML, a J-REIT must pay outdividends in excess of 90% of itsdistributable profits to qualify for dividendpayment deduction (the “90% DistributionTest”). On the other hand, the TSE Rulesrequire that the J-REITs maintain net assetsof at least JPY1 billion.

Tax treatment at REIT levelUnder the STML, dividends paid by a J-REITto its investors will be deductible forcorporate tax purposes, provided it satisfiescertain requirements. Set out below is asummary of certain requirements deservingspecial attention.

Japanese REITs (J-REIT) are formed under the Law Concerning Investment Trusts and Investment Corporations(ITL) with a view to managing investments in specified assets, including real estate. Except as may be necessaryfor context, the term J-REIT means a J-REIT that is listed on the Japanese stock exchange.

22 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Japan

Page 25: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Requirements relating to the J-REIT:

• One of the following requirements is met:

– A public offering of JPY100 million ormore was made at the time ofestablishment; or

– The units of the J-REIT are held by50 or more investors at the end of eachfiscal period, or 100% of the units ofthe J-REIT are held by institutionalinvestors as defined in the STML; and

• The Domestic Offering Test is met.

Requirements relating to the year oftaxation:

• The Activity Test is met;

• The J-REIT is not treated as a familycorporation at the end of the fiscal year(A family corporation is defined as acorporation in which a single individualor corporate unitholder (including itsrelated parties) holds 50% or more of theunits of the J-REIT);

• The 90% Distribution Test is met;

• The J-REIT does not hold 50% or more ofthe equity of another corporation; and

• The J-REIT has not obtained loans fromparties other than institutional investorsas defined in the STML.

Withholding tax ondistributionsDividend distributions paid by a J-REIT toJapanese individual investors and non-Japanese individual investors with apermanent establishment (PE) in Japan(“Individual Investors”) whose ownershipare less than 5% (“Minor IndividualInvestors”) are currently subject to 10%withholding tax (including local portion of3%). For Individual Investors whoseownership is 5% or more (“Major IndividualInvestors”), the above withholding tax ratewould be 20%. Such 10% or 20%withholding tax on dividend distribution iscreditable in full from income tax due uponthe filing of such dividend income.

Dividend distributions paid by a J-REIT toJapanese corporate investors and non-Japanese corporate investors with a PE inJapan (“Corporate Investors”) are currentlysubject to 7% withholding tax. In principle,a portion of such withholding tax iscreditable against corporate tax payable orrefundable upon the filing of the corporatetax returns.

Dividend distributions paid by a J-REIT tonon-resident investors without a PE inJapan (“Non-Resident Investors”) arecurrently subject to 7% withholding tax inthe absence of an applicable tax treaty.Notwithstanding the foregoing, the abovewithholding tax rate would be 20% forindividual Non-Resident Investors whoseownership is 5% or more.

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends distributions paid by a J-REIT toIndividual Investors are currently subject to10% (including local portion of 3%) or 20%withholding tax as described above.

Generally, Individual Investors are requiredto file an income tax return reporting suchdividends as dividend income. In principle,this income is aggregated with theIndividual Investor’s other income and issubject to income tax at the graduated rate.However, Minor Individual Investors areable to elect for separate assessmenttaxation in filing such income, in which casethe capital loss from the transfer of units canbe used to offset dividend income and thebalance is currently taxed at 10% (includinglocal portion of 3%). Individual Investorscan credit in full any withholding taxesagainst their income tax due.

Notwithstanding the above, MinorIndividual Investors may elect not to reportthe income; however, in such cases nocredit would be available for withholdingtaxes paid.

Capital gains derived from the transfer ofunits in a J-REIT are treated as a separateincome and are currently subject toJapanese capital gains tax at 10% (includinga local portion of 3%) upon filing.

Corporate investorsDividend distributions paid by a J-REIT toCorporate Investors are currently subject to7% withholding tax as described above. Asthe dividend exclusion rule does not applyto dividends paid by a J-REIT, the entireportion of such dividends are subject tocorporate tax at a rate of approximately42%. In principle, a portion of the 7%withholding tax on such dividends iscreditable against corporate tax payable orrefundable upon the filing of the corporatetax returns.

Capital gains derived from the transfer ofunits in a J-REIT are included in taxableincome and subject to Japanese corporatetaxes at an effective tax rate ofapproximately 42%.

Non-resident investorsIn the absence of an applicable tax treaty,dividend distributions paid by a J-REIT toNon-Resident Investors are currently subjectto 7% or 20% withholding tax, as describedabove. This withholding tax is a final taxand a tax filing is not required.

Capital gains derived from the transfer ofunits in a J-REIT are generally subject toJapanese capital gain tax at the rate of 30%for corporate Non-Resident Investors, or15% for individual Non-Resident Investors ifa transferor owns more than 5% (in the caseof a listed J-REIT), or 2% (in the caseof a non-listed J-REIT) of the units in theJ-REIT as of the end of the fiscal yearimmediately prior to the year in which thetransfer occurs.

Transition to REIT/Tax privileges

Acquisition taxA J-REIT is currently entitled to thefollowing concessionary rates:

• 1.33% for the acquisition of a non-residential building;

• 1.0% for the acquisition of residentialbuilding; and

• 0.5% for the acquisition of land.

Registration taxA J-REIT is currently entitled to theconcessionary rate of 1.1% of the assessedvalue for buildings and land excludingwarehouse.

23 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 26: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Jennifer ChangPwC (Malaysia)+60 3 2173 [email protected]

While the Malaysian REIT market is stillrelatively small and untapped compared toother regional markets such as Singapore orAustralia, it is expected to continue growing.As of 28 February 2011, there are 14 listedREITs, three of which are Islamic funds.

REITs in Malaysia are principally governedby the Securities Commission of Malaysia(SC). Malaysian REITs are managed bymanagement companies approved by theSC, while properties are held by appointedtrustee(s).

Legal formMalaysian REITs are governed by generaltrust law. Trusts are not separate legalentities, but are generally a set of obligationsaccepted by a trustee in relation to theproperties held in trust for beneficiaries.

Capital requirementsThe initial size of a REIT should be at leastRM100 million (approx. EUR23.3 million asof 1 April 2011). The SC, however, reservesthe right to review the reasonableness of theREITs size.

Listing requirementsOnly REITs registered with the SC areallowed to be listed on Bursa Malaysia.

Restrictions on investors

Minimum number of investorsThere is no minimum requirement on thenumber or composition of units that must besubscribed to.

Restrictions on non-residentinvestorsThere are no restrictions on non-residentunitholders of REITs.

Asset/income/activity testsA REIT may only invest in the followingassets:

• Real estate;

• Single-purpose companies;

• Real estate-related assets;

• Non-real estate-related assets; and

• Cash, deposits and money marketinstruments.

At least 50% of the REITs total asset valuemust be invested in real estate and/orsingle-purpose companies at all times.Investment in non-real estate-related assetsand/or cash, deposits and money marketinstruments must not exceed 25% of theREITs total asset value.

REITs are not permitted to extend loans orany other credit facilities; or developproperties; or acquire vacant land.

All real estate acquired by REITs must beinsured for full replacement value, includingloss of rental, where appropriate, withinsurance companies approved by thetrustee.

Restrictions onforeign assetsThere are no restrictions on the acquisitionof foreign assets.

Distribution requirementsDistribution of income should only be madefrom realised gains or realised income.There is no minimum requirement on howmuch REITs have to distribute tounitholders.

The Malaysian REIT industry started off with Property Trust Funds (PTF) listed on the Kuala Lumpur StockExchange (KLSE) in 1989. The term REIT was subsequently adopted, and the industry grew with an increasingnumber of listed REITs.

REITs in Malaysia are either listed or unlisted. Malaysian REITs can be sector specific (e.g. industrial, offices, etc.)or diversified. Malaysia saw the establishment of its first Islamic REIT in 2005.

24 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Malaysia

Page 27: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Tax treatment at REIT levelThe taxation of a REIT depends on theamount of income that is distributed tounitholders. If a REIT distributes 90% of itstaxable income, tax transparency rules willapply, and the REIT would not be subject tocorporate income tax. If this 90% conditionis not met, the REIT would be subject to taxat the prevailing corporate income tax rateof 25%. General deductibility rules wouldapply to the REIT.

In any case, most investment incomeearned by REITs is generally not subject tocorporate income tax.

Other tax incentives include exemptionsfrom stamp duty in respect of allinstruments of transfer of real propertyand instruments of deed of assignmentsto REITs; exemption from real propertygains tax; and allowable deductions onestablishment expenditure incurredby REITs.

Withholding tax ondistributionsWhere a REIT has been brought to tax for aYear of Assessment (i.e. failed to meet the90% distribution requirement), incomedistributed to resident unitholders will havetax credits attached to it. Non-residentunitholders, on the other hand, will not besubject to any further Malaysian tax.

If a REIT does not pay corporate income taxdue to tax transparency, distributionsreceived by unitholders are taxed via awithholding tax mechanism.

Individual resident unitholders are taxedat a scaled rate of up to 26%. Individualnon-resident and institutional investorunitholders are taxed at a flat rate of 10%,effective 1 January 2009 until 31 December2011.

Resident and non-resident corporateinvestors are taxed at the prevailingcorporate income tax rates, currentlyat 25%.

Tax treatment at theinvestor levelThere is no capital gains tax regime inMalaysia. With the exception of financialinstitutions or companies dealing ininvestments, gains received by unitholdersfrom the disposal of REIT units will not besubject to Malaysian income tax.

Resident investors

Individual investorsWhere a REIT does not pay corporateincome tax, individual resident unitholderswould be subject to a 10% withholding tax,effective 1 January 2009 until 31 December2011. The withholding tax imposed is a finaltax and individual resident unitholders neednot declare the income received from theREIT in their personal income tax returns.

Where income tax is paid by the REIT,individual resident unitholders would beentitled to a tax credit.

It is important to note that from 2012onwards, the concessionary tax rates mayrevert to the prevailing personal incometax rates.

Corporate investorsResident corporate REIT unitholdersare subject to normal corporate incometax rates.

Tax relief in order to avoiddouble taxationIncome that has been taxed at the REITlevel will have tax credits attached whensubsequently distributed to residentunitholders.

Like individual resident unitholders,resident corporate investors would also besubject to income tax at their respectiverates on REIT distributions and entitled totax credits representing tax already paid bythe REIT.

Please note that resident companies withpaid up capital of RM2.5 million (approx.EUR582,750 as of 1 April 2011 ) and beloware subject to a corporate income tax rate of20% for the first RM500,000 (approx.EUR116,550 as of 1 April 2011 ) ofchargeable income, with the balance beingtaxed at the normal corporate income taxrate, currently 25%.

Non-resident investors

Individual investorsWhere the REIT is not subject to incometax due to tax transparency, individualnon-resident unitholders are subject to afinal 10% withholding tax until 31December 2011.

Individual non-resident unitholders whoreceive distributions from REITs which havepaid corporate income tax would not besubject to any further Malaysian tax. Whereindividual non-resident unitholders aresubject to income tax in their respectivejurisdictions, depending on the provisionsof their country’s tax legislation, they maybe entitled to tax credits paid by the REIT.

It is important to note that theconcessionary tax rates may revert to theprevailing income tax rates from 2012onwards.

Corporate investorsWhether distributions received by non-resident corporate unitholders come froma REIT that has or has not paid corporateincome tax, non-resident corporateunitholders would be subject to a finalwithholding tax of 25%.

Where corporate income tax has not beenlevied at the REIT level, non-residentinstitutional investors (i.e. pension fundsand collective investment schemes or suchother person approved by the Minister ofFinance) are subject to a final withholdingtax of 10% up to 31 December 2011, afterwhich the concessionary tax rate may revertto normal corporate income tax rates.

Distributions to non-resident institutionalinvestors which have been taxed at the REITlevel would not suffer further income tax,and depending on the provisions of theircountry’s tax legislation, they may beentitled to tax credits paid by the REIT.

Transition to REIT/Tax privilegesThere are no specific exit tax concessions.Transfer of properties from a propertyowner to an approved REIT is exemptedfrom Real Property Gains Tax and stampduty. Disposals of properties by REITssubsequently will be subject to a 5%Real Property Gains Tax from 1 January2010 onwards.

25 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 28: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

David CuellarPwC (Mexico)+52 55 5263 [email protected]

Francisco J. ZamoraValenciaPwC (Mexico Tax Desk in UK)+44 20 [email protected]

Marco NavaPwC (Mexico)+52 55 5263 6000 Ext. [email protected]

During 2010 the Mexican Stock Exchangeintensified the promotion of REITs inMexico. Mexican authorities have stated inpublic business forums that the legalframework for REITs was completed withthe amendments made in 2008 and that nofurther changes will be introduced in yearsto come. The market has now a “first mover”known as Fibra Uno.

Legal formMexican REITs can only have the legal formof trusts, incorporated under Mexican laws,and with a Mexican resident creditinstitution acting as trustee.

Mexican corporations or limited liabilitycompanies incorporated under Mexicanlaws that pursue substantially the samebusiness purpose of Mexican REITs may also qualify for some of the tax benefitsavailable for Mexican REITs. These figuresare called real estate investmentcorporations (Mexican REICs).

Capital requirementsThere are no specific capital requirementsfor Mexican REITs.

At least 70% of the equity of the MexicanREIT should be invested in real estateprojects (or rights derived from them).The surplus of such equity (the other 30%)should be invested in government bonds.

Listing requirementsMexican REITs should be listed on theMexican Stock Exchange. It is possible tohave a privately funded Mexican REIT orcorporation, but it will not have access to allthe tax benefits available for Mexican REITs.

Restrictions on investors

Minimum number of shareholdersParticipation certificates for the goods thatare part of the Mexican REITs equity areissued by the trustee. These certificatesmust be publicly traded or acquired by agroup of investors formed by at least 10unrelated parties, whereby none of themmay individually hold more than 20% of thetotal amount of the certificates issued.

Restrictions on foreignshareholdersThere are no restrictions on foreignshareholders.

Asset/income/activity testsThe Mexican REITs main purpose must bethe construction or acquisition of real estateintended for lease (and possible subsequentalienation), the acquisition of the right toobtain revenues from such leases and thegranting of financing for said purposesguaranteed by the assets.

As previously mentioned, the MexicanREIT must invest at least 70% of its equityin real estate or rights derived from it.The other 30% should be invested ingovernment bonds.

The real estate acquired or developed mustbe owned for a period of at least four yearsafter the date on which such real estate wasacquired or developed before alienating it.

Mexican REITs are not allowed to haveinvestments in subsidiaries.

Restrictions onforeign assetsThere are no restrictions on foreign assets.

The 2005 tax reform introduced the first rules for Mexican REITs. With the objective of fostering investment inreal estate infrastructure in Mexico, a number of provisions were incorporated into the Mexican Income Tax Law(MITL), which established the requirements for a trust to receive a particular – beneficial – tax treatment.

Mexican REITs were welcomed by Mexican investors. However, investors remain cautious as their legal frameworkinitially suffered considerable amendments. The first Mexican REIT listed on the Mexican Stock Exchange was putin place in 2011.

26 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Mexico

Page 29: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Distribution requirementsThe Mexican REIT must distribute at leastonce per year before 15 March, at least 95%of its prior year’s taxable income to itsholders.

Tax treatment at REIT levelThe taxation of Mexican REITs taxableincome occurs at the holder level. Thetrustee will determine the taxable incomeaccording to the general rules provided inthe MITL, considering the income generatedby the Mexican REITs assets.

Once determined, the taxable income willbe divided between the number ofparticipation certificates issued by the trustto determine the amount of the taxableincome that corresponds to each holder.

Lastly, the trustee will withhold thecorresponding income tax from the amountof the distribution made to each holder byapplying the 28% tax rate.

Withholding tax ondistributionsAside from the income tax that must bewithheld by the trustee on the distributionmade to each holder, there should be noadditional withholding taxes ondistributions. In general, dividenddistributions by the Mexican REIT to bothresidents and non-residents that do nothave a permanent establishment in Mexicoare not subject to withholding tax as perthe MITL.

Tax treatment at theinvestor level

Resident investors

Individual investorsMexican resident individuals will considerthe income received from the Mexican REITas income arising from certificates inimmovable property. They will accrue thetotal amount of the taxable income relatedto their participation certificates, withoutclaiming a deduction for the income taxwithheld by the trustee. Such income taxwill be creditable against their income taxliability of the corresponding year.

With regard to capital gains derived fromthe disposal of the Mexican REITcertificates, Mexican resident individualholders will be subject to Mexican incometax on the gain arising from the sale of thecertificates in the Mexican REIT. The gainwill be the difference between the sale priceof the certificates and their tax basis.

When the Mexican REIT certificates arepublicly traded and sold on recognisedstockmarket, Mexican individual holderswill be exempt from Mexican income tax onthe sale of such certificates.

Corporate investorsMexican resident corporate holders mustaccrue the total amount of the taxableincome related to their participationcertificates, without claiming a deductionfor the income tax withheld by the trustee.Such income tax will be creditable againsttheir income tax liability of thecorresponding year. Holders that areexempt from Mexican income tax withrespect to the income generated by the trustshould not accrue said income.

Capital gains derived from the disposal ofthe Mexican REIT certificates will be taxablein Mexico on the gain arising from the saleof the certificates in the Mexican REIT. Thegain will be the difference between the saleprice of the certificates and their tax basis.

Non-resident investors

Individual investorsNon-resident individuals holding MexicanREIT certificates will consider thewithholding carried out by the trustee as afinal income tax payment.

For the case of capital gains from thedisposal of a Mexican REIT certificates,the buyer must withhold and remit to thetax authorities the income tax related to thetransaction. The MITL provides a 10%withholding rate on the gross amount of thesale. This will not apply to the extent theforeign resident seller is exempt fromincome tax on the income arising from theMexican REITs assets (e.g. some pensionfunds).

When the Mexican REIT certificates arepublicly traded and sold on a recognisedstock market, foreign resident individualholders will be exempt from Mexicanincome tax on the sale of such certificates.

Corporate investorsThe same applies as for foreign individualshareholders.

Transition to REIT/Tax privilegesThe specific tax incentives for MexicanREITs include:

• Deferral of the income tax on thecontribution of real estate to a MexicanREIT. The holders of the Mexican REITcertificates should consider as taxableincome the gain on such contributionuntil they sell the correspondingcertificates, or the Mexican REIT sells thereal estate contributed by the holders.The deferred gain should be restated byinflation as from the moment in whichthe real estate was contributed into theMexican REIT until the moment in whichthe certificates or the real estate are sold.

• The Mexican REIT is not obliged to filemonthly estimated advanced income taxor flat tax payments. This results in nocash disbursements for income or flat taxuntil the moment in which the annualtax return is filed.

• Foreign resident pension funds investingin a Mexican REIT will be exempt fromMexican income tax on the amountrelated to their investment, to the extentsuch funds are exempt from income tax intheir country of residence and they areregistered before the Mexican taxauthorities, provided several conditionsare met.

27 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 30: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Multiple factors fuelled the acceleratedgrowth of the S-REIT market. On theregulatory front, a strong framework andcomprehensive investment guidelines forproperty funds were put in place to instilconfidence in the S-REIT industry. The taxregime was also crafted to confer attractivetax concessions to S-REITs in terms of flow-through treatment for certain classes ofincome, exemption of specified foreignincome, stamp duty remission on propertytransfers, etc.

Legal formIn Singapore, an S-REIT is constituted as aunit trust and is governed by the CollectiveInvestment Scheme regime.

Capital requirementsThere are strictly no regulatory capitalrequirements for an S-REIT. However, alisted REIT must still achieve a minimumasset size threshold (S$20 million if theREIT is denominated in Singaporean dollarsand US$20 million or equivalent if it isdenominated in a foreign currency)prescribed by the SGX in order to maintainits listing.

Listing requirementsAlthough S-REITs can be listed or unlisted,listing is necessary to qualify for taxconcessions.

Restrictions on investors

Minimum number of investorsFor listed S-REITs denominated inSingapore dollars, at least 25% of the sharecapital or units must be held by a minimumof 500 public shareholders. For S-REITsdenominated in foreign currencies, the“spread of holders” requirement must becomplied with.

Restrictions on non-residentinvestorsThere are no restrictions on non-residentinvestors.

Asset/income/activity testsAn S-REIT, being a property fund, is boundby the Code on Collective InvestmentSchemes (the “Code”) and the PropertyFund Guidelines (PFG) appended to theCode.

The scope of investments which an S-REIT isallowed to make is restricted to thefollowing types of “permissibleinvestments”:

• Real estate in or outside Singapore;

• Real estate-related assets;

• Debt securities and listed shares of non-property corporations;

• Securities issued by a government,supranational agency or Singaporestatutory board; and

• Cash and cash equivalents.

Moreover, an S-REIT is also subject to therestrictions in terms of its investmentactivities including:

• At least 75% of the deposited propertyshould be invested in income-producingreal estate;

• The fund should not undertake propertydevelopment activities or invest inunlisted property development companiesunless it intends to hold the developedproperty upon completion;

• The fund should not invest in vacant landor mortgages (except for mortgage-backed securities);

• The total contract value of propertydevelopment activities and investments inuncompleted property developmentsshould not exceed 10% of the value ofdeposited property; and

• Not more than 5% of the depositedproperty should be invested in any oneissuer’s securities or manager’s funds.

Restrictions onforeign assetsThere are no restrictions on the ownershipof foreign assets.

Distribution requirementsStrictly, there is no legal or regulatoryrequirement for an S-REIT to distribute anypredetermined percentage of its income asdistributions for a given financial year.

However, in order to enjoy tax transparencytreatment, an S-REIT will be required todistribute at least 90% of its “TaxableIncome” in a financial year. “TaxableIncome” refers to the following:

The REIT regime in Singapore was officially launched in 1999, although the first Singaporean REIT (S-REIT) waslisted on the Singapore Exchange (SGX) in 2002.

The S-REIT market has grown exponentially in the last few years and has established itself as one of the largestin Asia. To date, 22 S-REITs and 3 business trusts are listed on the SGX. More are likely to be listed once the stockmarket conditions improve. The total market capitalisation of S-REITs was approximately S$37 billion as ofMarch 2011.

28 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Singapore

David SandisonPwC (Singapore)+65 6236 [email protected]

Wee Hwee TeoPwC (Singapore)+65 6236 [email protected]

Page 31: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

a) Rental income or income from themanagement or holding of immoveableproperty but excluding gains from thedisposal of immovable property;

b) Income that is ancillary to themanagement or holding of immoveableproperty but excluding gains from thedisposal of immoveable property andSingaporean dividends;

c) Income (excluding Singaporeandividends) that is payable out of rentalincome or income from themanagement or holding of immoveableproperty in Singapore, but not out ofgains from the disposal of suchimmoveable property; and

d) Distributions from an approved sub-trust of the real estate investment trustout of income referred to in (a) or(b) above.

Tax treatment at REIT levelSubject to obtaining a Tax Ruling from theInland Revenue Authority of Singapore(IRAS), an S-REIT can enjoy “taxtransparency” treatment for taxable incomedistributed to its unitholders. Under thistreatment, the trustee will not be taxed inrespect of the S-REITs income. Instead, tax(if any) is levied only at the level of theunitholder. Any portion of the specifiedincome not distributed will be assessed to afinal tax at the trustee level.

Foreign-sourced dividend income receivedby an S-REIT may be exempt from tax undersection 13(8) of the Income Tax Act (ITA),provided certain qualifying conditions aremet. If the foreign-sourced dividend incomedoes not qualify for the section 13(8)exemption, or if the foreign income is notdividend income (e.g. interest income onshareholders‘ loans), the S-REIT may applyto the IRAS for tax exemption under section13(12) of the ITA for qualifying foreign-sourced income that is received inSingapore on or before 31 March 2015.

Rental and related income derived by an S-REIT will likely be treated as income derivedfrom the business of the making ofinvestments in accordance with section 10Eof the ITA. These provisions do not allow thecarry forward or set-off of any tax losses orunused tax depreciation for a particular yearof assessment.

Withholding tax ondistributionsDistributions out of taxable income

No tax will be withheld on distributions tothe following unitholders:

• Individuals;

• Companies incorporated and residentin Singapore;

• Branches in Singapore that have obtainedapproval to receive such distributionswithout deduction of tax; and

• A body of persons incorporated orregistered in Singapore.

Tax will be withheld at 10% on distributionsto non-resident non-individuals. Tax will bewithheld at the prevailing corporate tax rate(currently 17%) on distributions to all otherpersons.

Distributions out of other incomeDistributions made by an S-REIT out of thefollowing will be exempt from Singaporeantax in the hands of all unitholders:

• Income taxed at the trustee level;

• Capital gains;

• Income originating from the holding offoreign properties, which is exempt undersections 13(8) or 13(12) of the ITA; and

• Dividends from Singaporean companies.

Tax treatment at theinvestor level

Resident investors

Individual investors• Distributions made by an S-REIT to

individuals will be exempt fromSingaporean income tax unless thedistributions are made out of taxableincome and they receive the distributionsas their trading income or through apartnership, in which case thedistribution will be subject to income taxat the prevailing rate.

• Any gain derived by unitholders fromthe sale of their units will not be subjectto tax as long as the gain is not derivedfrom the carrying on of a trade orbusiness in Singapore. Unitholders whotrade or deal in investments will besubject to tax on any gain derived fromthe disposal of the units.

Corporate investors• Distributions by an S-REIT out of taxable

income to companies incorporated andresident in Singapore are subject toSingaporean income tax at the prevailingcorporate tax rate (currently 17%).Distributions out of other income asspecified above will be exempt from tax.

Non-resident investors

Individual investors• As above, distributions made by an

S-REIT to individuals will be exempt fromSingaporean withholding tax.

Corporate investors• Distributions by S-REITs to non-

individual persons who are not taxresident in Singapore and either do nothave a permanent establishment (PE) inSingapore or, where they carry outoperations through PEs in Singapore,do not use funds from these operations toacquire units, will be subject to 10%withholding tax (for distributions madeon or before 31 March 2015). This tax is afinal tax.

Although Singapore has concluded a widenetwork of tax treaties, S-REITs will inreality find it difficult to access the benefitsprovided under these treaties because theIRAS, as a matter of policy and practice, hasbeen reluctant to certify an S-REIT as aSingaporean tax resident for tax treatypurposes.

Transition to REIT/Tax privilegesStamp duty remission is granted on thetransfer of any Singaporean immoveableproperty (on or before 31 March 2015)into a listed S-REIT or into one to be listedwithin six months from the date of transfer.Stamp duty remission is also available forthe transfer of shares in a special purposevehicle that holds, directly or indirectly,immoveable property located outsideSingapore.

S-REITs that derive primarily dividendincome or distributions (which are nottaxable supplies for goods and services taxpurposes) can claim input tax on businessexpenses incurred between 17 February2006 and 31 March 2015 by way ofremission.

29 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 32: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

So as to develop the Korean REIT market,the Korean Ministry of Land Transport andMaritime Affairs (MLTM) amended theREICA again in October 2007 by simplifyingthe double process of preliminary approvaland incorporation approval into a singlestep of operation approval and lowering theminimum capital.

As of February 2011, there are 30 CR-REITs,13 K-REITs and 13 P-REITs showing a totalasset value of KRW7,410 billion and anequity value of KRW3,983 billion.

Legal formThe REIT, as a legal entity, is incorporated asa form of general stock corporation.

Capital requirementsThe required minimum capital amount isKRW0.5 billion at establishment. However,the REIT must increase capital up to KRW5billion within the minimum capitalpreparation period, which is six monthsfrom the date of operation approval.

Listing requirementsK-REIT and P-REIT must publicly offermore than 30% (temporarily lower the rateat 20% until 31 December 2012) of totalissued shares within the minimum capitalpreparation period. Then it must list itsstocks on the securities market of the KoreaStock Exchange or register them with theKorea Stock Exchange or in the associationbrokerage market of the Korea SecuritiesDealers Association if certain conditionsare met.

CR-REIT is not restricted in this publicoffer rule.

Restrictions on investors

Minimum number of investorsOne shareholder and anyone who isspecially related with the shareholder shallnot possess in excess of 30% (temporarilyeasing the restriction at 35% until 31December 2012) of the total stocks issued byK-REIT and P-REIT after the minimumcapital preparation period.

This provision does not apply within theminimum capital preparation period. CR-REITs are not subject to this restriction.

Restrictions on non-residentinvestorsThere are no restrictions on non-residentinvestors.

Asset/income/activity testsExcept for CR-REIT, at least 80% of a K-REITand P-REITs total assets must be invested inreal estate, real estate-related securities andcash as of the end of each quarter after theminimum capital preparation period. Inaddition to those requirements, at least 70%of a K-REIT and P-REITs total assets must bereal estate (including buildings underconstruction).

In case of CR-REIT, 70% or more of theCR-REITs total assets must consist of realestate that a company sells in order to repayits existing borrowings, real estate for thepurpose of the execution of a financialrestructuring plan and the execution of acorporate restructuring plan.

The minimum real estate holding periodof a REIT is three years. There are norestrictions on a CR-REIT.

REITs are allowed to invest their entireassets in real estate development projects.

REITs shall not acquire more than 10%of the voting shares in other companiesexcept for the cases including merger andacquisition.

Restrictions onforeign assetsThere are no clear guideline on the REITsholding foreign assets.

Distribution requirementsThe REIT is obliged to distribute at least90% of its distributable income. The term“distributable income” is the net asset valueexcluding capital and capital reserve.

There are three types of REITs (comprehensively “the REIT”) in Korea: Self-managed REIT (K-REIT), Papercompany type REIT (P-REIT) and Corporate Restructuring REIT (CR-REIT). P-REIT and CR-REIT are papercompanies (special purpose companies).

K-REIT and CR-REIT were introduced by the so-called Real Estate Investment Company Act (REICA), which wasenacted in April 2001. In October 2004, the REICA was amended, expanding the CR-REITs corporate income taxexemption to P-REIT as well.

30 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

South Korea

David Jinyoung LeePwC (South Korea)+82 2 709 [email protected]

Taejin ParkPwC (South Korea)+82 2 709 [email protected]

Yongjoon YoonPwC (South Korea)+82 2 709 [email protected]

Page 33: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Tax treatment at REIT levelUnder Article 51-2 of the Corporate IncomeTax Act (CITA), if a CR-REIT or a P-REITdeclares 90% or more of its distributableincome as dividend, the amount declared asdividend can be deducted from the REITstaxable income.

Moreover, legal reserve of retained earningsis not required to be accumulated.

Therefore, income derived by a CR-REIT ora P-REIT is effectively exempt fromCorporate Income Tax (CIT) to the extenta CR-REIT or a P-REIT declares the incomeas dividend.

Withholding tax ondistributionsDividend distributions by the REIT toresidents are subject to a 15.4% withholdingtax (including residential surtax).

Dividend distributions to non-residents thatdo not maintain a permanent establishment(PE) in Korea are subject to 22%withholding tax. If the tax treaties areapplicable, the withholding tax rate can bereduced by Korean double tax treaties.

For domestic corporations, dividend incomereceived by a REIT is not subject towithholding tax.

A foreign company that does not havepermanent establishment is subject towithholding tax at a rate of 22% including aresidential surtax. In the case of a tax treaty,the rate can be reduced.

Tax treatment at theinvestor level

Resident investors

Individual investorsWhen a resident individual shareholderdisposes of REIT shares that are listed onthe Korean Stock Exchange or that areregistered with KOSDAQ, the capital gainswill be treated as follows:

• Capital gains are exempt from income taxif an individual is a minor shareholder, i.e.a shareholder (including related parties tohim/her) that holds less than 3% of REITshares that are listed on the Korean StockExchange or less than 5% of REIT sharesthat are registered with KOSDAQ;

• If an individual shareholder (includingrelated parties to him/her) holds morethan 3% in REIT shares that are listed onthe Korean Stock Exchange or more than5% in REIT shares that are registered withKOSDAQ, respectively, capital gains aresubject to income tax at a rate of 22%(33% if the shares are sold within oneyear from the acquisition date).

Corporate investorsDividends and capital gains derived fromthe disposal of REIT shares are fully subjectto corporate income tax at a rate of 24.2%.

Non-resident investors

Individual investorsThe disposal of REIT shares is not taxable ifthe respective REIT is listed on the KoreanStock Exchange or registered with KOSDAQand the non-resident individual shareholder(including related parties to him/her) holdsor has held less than 25% of the REIT sharesat any time during the year of disposal andthe preceding five calendar years.

Capital gains arising from the disposal ofREIT shares by non-resident individualshareholders are subject to Koreanwithholding tax. Withholding tax is assessedat the lesser amount of 22% on the capitalgain or 11% on the gross proceeds. In thecase of non-listed REIT shares, theindividual income tax return will berequired and then the total tax burden willbe 6.6% to 38.5%, depending on the taxbases with the above withheld amountbeing deducted.

Corporate investorsIf the respective REIT is listed on the KoreaStock Exchange or registered with KOSDAQ,the same exception applies as for foreignindividual shareholders. In that case acapital gain from disposal is not taxable.

Capital gains arising from the disposal ofREIT shares by foreign corporations that donot have a PE in Korea are subject to Koreanwithholding tax. The withholding tax is thelesser amount of 22% (including Residentsurtax) on the capital gains or 11%(including Resident surtax) on the grossproceeds. In the case of non-listed REITshares, a corporate income tax return will berequired and then the final tax burden willbe 24.2%, depending on the tax bases, withthe above withheld amount being deducted.

Transition to REIT/Tax privilegesAcquisition tax on transfer of real estate isgenerally levied at a rate of 4.6% includingAgriculture and Fishery Tax, and Educationsurtax. However, if the respective real estateis acquired before 31 December 2012, REITsmay benefit from a 30% acquisition taxexemption. As far as the acquisition taxexemption applies, no Agriculture andFishery Tax is levied.

31 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 34: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

SantiagoBarrenecheaPwC (Spain)+34 91 568 [email protected]

Antonio SánchezPwC (Spain )+34 91 568 [email protected]

José L. LucasPwC (Spain)+34 91 568 [email protected]

The main aim of this investment vehicle is torevitalise and increase the competitivenessof the Spanish real estate market. Pleasefind below the main features pursuant tothe applicable legislation.

Legal formThe only legal form that is permissible for aSOCIMI is a Spanish joint stock corporation(SA – Sociedad Anónima).

Capital requirementsThe nominal capital of a SOCIMI mustamount to at least EUR15 million.

There is a maximum threshold for externaldebt up to 70% of the value of the SOCIMIassets (leverage provision).

Listing requirementsSOCIMIs must be listed on an organisedstock market in Spain, the EU or the EEA.

Restrictions on investors

Minimum number of investorsThere are no specific provisions for SOCIMI.Pursuant to the applicable stock exchangeregulations and standard practice, a listedentity must have at least 100 shareholderswith an interest lower than 25% each, and aminimum 25% free float is required.

Restrictions on non-residentinvestorsThere are no specific restrictions onnon-resident investors.

Asset/income/activity tests The corporate activity of the SOCIMI mustbe the following:

• The acquisition and development ofurban real estate for rent;

• The holding of shares in other SOCIMIs orin foreign companies subject to a similarREIT regime;

• The holding of shares in Spanish orforeign companies with the samecorporate activity, dividend distributionobligations, leverage restrictions, assetand income tests as SOCIMIs; and

• The holding of units in Spanish regulatedreal estate collective investmentinstitutions.

At least 80% of the value of the assetsmust consist of qualifying real estate assetsand shares.

In addition, at least 80% of earnings mustrelate to rents and dividends from qualifyingshares.

Qualifying assets must be held for aminimum period of three years, extended toseven years for self-developed real estate.

Restrictions onforeign assetsThere are no restrictions on foreignassets assuming that they are located in ajurisdiction with information exchangewith Spain.

Spain introduced in October 2009 the SOCIMI regime (“Sociedades Anónimas Cotizadas de Inversión en elMercado Inmobiliario”), the Spanish version of a REIT vehicle. SOCIMIs are listed corporations whose mainactivity is direct and indirect investment in real estate for lease.

Unlike REITs in other countries, SOCIMIs are subject to a corporate rate of 19%, which is still more attractivewhen compared to the regular Spanish corporate rate of 30%. This flat rate will generally be the final taxation inSpain on regular income for individuals and non-resident investors (without a permanent establishment) asdividends shall not be subject to withholding tax at source. Additionally, it should be noted that this tax regime isapplicable to qualifying subsidiaries of REITs listed in the EU or EAA.

32 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Spain

Page 35: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Distribution requirementsThe SOCIMI is obliged to distribute thefollowing amounts:

• At least 90% of profits derived from rentalincome and ancillary activities;

• At least 50% of capital gains derived fromqualifying real estate assets and shares.The remaining gain shall be reinvestedwithin a three-year period or fullydistributed once the three-year period haselapsed and no reinvestment has beenmade; and

• 100% of profits derived from dividendsreceived from other SOCIMIs, foreignREITs, qualifying subsidiaries andcollective investment institutions.

Distribution of dividends shall be agreedwithin the six-month period following theend of the financial year, and be paid withinthe month following the date of thedistribution agreement.

Tax treatment at REIT levelThe SOCIMI must be a Spanish tax resident.The taxable base corresponding to theportion of qualifying income whosesourced-profits distribution has beenapproved shall be subject to a 19%corporate tax rate as opposed to thestandard rate, which currently stands at30%. All other income will be taxed at thestandard tax rate. A 20% exemption onincome from residential property isavailable when the majority of assets heldby the SOCIMI are dwellings for lease.

The SOCIMI’s 100% subsidiaries maybenefit from this tax regime.

In addition, qualifying Spanish subsidiariesof REIT vehicles listed in the EU or EEA areeligible for the SOCIMI regime for theirSpanish rental income.

There is no entry tax charge established forthe transition to the SOCIMI regime.

Delisting, waiver of the regime, substantialnon-compliance of reporting information, ordividend distribution obligations, or anyother requirements will result in removalfrom the SOCIMI regime.

Transfer tax, capital duty and stamp dutybenefits may be of application.

Withholding tax ondistributionsDividend distributions by the SOCIMI, bothto residents and non-residents, are notsubject to Spanish withholding tax.

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends derived from SOCIMI shares areexempt from personal income tax.

Capital gains derived from the disposal ofSOCIMI shares are partially exempt. Theexemption is equal to 10% of the acquisitionvalue of the shares multiplied by thenumber of years the shares have been held,less exempt dividends received during theholding period.

Corporate investorsDividends are subject in their entirety tocorporate income tax at the general rate(30%). Those dividends distributed out ofprofits taxed at the reduced rate at the levelof the SOCIMI are entitled to a tax credit toavoid double taxation equal to 19%(effective taxation of 11% at the level ofshareholders). Those dividends taxed at thegeneral rate are entitled to the same taxprivileges that apply to ordinary dividends.

Capital gains derived from the disposal ofSOCIMI shares shall be subject to thegeneral income rate.

Non-resident investors

Individuals and corporate investorswithout a Spanish permanentestablishmentDividends and capital gains are subject tothe same rules as resident individuals,assuming there is an information exchangebetween Spain and the shareholder’scountry of residence.

Individuals and corporate investorswith a Spanish permanentestablishmentDividends and capital gains are subject tothe same rules described above for residentcorporate shareholders assuming there is aninformation exchange between Spain andthe shareholder’s country of residence.

Transition to REIT/Tax privilegesNew or existing companies and collectiveinvestment institutions can opt for theSOCIMI regime by notifying the TaxAdministration. The regime appliesretroactively from the start of the financialyear in which the SOCIMI has validlyapplied for this tax regime.

33 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 36: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Legal formThe FBI regime is open for Dutch publiccompanies, limited liability companies andmutual funds. Also, non-Dutch entitiesestablished under the laws of an EUMember State, the Dutch Antilles or Aruba,or a country that has concluded a tax treatywith the Netherlands containing a non-discrimination clause may qualify for theFBI regime under the condition that theentity has similar characteristics as a Dutchpublic company, limited liability company ormutual fund.

Capital requirementsBased on Dutch civil law, a Dutch limitedliability company has a minimum sharecapital requirement of EUR18,000. ForDutch public companies the minimumrequired share capital is EUR45,000. Thereis no minimum share capital requirementfor mutual funds.

Moreover, gearing restrictions should beobserved. In principle, investments may befinanced out of borrowings (bothshareholder and third-party loans) up to:

• a maximum of 60% of the tax book valueof directly- or indirectly-held real estateinvestments; and

• a maximum of 20% of the tax book valueof other investments.

Listing requirementsThe FBI regime does not require listing on astock exchange.

Restrictions on investorsFor the shareholder restrictions a distinctionmust be made between public and privateFBIs. FBIs whose shares are officially quotedon a stock exchange, FBIs that hold a permitto issue shares to the public are considered apublic FBI. Public FBIs are able to benefitfrom more relaxed shareholder restrictionsthan private FBIs.

Minimum number of investors

Public FBIs• No single entity that is subject to tax on its

profits (or the profits of which are subjectto tax at the level of the shareholders/participants of such entity) may, togetherwith related entities, own 45% or more ofthe shares in the FBI;

• No individual may hold an interest of 25%or more.

Private FBIs75% or more of the total shares in an FBImust be held by:

• Individuals; and/or

• Entities that are not subject to a taxationon their profits or are exempt from taxand the profits of which entities are notsubject to tax at the level of theshareholders/participants of suchentities; and/or

• Public FBIs;

• No individual may hold a substantialinterest (which broadly means a direct orindirect interest of 5% or more).

• Dutch resident entities may not hold aninterest of 25% or more in the FBI through

In addition to the above describedshareholding requirements, the followingrestriction applies to public and private FBIs:

Dutch resident entities may not hold aninterest of 25% or more in the FBI throughnon-resident mutual funds or throughnon-resident entities with a capital fully orpartly divided into shares.

Restrictions on non-residentinvestorsThere are no restrictions on non-residentinvestors.

The FBI regime was introduced in the Netherlands in 1969. The Dutch regime was the first REIT look-a-likeregime in Europe.

The FBI regime enjoys a corporate income tax rate of 0% (a de facto full exemption). Dividends paid by an FBI aresubject to 15% dividend withholding tax. Individuals, financial institutions like pension funds and insurancecompanies make frequent use of FBIs.

34 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

The Netherlands

Jeroen ElinkSchuurman PwC (The Netherlands)+31 88 79 26428 [email protected]

Serge de Lange PwC (The Netherlands)+ 31 88 79 [email protected]

Page 37: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Asset/income/activity testsThe statutory purpose, as well as the actualactivities of the FBI must consist solely ofpassive investment activities.

Investment activities may include any typeof investment including real estate orinvestments of a financial nature (such asloan notes, shares or other securities).Activities such as trading in real estate orreal estate development are generally notallowed.

The FBI is allowed to manage and holdshares in an entity carrying out real estatedevelopment activities for this entity itself,for the FBI, or for certain related entities.This development subsidiary is taxed on itsprofits and/or losses at the regular corporateincome tax rate of a maximum 25%.

The improvement or expansion, includingmaintenance of real estate is considered apassive investment activity if it is less than30% of the official market value of thereal estate.

Guarantees towards third parties inrelation to obligations of subsidiaries andthe on-lending of third-party financing tosubsidiaries are considered passiveinvestments activities.

Restrictions onforeign assetsThere are no restrictions on foreign assets.

Distribution requirementsAn FBI is required to distribute its entiretaxable profit within eight months followingthe financial year-end.

Capital gains do not have to be distributedif they are contributed to a reinvestmentreserve.

Tax treatment at REIT levelAn entity can elect to apply the FBI regimein its corporate income tax return. The FBIregime can only be applied for with effectfrom the beginning of a financial year, withall statutory requirements being met fromthat date. The FBI is subject to Dutchcorporate income tax at a rate of 0%.

Being an entity resident in the Netherlands,the FBI can benefit from the Dutch taxtreaties.

Withholding tax ondistributionsDividends paid by an FBI are subject to a15% dividend withholding tax. Reduction ofthis rate under applicable tax treaty may

apply. Further, shareholders may credit thewithholding tax levied against their Dutchincome tax liability. Distributions out of thereinvestment reserve are exempt fromwithholding tax.

Tax relief in order to avoiddouble taxationDividends and interest payments receivedby the FBI may be subject to Dutch dividendor foreign withholding tax. FBIs are entitledto credit the Dutch and foreign withholdingtax against the obligation of withholdingDutch dividend withholding tax onoutgoing dividend distributions. The creditis maximised to 15%.

Tax treatment at theinvestor level

Resident investors

Individual investorsDutch resident individuals who own, aloneor together with certain relatives, 5% ormore of the shares in an FBI are consideredthe holder of a substantial interest for Dutchpersonal income tax purposes. Dividends,profit rights and capital gains derived fromthe substantial interest by Dutch residentsubstantial interest holders are subject to aflat 25% tax rate.

Dutch resident individuals who own lessthan 5% of the shares in an FBI are notconsidered holders of a substantial interest.Income derived from such a shareholding issubject to a 1.2% tax.

Individual taxpayers can credit theDutch dividend withholding tax againsttheir Dutch income tax liability.

Corporate investorsDividends received and capital gainsrealised by Dutch resident corporateinvestors from an FBI are subject to Dutchcorporate income tax at the standard rates(25% for 2011). An investment in an FBIwill, in principle, not qualify for theparticipation exemption.

Corporate taxpayers can credit the Dutchdividend withholding tax against theirDutch corporate income tax liability.

Tax-exempt institutionsDutch pension funds are exempt fromcorporate income tax and are entitled to afull refund of the Dutch dividendwithholding tax.

Non-resident investors

Individual investorsNon-resident individuals who own 5% ormore of the shares in an FBI will also beconsidered the holder of a substantialinterest and will be considered anon¬resident taxpayer for Dutch personalincome tax purposes. Non-residentsubstantial interest holders are, in principle,subject to the tax rate of 25% applicable ondividends, capital gains on the FBI shares.Tax treaties may limit the right for theNetherlands to levy Dutch income tax onsubstantial interest income and gains.

Non-resident individuals who are notconsidered holders of a substantialinterest are not subject to Dutch personalincome tax.

Corporate investorsIn general, Dutch (corporate) incometaxation will only arise in case thenon¬resident investor holds a substantialinterest (5% or more of the shares of an FBI)and this interest is not attributable to a tradeor business of the non-resident investor.Tax treaties may limit the right for theNetherlands to levy Dutch corporate incometax on substantial interest income and gains.Furthermore, taxation may arise in caseswhere the FBI shares are attributable to aDutch permanent establishment (PE) of thenon-resident investor.

In case of substantial interest taxation orallocation to a Dutch PE, dividend incomereceived and gains realised by a non-resident corporate investor on the shares ofan FBI are subject to 25% Dutch corporateincome tax.

Non-resident taxpayers can credit theDutch withholding tax on dividends againstDutch (corporate) income tax levied.

Tax-exempt institutionsEU-resident pension funds that are tax-exempt and that are comparable with Dutchpension funds are under conditions entitledto a full refund of Dutch dividendwithholding tax levied on dividenddistributions made by the FBI.

Transition to REIT/Tax privilegesThere are no specific exit tax concessions fortaxable entities opting for the FBI regime. Atthe end of the year prior to the year that theentity converted to FBI regime , all assets arerestated at market value. The capital gainresulting from such restatement is subject tothe regular corporate income tax rate (25%).

35 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 38: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Legal formThe REIC must be a joint stock corporation.A REIC can be established by immediateestablishment, i.e. by establishment of anew joint stock company. Moreover, anexisting company can be converted into aREIC by amending its articles of association.

Capital requirementsThe minimum capital requirement for aREIC is TRL21.54 million for the year 2011.

Listing requirementsAt least 25% of the REIC’s shares should beoffered to the public. REICs are obligated tooffer share certificates representing 25% oftheir capital to the public within 3 monthsfollowing the registration of incorporationor amendment of the articles of associationwith the Trade Registry.

Restrictions on investorsAt least one of the founders must be a leaderequity owner (individually or by comingtogether owning shares equal to at least20% of the capital).

Furthermore, it is required for real estateinvestment companies that:

• Real or legal person founders must nothave any payable tax and insurancepremium debt; and

• Leader equity owners and real or legalfounders that have 10% or more of thecapital shares must provide the requiredsources for the incorporation of REICfrom their own commercial, industrialand other legal activities as free from anydebt. Leader equity owners and real orlegal founders that have 10% or more ofthe capital shares must have a goodreputation as required by their status.

Restrictions on non-residentinvestorsThere are no restrictions on non-residentinvestors.

Asset/income/activity testsThe portfolio of a general purpose REIC isrequired to be diversified, based onindustry, region and real estate, and to bemanaged with a long-term investmentpurpose. If a REIC is established with thepurpose of operating in certain areas orinvesting in certain projects, at least 75% ofthe REIC’s portfolio must consist of assetsmentioned in its title and/or articles ofassociation.

REICs are required to invest in real estate,rights supported by real estate and realestate projects at a minimum rate of 50% oftheir portfolio values.

REICs can invest in time deposit anddemand deposits in TRL or any foreigncurrency for investment purposes at amaximum rate of 10% of their portfoliovalues.

The rate of vacant lands and registeredlands that are in the portfolio for a period offive years, which have not been subject toany project development should not exceed10% of the portfolio value.

REIC’s cannot:

• Engage in capital market activities otherthan portfolio management for its ownportfolio limited to the investment areas;

• Be involved in construction of real estateas a constructor;

• Commercially operate any hotel, hospital,shopping centre, business centre,commercial parks, commercialwarehouses, residential sites,supermarkets and similar types of realestate, or employ any personnel for thispurpose;

• Engage in deposit business, conductbusiness and operations resulting indeposit collection;

• Engage in commercial, industrial oragricultural activities other than thetransactions permitted; and

A Turkish Real Estate Investment Company (REIC) is a capital market institution that can invest in real estate andcapital market instruments. Turkish REICs are corporate income tax-exempt stock companies that must be listedon an organised stock market in Istanbul. Currently, there are 21 REICs listed on the Istanbul Stock Exchange.

Starting from the beginning of 2009, the Capital Markets Board (CMB) announced another type of CMB-regulated company: the Infrastructure Real Estate Investment Company (IREIC). IREICs are closed-end, corporatetax-exempt, investment companies managing portfolios composed of infrastructure investments and services,projects based on infrastructure investments and services, capital market instruments based on infrastructureinvestments and services, infrastructure companies, other real estate investment trusts, companies operatingfoundations established within infrastructure investments and services (operating companies), and other capitalmarket instruments. (Explanations below are specific to REICs. Please consult your adviser for detailed inforegarding IREICs.)

36 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Turkey

Ersun BayraktarogluPwC (Turkey)+90 212 326 [email protected]

Baran AkanPwC (Turkey)+90 212 326 6534 [email protected]

Page 39: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

• Grant a loan or commit into anydebit/credit transaction with theirsubsidiaries, which is not related to thepurchase and sale of goods or services.

Restrictions on foreign assetsREICs can invest in foreign real estate andcapital market instruments backed by realestate up to a maximum of 49% of theportfolio value.

Distribution requirementsAs REICs are public companies, profitdistributions of REICs are subject to thegeneral regulations of the CMB.Thedistributable profit is calculated in line withboth CMB and Turkish Commercial Coderegulations. In order to secure the capitalposition of the REIC, the lesser of the netdistributable profit calculated in line withthe Turkish Commercial Code or in line withCMB regulations should be distributed.Under either calculation, net profit isgenerally the gross income of the REICminus taxes, legal reserves, accumulatedlosses and donations within the year.Unrealised capital gain is not included in thecalculation of gross income.

Tax treatment at REIC levelProfits generated from the activities ofREIC are exempt from corporate tax anddividend withholding tax rate is determinedto be 0% for REICs. The transactions ofREICs are subject to VAT and most othertransfer taxes.

Withholding tax ondistributions

Taxation of investors receivingdividends from a REICAlthough dividend distributions toindividual and non-resident shareholders ofTurkish companies are currently subject to a15% dividend withholding tax in Turkey(double tax treaty provisions are reserved),since the withholding tax rate is determinedas 0% for REICs by the Council of Ministers,dividend distributions to individual andnon-resident shareholders of the REICscurrently have no dividend withholding taxburden.

Dividends received by residentcorporationsSince REICs are exempt from corporate tax,“participation exemption” is not applicablefor dividends received from REICs. So,dividends received by corporations inTurkey from REICs are subject tocorporation tax. And then, if distributed tonon-resident companies or individuals,those distributions are also subject todividend withholding tax in line with localregulations.

Dividends received by non-resident corporations

Taxation of dividends in the hands of a non-resident corporation depends on the taxtreatment of the country of residence.

Dividends received by residentindividualsResident individual shareholders of REICsare obliged to declare half the dividendsreceived from REICs if half of the dividendsreceived is higher than the declaration limit(approximately EUR 10,600 for 2011).Declared income will be subject to incometax at the progressive rate between 15%and 35%.

Dividends received bynon-resident individualsTaxation of dividends in the hands of non-resident individuals depends on the taxtreatment of the country of residence.

Tax treatment at theinvestor level

Capital gains received by residentcorporationsThe capital gains derived from the sale ofREIC shares by resident legal entities are tobe included in the corporate income andwill be subject to corporate tax. However,corporate tax exemption method can beused to minimise the tax burden on the saleof shares.

Capital gains received bynon-resident corporationsSince REICs are public companies, capitalgains derived from the sale of shares in theIstanbul Stock Exchange by non-¬residentlegal entities that do not have a permanentestablishment (PE) in Turkey will be subjectto taxation via a withholding tax. Thecurrent rate of 0% withholding tax isapplicable for the capital gains received bynon-resident corporations, and that tax willbe the final tax for those companies.

Please note that capital gains derived fromthe sale of unlisted Turkish company sharesby non-resident corporations that do nothave a PE in Turkey should be declared afterthe application of a cost adjustment. Thisdeclaration should be made within 15 daysafter the sale of shares, through a specialcorporate tax return, and be taxed at thestandard corporation tax rate. (For the costadjustment, the original cost is adjustedrelative to the wholesale price index (WPI),except for the month the shares aredisposed of, if the total increase in WPI ismore than 10%.) Additionally, a dividendwithholding tax will be applied to the netgains. But, since most double tax treatiesprohibit Turkey’s taxation right on thesecapital gains, depending on the holdingperiod (one year in most cases) of theTurkish company shares, we stronglysuggest the double tax treaties areexamined before these transactions.

Capital gains received byresident individualsSince REICs are public companies, capitalgains derived from the sale of shares in theIstanbul Stock Exchange by residentindividuals will be subject to taxation viawithholding tax. The current rate of 0%withholding tax is applicable for the capitalgains received by resident individuals, andthat tax will be the final tax for thoseindividuals.

Capital gains received bynon-resident individualsSince REICs are public companies, capitalgains derived from the sale of shares in theIstanbul Stock Exchange by non¬residentindividuals will be subject to taxation viawithholding tax. The current rate of 0%withholding tax is applicable for the capitalgains received by non-resident individualsand that tax will be the final tax for thoseindividuals.

Transition to REIT/Tax privilegesThere are no specific exit tax concessionsapplicable on the disposal of real estate tothe REIC.

37 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 40: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Since REITs have been introduced in the UKthere have been a number of developments.

The legistation has been rewriten intothe Corporation Tax Act 2010 as part ofthe tax law rewrite project. HM Revenue &Customs are currently updating guidanceto reflect the new legislation and practicalexperience.

The ability to pay rental incomedistributions as stock dividends wasintroduced as part of the Finance (No 3)Act 2010.

The Government has launched aconsultation as part of the 2011 budgetanouncements on how to simplify andimprove the legislation. The changesproposed include: abolition of the entrycharge; permission to list on AIM and othermore junior stock markets; simplification ofshareholding requirements to encourageinstitutional investors, allowing a graceperiod when a new REIT could be “close”(see below for definition of close); enablingcash to be a good asset; and refining thedefinition of “finance” for the finance costratio. Any changes resulting from theconsultation are not expected to belegislated until 2012.

Legal formA UK REIT can be a group of companieswith a parent company (or a single companylisted REIT, although none currently exist).

The parent company cannot be an open-ended investment company.

The parent must own at least 75% of theshares of a member of the group (“75%subsidiary”). Any such member may alsohold 75% subsidiaries, but the parent mustultimately own at least 50% of the shares ofall of the group subsidiaries.

In order to become a UK REIT, the parentcompany must file a notice specifying whenthe REIT rules will apply from and this mustbe accepted by the tax authorities.

The REIT must pay an entry charge of 2% ofits gross assets (market value before debt) toenter the regime. When a REIT is initiallyestablished it can elect to pay the entrycharge over four years. However, if furthercompanies join the REIT regime, then anentry charge is paid in respect of eachcompany but spreading these additionalcharges is not permitted.

Where a REIT holds 40% or more in acompany or group that owns UK investmentproperty, then it can also elect its share ofthat company/group’s income and gainsinto the REIT regime. An entry fee of 2% ofthe value of its share of the property ispayable. The instalment option is only forjoint venture (JV) interests held when theREIT is first formed.The JV company doesnot pay UK tax on the REITs share of incomeand gains arising from its UK propertyinvestments (and non-UK investmentproperty if the JV company/group is a UKtax resident).

Capital requirementsThere are no capital requirements, but thereis a limitation on the type of shares that theparent company of a UK REIT can issue,being ordinary shares and non-voting

preference shares, including convertiblenon-voting preference shares.

There are financing requirements. A UKREIT must generate profits from itsrental business of at least 1.25 times itsfinance costs (e.g. interest, fees, debt breakcosts). There is an exemption where theREIT is suffering unexpected financialdiffiiculties, which was introduced in theFinance Act 2009.

Any loans to the UK REIT should be onnormal commercial terms and not providefor an interest rate that increases withimproved performance (disguiseddividend).

Listing requirementsA UK REIT must be listed on a stockexchange that appears on the list ofworldwide stock exchanges recognised bythe UK tax authorities, but not theAlternative Investment Market (AIM),which is an exchange for smaller companiesin the UK.

Restrictions on investors

Minimum number of investorsA UK REIT cannot be close (that is under thecontrol of only a few investors). At least 35%of the shares must be freely available to thepublic (free float) and the remainingshareholders must not be entitled to 85% ormore of the votes.

UK REITs are penalised if they makedistributions to any particular corporateshareholder that owns 10% or more of itsshares; to prevent such penalties arising allUK REITs have amended their articles ofassociation to prevent payments of suchdividends.

The UK REIT was introduced by provisions in the Finance Act 2006 and came into force on 1 January 2007.

A UK REIT comprises a group of companies carrying on a property investment business, with property let to third-party tenants. The parent company can be incorporated anywhere but must be a UK tax resident and listed on arecognised stock exchange. A UK REIT benefits from an exemption from UK tax on both rental income and gainsrelating to its property investment business. On conversion, the UK REIT must currently pay an entry fee. On anongoing basis, the REIT business has to meet certain tests (detailed below) and the REIT is required to distribute 90%of its rental income in respect of each accounting period in order to obtain exemption from tax on its rental income.

38 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

United Kingdom

Rosalind RowePwC (UK)+44 20 7213 [email protected]

Page 41: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Restrictions on non-residentinvestorsThere are no additional restrictions on non-resident investors.

Asset/income/activity testsAt least 75% of the UK REITs gross assetsmust be used in the rental business and atleast 75% of the UK REITs profits must beearned in its qualifying rental business.

It is possible for any members of a UK REITto have other activities. Such activities mustnot involve more than 25% of the UK REITsgross assets, nor generate profits of morethan 25%.

Such tests are carried out using theconsolidated group results as set out infinancial statements produced usingInternational Financial Reporting Standards(IFRS) with adjustments for non-recurringor distortive items, e.g. movement onhedging, one-off transactions, etc.

There must be at least three properties withno one property accounting for more than40% of the value of the REIT assets.

Restrictions onforeign assetsThere are no additional restrictions onforeign assets.

Distribution requirementsThe UK REIT is required to distribute at least90% of its rental profits (being rentalincome after deducting finance costs,overheads and tax depreciation). Thedistribution requirement can now be metusing stock dividends. There is norequirement to distribute gains.

Tax treatment at REIT levelThe UK REIT must be a UK tax resident andnot resident elsewhere. It is not subject totax in respect of either rental income earnedor capital gains realised in respect of itsrental business assets. It is subject tocorporation tax on all other income underthe usual taxation rules.

There is no special exemption for UK REITsfrom value added tax, uniform businessrates, employment taxes or transaction taxes(stamp duty land tax).

Withholding tax ondistributionsDividend distributions out of rental incomeand gains by the UK REIT are generallysubject to a withholding tax of 20%;however, payments can be made grossto UK corporates, UK pension funds andUK charities.

Distributions out of taxed income aretreated as ordinary dividends with no actualwithholding (although they carry a deemedwithholding credit of 10% where receivedby UK individuals).

If the UK REIT shares are held by UKresident individual shareholders, thewithholding tax cannot be reduced.

Most UK double tax treaties provide for areduced withholding tax rate of 15% fordistributions to non-UK tax residentinvestors. The UK REIT legislation penalisesUK REITs, which make distributions to anycorporate shareholder that owns 10% ormore of the UK REITs shares. Consequently,all UK REITs have amended their articles ofassociation to prevent payments of suchdividends and therefore the internationalaffiliation privilege, which grants furtherreduction to foreign corporate shareholders,is generally not applicable. Moreover, theEU Parent Subsidiary Directive does notapply, due to the UK REITs tax exemption.

Tax treatment at theinvestor level

Resident investors

Individual investorsDividends derived from UK REIT shares heldby individuals are subject to a withholdingtax of 20%.

• Capital gains realised on the disposal ofUK REIT shares held by individuals aresubject to capital gains tax at theindividual's marginal rate (18–28%).

• Dividends and capital gains that resultfrom the rental business and which aredistributed to UK tax resident individualsare subject to income tax at the highestrate with credit for the withholding tax of20% which has been suffered.

• Distribution of other income is subject toUK tax as dividend income with a deemedwithholding of 10% as these would be adistribution out of taxed profits (e.g.interest income). The individual would besubject to tax at his/her highest dividendrate on this income less the imputed 10%tax credit.

Corporate investorsDistributions of rental income and capitalgains derived from the disposal of rentalproperty are subject to corporate tax at therelevant coporation tax rate – currently 26%– but dropping to 23% by 2014 and 20% forsmall companies. Gains on the sale of sharesdisposed of by corporate shareholders aresubject to tax at the relevant corporation tax rate.

Income or gains paid out of taxed incomeare treated as a normal distribution and arenot generally subject to further tax whenreceived by a UK corporate.

Tax relief in order to avoiddouble taxationREITs are obliged to distribute 90% of theirrental profits, which may be generated byUK members (owning UK and non-UK rentalassets) and non-UK resident membersowning UK property. Any non-UK tax isexpensed against the rental income.

All other income is subject to tax and may bedistributed as ordinary income with nowithholding tax deducted.

Non-resident investors

Individual investorsDistributions of rental income and capitalgains derived from the disposal of rentalproperty are subject to withholding tax of20% (subject to treaty relief – see above).

Distributions of taxed income are notsubject to withholding tax.

Capital gains from the disposal of UK REITshares are not subject to UK tax if theindividual is resident outside the UK.

Corporate investorsDistributions of rental income and capitalgains derived from the disposal of rentalproperty are subject to withholding tax of20% (subject to treaty relief – see above).

Distributions of taxed income are notsubject to withholding tax.

Capital gains from the disposal of UK REITshares are not subject to UK tax if thecorporate is resident outside the UK.

39 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 42: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

Gary CutsonPwC (USA)+1 646 [email protected]

Legal formA US REIT may be formed as a corporation,trust or an association taxable as acorporation, including a limited partnershipor limited liability company. REIT status isprincipally a creation of the tax law ratherthan commercial law.

Capital requirementsA REIT is not limited on the amount of itsborrowings although the deduction ofinterest to related persons is subject to thesame earnings stripping and debt/equityconsiderations as other corporations.

Listing requirementsThere is no requirement to be listed; bothpublic and private REITs exist in the US.

Restrictions on investors

Minimum number of investorsA REIT must have at least 100 shareholders,but no minimum value for each shareholderis required. Generally, five or fewerindividuals cannot own more than 50% ofthe value of the REITs stock – applyingbroad attribution rules – during the last halfof its taxable year.

Restrictions on foreign investorsThere is no restriction on ownership byforeign persons.

Asset/income/activity tests• Annually, at least 75% of the REITs

gross taxable income must be from realestate-related income such as rents fromreal property, interest on obligationssecured by mortgages on real property,gain on sale of real property andmortgage loans, and dividends and gainsfrom other US REITs.

• Annually, at least 95% of the REITs grosstaxable income must be from sourcesincluding those qualifying for the 75%income test described above, otherinterest and dividend income, and gainson securities.

• Quarterly, at least 75% of the value of theREITs gross assets must consist of realestate assets (interests in real property,mortgages secured by real property andshares in other REITs), cash and cashitems (including receivables), and USGovernment securities.

• Quarterly, a REIT cannot own more than10% of the vote or value of the securitiesof another person, and these securitiescannot comprise more than 5% of thevalue of the REITs gross assets. Shares inother REITs, 100%-owned subsidiaries(which are disregarded entities) andsecurities of taxable REIT subsidiaries arenot subject to these restrictions.

• Quarterly, the value of all securities oftaxable REIT subsidiaries owned by theREIT cannot be more than 25% of thevalue of the REITs gross assets.

A taxable REIT subsidiary can undertakeactivities that the REIT cannot, and thisstatus is obtained by filing a tax election.

• A REIT is subject to a penalty tax of 100%on the gain from the sale of “dealerproperty” (property held primarily forsale to customers in the ordinary course ofa trade or business).

• A REIT may operate or manage its ownproperties and provide “customary”services to tenants. Special rules apply to“non-customary” services, rental incomefrom related parties and rents based uponnet income rather than gross income ofa tenant.

The US REIT regime was first enacted in 1960 and effective in 1961.

The year-end market value of publicly traded US REITs was more than US$300 billion in 2010, off from its peak ofUS$438 billion in 2006. Unlisted REITs held an additional US$70 billion in assets, a segment that continues togrow by about $7 billion annually.

The number of US publicly held REITs declined to 134 in 2010 from almost 200 in 2005.

40 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

United States

Page 43: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

• A REIT must adopt the calendar year asits taxable year.

Restrictions onforeign assetsThere is no limitation on ownership offoreign assets, but the REIT must meet theincome and asset tests described above withspecial rules for currency gains.

Distribution requirementsThe REIT must distribute at least 90% of itsordinary taxable income of each year.Distributions made after year-end may beapplied to satisfy this requirement undercertain circumstances.

Tax treatment at REIT levelThe REIT must be formed in one of the 50states or the District of Columbia. There isno residency requirement based upon placeof management.

• A deduction is allowed for dividends paidto shareholders.

• Corporate level tax applies on any taxableincome that is not distributed.

• Most states follow the federal treatment;however, some have enacted laws torestrict the ability to take the dividendspaid deduction under certaincircumstances.

• An excise tax of 4% applies to the extentthat the REIT fails to distribute at least85% of its ordinary income and 95% of itsnet capital gain within the tax year

Withholding tax ondistributionsDomestic shareholders are not generallysubject to withholding tax.

Foreign shareholders are subject to 30%withholding tax on ordinary dividends,35% on capital gain dividends and 10% onreturn of capital unless a withholdingcertificate is obtained. Governmentalentities may be exempt from withholdingunder domestic law.

Treaty access– If a treaty rate applies, ordinary dividends

are subject to withholding tax at reducedrates (generally from 10% to 25%,depending on the investor type, treatycountry and ownership percentage in theREIT) . Benefits are often limited toinvestors who have 5% or less ownershipof a public REIT and 10% or less if non-public, provided that the non-public REITis “diversified”. A diversified REITgenerally must hold no interest in US realproperty that is more than 10% of all itsreal property holdings. Zero withholdingtax is possible for pension funds or tax-exempt entities in certain treaty countries,mostly only if ownership is below acertain percentage.

– Capital gain dividends attributableto sale of US real property are subject towithholding tax at 35%. However, if theinvestor owns 5% or less of an REIT listedon a US stock exchange, the distribution issubject to the reduced treaty rates thatapply to ordinary dividends.

A 10% withholding tax applies to the salesprice of REIT shares when the REIT is notdomestically controlled unless either (1)less than 5% of the REIT is owned, or (2) awithholding tax certificate is obtained.

Tax treatment at theinvestor level

Domestic investorsDistributions from a REIT are taxable asordinary income (currently 35%) to theextent of earnings and profits.

Individuals, estates and trusts (determinedunder US tax principles) are generallysubject to tax on capital gain dividends at a15% rate (25% on gains attributable toaccumulated depreciation).

The US tax rate on ordinary dividends andcapital gain distributions will automaticallyrevert back to 39.6% and 20%, respectively,after 2012, if no further Congressionalaction is taken.

Foreign investorsA foreign shareholder that is subject to taxon capital gain dividends or from a sale ofshares must file a US tax return, even if itstax liability is fully withheld upon at source.

For foreign corporations, withholding taxon capital gain dividends or the sale ofshares is credited against their substantiveUS tax of 35% plus any branch profits tax.

Foreign corporations may be subject to thebranch profits tax at 30%, which is appliedto gains less the regular income tax resultingin an effective rate of 54.5%. Many treatiesprovide for a reduction in rate on the branchprofits tax. No branch profits tax applies tothe sale of shares.

Individuals, estates and trusts (determinedunder US tax principles) are generallysubject to tax on capital gain dividends at a15% rate (25% on gains attributable toaccumulated depreciation) through to 2012.

A tax-free exit is available upon sale ofshares in publicly traded REITs (if less than5% ownership limitation is met) anddomestically controlled REITs. Theexception must be satisfied for the previousfive-year period.

Transition to REIT/Tax privilegesA REIT election is made by filing itscorporate income tax return on Form 1120-REIT. A regular corporation that elects REITstatus is required to distribute itsaccumulated tax earnings and profits beforethe end of its first year as a REIT. Any netbuilt-in gain in assets at the date of theelection is subject to corporate level tax ongain recognized within the next 10 years.This tax can often be deferred by acquiringreplacement property in a “like-kindexchange”.

41 PwC Worldwide Real Estate Investment Trust Regimes (REIT)Country summaries

Page 44: Compare and contrast: CCoommppare and contrraast€¦ · compare the various regimes. As you will notice, it is a high level comparison of key attributes of selected REIT regimes.

www.pwc.com/assetmanagementThis publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for anydecision based on it.

© 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of itsmember firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions ofany other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.