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Issue 4 of 2008 International Tax Newsletter Real Estate Investment Trusts – introduction Zbigniew Marczyk introduces our special REITs edition of the International Tax Newsletter, in which we consider REITs regimes in France, Germany, Italy, Poland, Spain, the UK and the US. Real estate investments have always been regarded by investors as the most stable ones and generating fair profits in the long term. In order to stimulate the real property market, avoid double taxation of income derived from real estate investments and open the possibility of such investments to a large number of individual investors, legislators in numerous countries decided to introduce a special legal and tax regime for REIT (Real Estate Investments Trust) companies. The REITs regulations were first launched in the US, later joined by Australia, Japan and other Asian countries. Over recent years, structures of this type have been introduced by many European countries, including France, the UK, Germany and Italy. Although specific REITs regulations may vary between particular countries, such regulations undoubtedly also share some basic common elements, which cause a certain company to be classified as a REIT. Contents Real Estate Investment Trusts – introduction 1 The tax regime for French listed real estate companies 2 The German REIT regime 6 Italian REITs and REIFs 9 The Polish alternative to the Real Estate Investment Trust 13 Real Estate Investment Corporations and Real Estate Investment Funds in Spain 15 Real Estate Investment Trusts in the United Kingdom 18 Real Estate Investment Trusts – United States 21 The common features concern the purpose for which a REIT is established, its scope of investment and a specific tax status for such a company. REITs are established with an aim to perform a specialised investment strategy which focuses on the purchase of real estate (mainly commercial, such as offices, hotels or warehouses) in order to derive profits from leasing it and also from trading in it. When investing their money in a REIT, individual investors are choosing an indirect investment on the real property market, which is very often the only possibility for them to invest in commercial real estate (because of the significant value of such real estate). Apart from that, such investments involve lower risk and a lesser administrative burden, and can be characterised by greater liquidity (it is easier to start and complete an investment through a REIT than in the case of direct real estate investment). Nevertheless, the second and, at the same time, basic feature of REIT companies is their special tax status. A company of this type is exempt from tax on the profit derived from investments. In order for a REIT to be exempt from taxation, it is required to distribute a certain percentage of its profits (in the case of REITs operating in the UK, it is no less than 90%) in the form of dividends to its investors. For this reason, the institution under review is favourable to investors from a tax law perspective, as it allows them to avoid the double taxation of the income derived from real estate investments. Such income is exempt from taxation on the part of the company and is taxable only on the part of investors, as a result of dividends distributed to them. n 2 International Tax Newsletter – Issue 4 of 2008 The tax regime for French listed real estate companies Hervé Israël explains the tax regime applicable to Sociétés d’Investissements Immobiliers Cotées (listed real estate companies, ‘‘SIIC’’), following the coming into force of the 2006 Amending Finance Act, which has extensively amended the regime. It aims to encourage French companies, as well as international businesses, to invest in the French real estate market by creating opportunities for investors operating in this market. Further changes, expected to be introduced by the 2008 French Finance Act, will form the subject of a second article next year. OUTLINE OF THE SIIC REGIME AND ITS LEGISLATION The principal characteristic of the regime is that it exempts SIICs from French corporate income tax (“CIT”) on rents they receive and on capital gains resulting from the sale of real estate assets. This revenue is taxable only at the level of their shareholders. Finally, the 2006 Amending Finance Act substantially modified the SIIC regime: ●● ●● In exchange for this exemption from CIT, SIICs are required to distribute 85% of their tax-exempt profits from rental income and 50% of their tax-exempt profits from the sale of real estate or shares in subsidiaries benefiting from the SIIC tax regime or subject to the tax regime for partnerships. making its application conditional on compliance with new conditions intended in particular to ensure wider distribution of the capital of these companies among the general public relaxing it (in particular by opening it up to subsidiaries of more than one SIIC, extending the CIT exemption to profits on lettings and assignments by holders of certain real estate title rights, and creating a sort of new “parent company – subsidiary” regime exempting distributions of dividends between two SIICs from CIT). ●● However, the tax authorities have specified that SIICs may carry out ancillary activities that do not correspond to their main corporate purpose, provided they comply continuously with the following two ratios for the entire period of application of the SIIC regime: ●● The SIIC regime, codified in articles 208 C, 208 C bis and 208 C ter of the French Tax Code, was first introduced by the 2003 French Finance Act, completed by a decree of 11 July 2003. Guidelines issued by the tax authorities on 25 September 2003 provided further details on the regime. The regime was subsequently amended by the 2005 Finance Act, which: ●● ●● extended the CIT exemption to profits from the subletting of buildings subject to a finance lease or the assignment of rights under a real estate finance lease created a specific regime with the aim of neutralising the effect of restructurings involving SIICs and their subsidiaries under the same regime. CONDITIONS FOR APPLICATION OF THE REGIME Any company wishing to benefit from the SIIC regime must formally opt for it and satisfy the conditions for application of this regime. General conditions for access to the SIIC regime To be eligible for the SIIC regime, a company must satisfy all of the following conditions as of the first day of the financial year under way at the time of opting for this regime, and continue to satisfy them in an uninterrupted fashion throughout each financial year in which the regime applies: ●● ●● The 2005 Finance Act and the 2005 Amending Finance Act also introduced a preferential tax system (codified in article 210 E of the French Tax Code) for sales of real estate or rights under a real estate finance lease by companies subject to CIT to a SIIC. ●● be incorporated as a société par actions be listed on a French regulated stock exchange (First Market, Second Market or New Market). The tax administration has said that a company that is already listed on a foreign stock market may benefit from the SIIC regime on condition it is also listed on a French regulated market have a share capital of at least €15 million have as its main corporate purpose the acquisition or construction of real estate assets for the purposes of renting or direct or indirect holding of interests in legal entities with an identical corporate purpose and subject either to the tax regime for partnerships or to CIT. ●● receivables under real estate finance leases must not constitute more than 50% of the assets of the SIIC the value of assets allocated to these ancillary activities must not be greater than 20% of the gross value of the SIIC’s assets. Revenues from ancillary activities remain liable to CIT as normal (at a rate of 33.33%) and are not subject to the distribution requirements of the SIIC regime. The SIIC and its subsidiaries may have some of their activities outside France. However, only the activity carried out in France (holding of real estate or interests in companies that have the same corporate purpose as that required for SIICs) can give access to the preferential regime. The shareholders of the SIIC may be French or otherwise. No specific conditions need be met with regard to the borrowing capacity of the SIIC. 3 International Tax Newsletter – Issue 4 of 2008 New conditions governing the dispersal of the SIIC’s share capital The following new conditions for dispersal of the share capital must also be complied with (further to the 2006 Amending Finance Act): ●● ●● no more than 60% of the capital of the company may be held, directly or indirectly, by one or more shareholders acting in concert (unless the shareholders are themselves SIICs). The same must be true for voting rights at the SIIC’s meetings of shareholders. This condition must be continuously met throughout all financial years in which the regime applies. Therefore, it applies both to companies that joined the SIIC regime in 2007 as well as those that were already benefiting from it. For companies opting for the SIIC regime in 2007 or later, this condition must be met at the time they become subject to the regime. But companies that were already subject to the regime will only have to comply as from 1 January 2009. Exceeding the 60% cap during a financial year does not put an end to the regime but makes the SIIC liable to CIT in the normal way for the financial years in which the cap is exceeded. However, if this condition ceases to be satisfied during a financial year following a takeover, public exchange offer, merger, demerger, dissolution – confusions de patrimoine (a simplified type of merger between parent companies and their wholly owned subsidiaries) or conversion or repayment of bonds in shares, it will nonetheless be considered to have been satisfied if the situation is regularised at the latest by the expiry date of the period for filing the declaration of the results of the financial year in question (that is, 30 April of the following year for companies whose financial year coincides with the calendar year, subject to extensions of time periods granted by the administration) at least 15% of the capital and voting rights of the company must be held by persons who individually hold less than 2%, directly or indirectly. Compliance with this condition is required only on the first day of the financial year of entry to the SIIC regime and the condition only applies for financial years starting on or after 1 January 2007. Therefore, it only applies to companies joining the regime in 2007 or later. Conditions governing access by subsidiaries of the SIIC to the regime Among the subsidiaries of the SIIC, those that are subject to CIT may also opt for the regime provided they comply with the following conditions: ●● ●● they are at least 95% owned, directly or indirectly −− by a single SIIC or −− for financial years starting on or after 1 January 2007, jointly by several SIICs, and they have the same corporate purpose as the SIICs. These conditions must be satisfied on a continuing basis throughout each of the financial years in which the SIIC regime applies. The 2006 Amending Finance Act made an important relaxation to the SIIC regime by extending its scope to subsidiaries owned jointly by several SIICs. Subsidiaries of a SIIC that are subject to the partnership tax regime may not opt for the SIIC regime. However, if their corporate purpose is identical to that required for SIICs, the lettings, sublettings or disposals of real estate assets that they carry out are deemed to be made by their partners to the extent of their respective percentage interests. TAXATION RULES FOR COMPANIES OPTING FOR THE REGIME Exit tax upon entry by a company to the SIIC regime Opting for the regime causes a company to cease its activity, to the extent that it ceases, entirely or partially, to be subject to CIT as a result of the option. Cessation of activity has the consequence of immediate taxation at 16.5% (“exit tax”) of unrealised capital gains on real estate, including the company headquarters, rights under real estate finance leases and partnership shares in French partnerships or similar held by the SIIC and its subsidiaries that have opted for the regime. Unrealised capital gains on fixed assets used for ancillary activities are only taxed at the date they are realised. Taxation of unrealised capital gains on equity shares in subsidiaries subject to CIT that do not opt for the regime is postponed until disposal of the shares. 4 International Tax Newsletter – Issue 4 of 2008 The tax regime for French listed real estate companies continued… New 20% deduction from certain distributions of dividends SIICs must now pay an amount equal to 20% of distributions made on or after 1 July 2007, when: ●● ●● sums distributed are taken from profits exempt from CIT owing to the SIIC regime (the deduction does not apply to distributions taken from the company’s taxable income) and distributions are made to a shareholder that is not an individual that: −− holds, directly or indirectly, at least 10% of the rights to dividends of the SIIC at the time the distributions are made and −− is not subject to CIT or an equivalent tax on income received. This will be deemed to be the case if (i) a French or foreign shareholder is exempt from corporation tax or (ii) a foreign shareholder is subject, in its state of residence, to a tax on profits that is more than two-thirds less than it would have paid in France. By exception, the deduction is not applicable if the shareholder in question is a company that is itself subject to an obligation to distribute all the dividends it receives, in particular if it is another SIIC. But in this last case, this exception will only apply if shareholders of the second SIIC that hold, directly or indirectly, at least 10% of its share capital are themselves subject to corporation tax or an equivalent tax on the distributions they receive. The 20% deduction relates to distributions as strictly defined and also to amounts deemed to be distributed (for example, sums reincorporated into the taxable result of a company and hidden distributions or salaries). The deduction is recovered in the same way as corporation tax and must be paid spontaneously to the tax authorities in the month following payment of the dividends in question. Furthermore, the deduction is neither imputable nor refundable and may not be treated as a charge that is deductible from the tax result of the SIIC making the distribution. PREFERENTIAL REGIME FOR DISPOSAL OF REAL ESTATE ASSETS TO A SIIC By virtue of a preferential regime introduced by the 2005 Finance Act and the 2005 Amending Finance Act, a reduced 16.5% CIT rate is applicable to capital gains on the disposal of certain real estate assets when the disposal is made by a legal entity subject to CIT (in ordinary law conditions) in favour of a SIIC or, for financial years starting on or after 1 January 2007, in favour of a subsidiary of a SIIC subject to CIT and benefiting from the same regime. The real estate rights include rights under a real estate finance lease or, for financial years starting on or after 1 January 2007, certain real estate title rights consisting of the beneficial ownership of a real estate asset and the rights of the lessee under a construction lease and certain types of long-term lease. Furthermore, this preferential regime has been extended by the 2008 Finance Act to capital gains realised by a legal entity subject to CIT as a result of the transfer of shares in companies with mainly real estate assets to a SIIC, or subsidiary of a SIIC, that is subject to CIT and benefits from this same regime. This measure also applies, generally speaking, to capital gains on disposals made under the same conditions, in favour of a company making a public offering (of securities giving access to the share capital) and whose main corporate purpose is acquiring or constructing real estate assets for rent. Conditions of application Under this preferential regime, capital gains on disposals of this type (sales, contributions or exchanges) are subject to CIT at the reduced rate of 16.5%, provided they fulfil the following conditions: ●● ●● the disposal must be made between 1 January 2006 and 31 December 2008 the acquiring company must undertake to retain, for at least five years, the real estate asset, the shares in the company with mainly real estate assets or the rights transferred to it in the disposal. A recent decree specified that this retention undertaking must be given in the deed of assignment of the real estate assets or rights concerned and a copy of the deed must be attached to the declaration of results of the transferring and acquiring companies for the financial year in which the disposal occurs. In addition, when the acquiring company is a subsidiary of a SIIC (subject to the same regime), this company must also remain subject to the exemption regime for SIICs for at least five years starting from the financial year of the acquisition. 5 International Tax Newsletter – Issue 4 of 2008 Sanction for non-compliance with application conditions Failure to comply with this retention undertaking will make the SIIC benefiting from the disposal liable to a fine of 25% of the disposal value of the real estate assets, the shares in the company with mainly real estate assets or the rights not retained. When the acquiring company is a subsidiary of a SIIC, its exit from the SIIC regime before expiry of the aforementioned five year period makes the same fine payable. Hervé Israël is a partner in Lovells’ International Tax Practice based in our Paris office. n Hervé Israël herve.israel@lovells.com T +33 1 5367 4829 Key Points ●● ●● ●● ●● ●● ●● ●● Exemption regime modified in 2006 to encourage investment by individuals and to include subsidiaries of more than one SIIC Opt in to regime if fulfil listing, main purpose and capital requirements No more than 60% of capital and voting rights can be held by associated shareholders At least 15% of capital and voting rights must be held by persons who each hold less than 2% Exit tax on capital gains on entry to regime New 20% withholding tax on distributions to 10% exempt shareholders Reduced tax rate on disposals of real estate assets and shares in real estate companies to SIIC and subsidiaries. 6 International Tax Newsletter – Issue 4 of 2008 The German REIT regime The German REIT regime was introduced (retroactively) on 1 January 2007. Although it was long awaited by the German real estate industry, until now only two REITs have been listed on the German stock exchange. Thus, one can say that the German REIT has not been a success story so far. Heiko Gemmel provides an overview of the German REIT regime, the taxation of domestic and foreign shareholders of a German REIT and the “exit tax” provisions. CRITERIA FOR OBTAINING REIT STATUS Corporate requirements REIT status may only be obtained by a German or European stock corporation whose share capital has a minimum nominal amount of €15 million. It must have both its statutory seat and its actual place of management in Germany. Its corporate purpose must be generally limited to acquiring and managing domestic and foreign real estate (except domestic residential properties constructed prior to 1 January 2007) for the purpose of letting and leasing. In addition some other activities are allowed, including investment in real estate partnerships, foreign property companies and REIT subsidiaries (created to carry on specific property-related activities other than owning real estate). Note that the REIT may not hold shares in other German corporations that own real estate. Thus a group of German REITs is not possible. On application to the Federal Tax Office, a German stock corporation can be registered as a “pre REIT”. At the end of the fiscal year following its registration the pre-REIT must demonstrate that its corporate purpose fulfils the REIT requirements and that the asset composition requirements (see below) are met. The pre-REIT is subject to corporate income tax and trade tax like every other corporation. The only tax privilege of a pre-REIT is that a transfer of real estate to the pre-REIT is tax beneficial for the seller/transferor (the “exit tax”, see below). This tax benefit is clawed back from the seller or transferor if the pre-REIT status is withdrawn by the Federal Tax Office or if the pre-REIT has not been registered as a REIT within a time period of four years. The REIT must apply for listing on an organised market in an EU or EEA member state within a period of three years following the registration as a pre-REIT. This threeyear period can be extended if extraordinary circumstances exist. Free float requirement and shareholder structure A permanent free float is imposed to provide a fungible indirect investment in real estate assets to small investors. This requirement is at least 25% free float on stock exchange admission and at least 15% free float in the time after admission. No investor may hold directly 10% or more of the shares in a German REIT. In contrast, up to 85% of the shares may be held indirectly. Such (permitted) indirect investment can be made via intermediary corporations or via partnerships. The investor structure can be controlled by using the notification requirements in the German Securities Trading Act, under which a party reaching, exceeding or falling below 5%, 10%, 25%, 50% or 75% of the voting rights in a listed company in any manner must inform the company and the Federal Financial Supervisory Authority (BaFin) in writing within seven days of becoming aware of the facts. In addition to these general rules, investors of a REIT are under obligation to provide notification if they reach the thresholds of 3%, 80% and 85%. This enables the REIT to ensure the minimum free float. 90% distribution obligation The REIT is generally obliged to distribute at least 90% of its profits to its shareholders by the end of the following financial year. The (distributable) profits are calculated using German GAAP in accordance with the German Commercial Code. Capital gains transferred into a reinvestment reserve must not be distributed. Composition of the REIT’s assets and earnings At least 75% of the total assets of the REIT must consist of immovable assets (“asset test”). This asset test is annually applied at the end of each fiscal year (that is, at the balance sheet date). Thus, temporary discrepancies during the fiscal year are not relevant for the asset test. Furthermore, the equity of a REIT must not fall below 45% of the amount of the immovable assets as recorded in the IFRS accounts of the REIT at the end of each fiscal year. At least 75% of the gross income of the REIT must derive from letting, leasing and disposal of immovable assets (“earnings test”). The term “gross income” also includes extraordinary income such as evaluation profits and losses, capital losses etc. In order to determine and monitor the asset and earnings tests the REIT must set up IFRS accounts either for the REIT as a single entity or for the group (if the REIT holds real estate partnerships, foreign property companies or REIT service companies). For the purposes of the REIT Act, the REIT is obliged to use the fair value model under IAS 40 (and not the cost model). TAXATION AT REIT LEVEL Taxation of the REIT Income, including capital gains, of a REIT is exempt from German corporation tax and German trade tax. 7 International Tax Newsletter – Issue 4 of 2008 If the REIT does not adhere to the prescribed asset and earnings tests or falls short of the prescribed 90% profit distribution rate, it does not immediately lose its tax exemption but instead suffers (“penalty”) payments. However, the REIT’s tax exemption ends immediately if either: ●● ●● the stock exchange listing ceases or the threshold to real estate trading is exceeded. If the REIT does not fulfil one of the tests mentioned above over a period of three successive fiscal years, the tax exemption does not end immediately but only after the end of the third fiscal year. Generally, the same is true if less than 15% of the shares of the REIT are in free float or if one investor exceeds the 10% direct share ownership of its shares over a period of three successive fiscal years. Furthermore, if one investor exceeds the 10% direct share ownership he cannot derive any tax advantages from exceeding the maximum investment rate. In particular, such investor shall not benefit from any double taxation treaty provision that requires a 10% or more shareholding. Taxation of the REIT’s subsidiaries By contrast, the permitted subsidiaries of a REIT (real estate partnerships, foreign property companies and REIT service companies) are not tax exempt. According to the general rules, real estate partnerships are transparent for tax purposes. Thus, the profits generated by real estate partnerships are assigned to the REIT to the extent of its shareholding. As the latter is exempt from corporation tax, the income of the partnership is also exempt from corporation tax. However, real estate partnerships themselves can be subject to trade tax. A special trade tax exemption may apply but is subject to specific requirements. In principle, foreign property subsidiaries are fully taxable. However, double tax treaties generally exempt income from foreign real estate from German taxes. Thus, it would be subject to tax in the state where the real estate is located. REIT service companies will be subject to corporation and trade tax in accordance with the general rules. TAXATION OF GERMAN TAX-RESIDENT INVESTORS Private investors As of 1 January 2009 both capital gains on a disposal of REIT shares and distributions paid to private shareholders (that is, investment income) will be subject to a 25% definite taxation (Abgeltungssteuer). Definite taxation means that such income cannot be offset against any expenses and that the tax rate is (in principle) independent from the individual tax rate. In the case of a lower individual tax rate, a tax return may be filed, so that the lower rate is granted. Since the tax exemption at REIT level generally prevents a double charge to tax, this is not true where income of the REIT has already suffered tax, for instance foreign source income or income from REIT service companies. There is currently a legislative initiative in Germany to address this issue. The REIT withholds and accounts for tax as a pre-payment of income tax from dividend distributions at a rate of 25% plus solidarity surcharge. Institutional investors Distributions that a REIT grants its institutional investors are subject to tax, provided they are not entitled to a corporation tax exemption. The general 95% tax exemption (which otherwise usually applies to prevent a double charge to tax) is expressly excluded. The REIT withholds and accounts for corporation tax from dividend distributions at a rate of 25% plus solidarity surcharge. Capital gains from the disposal of shares in the REIT are also subject to full taxation. TAXATION OF NON GERMAN TAX RESIDENT INVESTORS Private investors A foreign private investor is subject to tax in Germany on the distributions that are received from its investment in the German REIT. The REIT will withhold and account for tax at a rate of 25% plus solidarity surcharge to discharge the overseas taxpayer’s liability to tax. However, Germany’s taxation right may be restricted by the application of the relevant double taxation treaty. In this case, overpaid tax must be refunded on request of the taxpayer. Double taxation treaties grant a taxation right regarding dividends to the contracting state in which the distributing company is domiciled. However, this is regularly limited to 15% and is sometimes restricted to 10% (for example, under the treaties with Ireland, India and China). Gains on the disposal of shares in a REIT are treated in the same way as for domestic private investors. However, again, Germany’s taxation right may be limited and often excluded by double taxation treaties. Some treaties, such as those with Spain and the UK, state that income from the disposal of an investment in a corporation company may only be taxed in the contracting state in which the seller is domiciled. 8 International Tax Newsletter – Issue 4 of 2008 The German REIT regime continued… Other treaties may assign taxation rights to the country in which the investment company is domiciled, in particular if the value of the shares is based as to more than 50% directly or indirectly on immovable assets located in Germany. Institutional investors Institutional investors are subject to German withholding tax on dividends distributed by a German REIT. This is subject to the limits imposed by European law provisions or applicable double tax treaties. Under the legislation implementing the European Parent-Subsidiary Directive, German withholding tax is not levied if dividends are distributed to a foreign parent with a minimum shareholding of 10% (as of 1 January 2009) in the distributing subsidiary. The restriction in the REIT legislation preventing direct ownership of 10% or more of the shares in the REIT excludes the Parent-Subsidiary Directive and, in any event, the full tax exemption for the REIT excludes the Directive (since it aims to avoid double taxation on dividends within the EU). As with foreign private investors, double tax treaties limit German taxation rights. The taxation right of the country in which the distributing company is domiciled is limited depending on the size of investment. For example, the US and French treaties provide for a withholding tax limitation to 5% in the case of a holding of at least 10%. The Swiss treaty excludes the German taxation right completely for a holding of at least 20%. However, the prescribed limitation of direct investment in a German REIT to less than 10% of the shares excludes such treaty protection. Gains on the disposal of shares in a German REIT will be subject to tax; the application of double tax treaty relief is the same as for foreign private investors. TAX ASPECTS OF ESTABLISHING A REIT (“EXIT TAX”) To induce a company to transfer its immovable assets to a German REIT or to transform itself into a German REIT an incentive in the form of a tax privilege has been created (the “exit tax”). Only one half of the capital gains derived from the disposal of land and buildings to a REIT is taxable, provided the real estate has been part of the seller’s fixed assets for more than five years (as of 1 January 2007) and the sale takes place in the time between 1 January 2007 and 31 December 2009. This tax privilege also extends to pre-REITs. Note that there are several restrictions to the “exit tax” to prevent abusive structures. Heiko Gemmel heiko.gemmel@lovells.com T +49 (0) 211 13 68 0 Key Points ●● ●● ●● Heiko Gemmel is a Senior Associate in Lovells’ International Tax Practice based in our Düsseldorf office. n ●● ●● ●● ●● ●● German resident listed real estate company with minimum €15 million share capital may register as REIT Minimum free floating share capital of 25% on listing and 15% thereafter Must meet the 75% assets test and the 75% earnings test Must distribute at least 90% of profits REIT exempt from corporation tax and trade tax on income and capital gains Investors subject to 25% withholding tax plus solidarity surcharge Foreign investors may benefit from double tax treaties but maximum 10% shareholding restricts relief 50% exemption from tax on capital gain on transfer to REIT or pre-REIT (“exit tax”) expires 31 December 2009. 9 International Tax Newsletter – Issue 4 of 2008 Italian REITs and REIFs Recent amendments to the tax rules for listed Real Estate Investment Companies (Società di Investimento Immobiliare Quotate, “SIIQ”) and Real Estate Investment Funds (“REIF”) have been introduced to encourage investment in Italian real estate, align the two regimes and prevent abusive practices. Fulvia Astolfi and Laura Laureti examine the most significant corporate features of a SIIQ and its related tax regime and the recent changes to the REIF rules, and provide a comparison of the two investment vehicles. INTRODUCTION With Law no. 296 of 27 December 2006 a new Italian vehicle for investments in real estate, the Listed Real Estate Investment Company, was introduced. The rules of Law no. 296 of 2006 were implemented by Decree no. 174 of 7 September 2007 and Regulation 28 November 2007 of the tax authorities, and have been recently amended by Budget Law 2008 (Law no. 244 of 2007). With regard to REIFs, Law Decree no. 112 of 25 June 2008 (converted into Law no. 133 of 6 August 2008) amended the tax rules on real estate investment funds with the double aim of aligning them to the new SIIQ tax regime (since otherwise the latter would have been less attractive) and preventing abusive practices. ●● ●● Notwithstanding the listing requirement, under certain conditions non-listed companies investing in real estate may also benefit from the “SIIQ regime” (non-listed Real Estate Investment Companies, Società di Investimento Immobiliare Non Quotate, “SIINQ”). In particular: ●● CORPORATE FEATURES OF A SIIQ In order to be eligible for the “SIIQ qualification”, a company must meet the following requirements: ●● ●● it must be resident in Italy for tax purposes, be incorporated in the form of an S.p.A. (joint-stock company limited by shares) and its shares must be listed in an EU regulated stock market or in a regulated stock market of a non-EU country joining the treaty on the European Economic Area the company must mainly carry on a real estate lease activity. This requirement is considered to be satisfied when (i) the real properties that are leased represent 80% or more of the company’s total assets (the “asset test”), and (ii) the revenues deriving from the real estate lease activity are 80% or more of the company’s overall revenues (the “profit test”) none of the shareholders of the company must own, directly or indirectly, more than 51% of the voting rights in the ordinary shareholders’ meeting, nor more than 51% of the dividends rights and at least 35% of the company’s shares must be held by investors each owning no more than 2% of the voting rights in the ordinary shareholders’ meeting and no more than 2% of the dividend rights. ●● ●● ●● like a SIIQ, a SIINQ must be a company resident in Italy and incorporated in the form of an S.p.A a SIINQ must also comply with the “asset test” and “profit test” described above (that is, mainly carry on a real estate lease activity) at least 95% of the voting rights in the SIINQ ordinary shareholders’ meeting and 95% of its dividend rights must be owned by one or more SIIQs both the SIINQ and the SIIQ controlling it must meet the conditions for the domestic tax consolidation. This means that in the case of a SIINQ with participants other than a SIIQ, a SIIQ must in any case own at least 51% of the corporate capital of the SIINQ. TAX REGIME If the above requirements are met, a company can opt for the “SIIQ qualification” so as to be subject to the “SIIQ regime”. This implies a favourable tax treatment but also certain corporate duties, such as – inter alia – the duty of the company to distribute, each tax year, at least 85% of its profits deriving from the real estate lease activity and from its shareholdings in other SIIQs or SIINQs. As to the favourable tax regime applicable to SIIQs and SIINQs, it involves the following taxable items: ●● ●● ●● ●● capital gains deriving from the notional realisation of the real property owned by the company (SIIQ or SIINQ) opting for the “SIIQ regime” (“entrance tax”) income of the SIIQ/SIINQ dividends distributed by the SIIQ/ SIINQ to its shareholders and capital gains from contributions of real properties to the SIIQ/SIINQ. Entrance tax The option for the SIIQ regime will trigger a deemed realisation – at its fair value – of the real property that is subject to the lease activity and owned by the company (SIIQ or SIINQ) at the date of closing of its last accounts prior to the application of the SIIQ regime. Capital gains so realised, net of any capital loss, are taxable in one of two ways: ●● substitutive tax regime – a substitutive tax at 20%, which replaces corporate tax (“IRES”, levied at 27.5%) and regional tax (“IRAP”, generally levied at 3.9%). The taxable basis of this 20% substitutive tax is reduced by tax losses realised by the SIIQ/SIINQ before the application of the SIIQ regime 10 International Tax Newsletter – Issue 4 of 2008 Italian REITs and REIFs continued… ●● ordinary taxation – by choice of the taxpayer, capital gains (net of any capital loss) deriving from the deemed realisation of the real property at its fair value may be subject to ordinary taxation (IRES and IRAP). Income of the SIIQ/SIINQ Under the SIIQ regime, certain income realised by the SIIQ/SIINQ will be tax exempt. The exempt income is business income deriving from the lease of real estate as well as dividends received in relation to shareholdings in other SIIQs or SIINQs attributable to profits realised by the participated company through its real estate lease activity (“tax-exempt activities”). In contrast, any other income realised by the SIIQ/SIINQ through activities other than those described above (“taxable activities”) will be subject to ordinary taxation (IRES and IRAP). Accordingly, regional and corporate taxes will apply, among others, to the sale of real properties, to the sale of shareholdings in other SIIQs or in SIINQs, as well as to dividends deriving from the said shareholdings and corresponding to profits realised by the participated company through activities other than the lease of real estate. SIIQ/SIINQ’s shareholders Dividends Dividends received by investors (other than SIIQs) and deriving from the “tax-exempt activities” are subject to a 20% withholding tax. In contrast, dividends deriving from the “taxable activities”, as well as dividend reserves created before the application of the SIIQ regime, are subject to the ordinary tax regime of dividends. The 20% withholding tax applies as the final tax in relation to Italian and foreign individuals holding the shareholding outside a business activity and to foreign companies with no branch in Italy. Foreign investors resident in “white-list” countries (that is, countries with no privileged tax regime which allow the exchange of information with the Italian tax authorities) will not be entitled to any exemption from the 20% withholding tax (in contrast to the exemption for investors in an Italian REIF). Furthermore, because of the SIIQ/SIINQ tax-exemption (even if it is only partial), doubts exist on the possibility of benefiting from the more favourable treatment of double tax treaties. The 20% withholding tax applies as payment on account of income taxes for Italian companies or Italian branches of foreign companies. This means that the dividends will be included in the business income of the investor, subject to corporate taxation, and the 20% tax levied at source will be set-off against the corporate tax due. Finally, certain Italian investors (such as other SIIQs, Italian pension funds, Italian investment funds including REIFs) are exempt from the 20% withholding tax. In these cases the dividends must be included in the taxable income of the investor and be subject to the related tax regime (11% substitutive tax for pension funds; 12.5% substitutive tax for investment funds; no taxation for REIFs). Capital gains Capital gains deriving from the sale of the SIIQ/SIINQ’s shareholding do not benefit from the participation exemption and will be subject to ordinary taxation on 100% of its amount. In particular, as to Italian corporate investors, the capital gain is fully subject to corporate tax (IRES at 27.5%). Non-Italian investors operating in Italy through a branch are treated as Italian corporate investors. Should the foreign investor have no branch in Italy, the capital gain will not be taxable in Italy provided that the shareholding is “non-qualified” (that is, representing 2% or less of the voting rights or 5% or less of the corporate capital in the participated company). If the shareholding is instead “qualified”, the capital gain will be 100% subject to corporate tax. Contributions of real properties Capital gains realised by the transferor from the contribution of real properties to a SIIQ/SIINQ are subject to ordinary taxation or, upon choice of the taxpayer, to a 20% substitutive tax (which replaces corporate and regional taxes). However, the 20% substitutive tax is only available if the SIIQ/SIINQ owns the real properties contributed for at least three years. As to transfer taxes (VAT, registration, mortgage and cadastrial taxes), the contribution to a SIIQ/SIINQ of a group of real properties that are mainly leased is considered for tax purposes as a contribution of a going concern. Thus it falls outside the scope of VAT, and registration, mortgage and cadastrial taxes are due in their fixed amount (in total €504). It should be highlighted that the Italian tax authorities, with their Ruling no. 389 of 20 October 2008, have expressly stated that a contribution involving real properties held by the transferor on the basis of a financial leasing may benefit from the favourable tax regime. 11 International Tax Newsletter – Issue 4 of 2008 If the above condition is not met, the contribution of real property to a SIIQ/SIINQ will be subject to the ordinary VAT and registration tax, while mortgage and cadastrial taxes are reduced to half. REAL ESTATE INVESTMENT FUNDS Recent amendments of the REIF tax treatment involve: ●● ●● an increase in the rate of the withholding tax applicable to the profits distributions from a REIF to its shareholders, from 12.5% to 20%, in order to equalise it to the withholding tax levied on the profits distributions from a SIIQ the abolition of the tax exemption at the level of the REIF for “family REIFs”. These are REIFs the management provisions of which do not set out the listing of the fund in a regulated market and which have total assets amounting to less than €400 million. The qualification as “family REIF” also imposes one of the following two requirements: −− it has less than 10 quotaholders, unless at least 50% of the quotaholders are institutional investors, individuals or companies owning the REIF’s shareholding within a business activity, or foreign investors resident in “white list” countries −− at least two-thirds of the quotaholders are individuals pertaining to the same family or companies and entities directly or indirectly controlled by the same individuals. If the conditions to qualify as “family REIF” are met, the fund will be subject to a yearly 1% tax levied on the net value of its assets resulting from its periodical accounting statements. This new tax charged at the fund level is added to the ordinary withholding tax levied (at the increased rate of 20%) on the profits distributions to the REIF shareholders. The Italian legislator has therefore introduced a less attractive tax regime when a REIF is used by a restricted number of investors in real estate outside an institutional or business activity. However, if the REIF does not meet the requirements to be deemed a “family REIF”, it will still benefit from favourable tax treatment and, depending on the specific circumstances, may be preferred to a SIIQ for real estate investments. The main advantages of the REIF tax treatment in respect to the new SIIQ regime are the following: ●● ●● a REIF (other than a “family REIF”) is exempt from regional and corporate taxes in relation to any income realised, even if not deriving from the leasing of real estate, and including the gains from the sale of the real estate as well as from the sale of shareholdings in real estate companies profits distributions from a REIF are subject to a withholding tax at the same rate (20%) as the withholding tax chargeable on profits distributions from a SIIQ. However, in contrast to a SIIQ, the REIF has no duty to distribute its profits. Furthermore, foreign investors with no branch in Italy and resident in “white list” countries are entitled to a withholding tax exemption under the domestic tax legislation ●● ●● ●● capital gains deriving from the sale of the REIF shareholding are in principle subject to a 12.5% withholding tax. However, as far as foreign investors are concerned, the gains will not be taxable in Italy if the REIF is listed on a regulated stock market (as occurs for “non-qualified” shareholdings in a SIIQ, see above). Furthermore, even if the REIF is not listed, an exemption from the substitutive tax will be available for foreign investors resident in “white-list” countries as for the “SIIQ regime”, capital gains realised from the contribution of real property to a REIF may be subject, upon option of the tax payer, to a 20% substitutive tax. However, in the case of a REIF, there is no duty imposed on the fund to own the property contributed for a three-year period as for the “SIIQ regime”, the contribution to a REIF of a group of real properties which are mainly leased is treated for tax purposes as the contribution of a going concern, with the consequence that VAT is not due, and registration, mortgage and cadastrial taxes apply at their fixed rate (in total, €504). Notwithstanding the amendments of the REIF tax treatment, therefore, it may still be attractive from a tax point of view to use a REIF for real estate investments. However, the choice between this investment vehicle and the new SIIQ may also be linked to considerations other than the tax regime, such as the fact that by using a SIIQ the investor can maintain “control” of the assets contributed while the management of a REIF must be granted to a special vehicle (the “management company” or “SGR”) other than the shareholders. 12 International Tax Newsletter – Issue 4 of 2008 Italian REITs and REIFs continued… Fulvia Astolfi is head of Lovells’ International Tax Practice and Laura Laureti is a lawyer in Lovells’ International Tax Practice. Both are based in our Rome office. n Key Points ●● ●● ●● ●● Fulvia Astolfi fulvia.astolfi@lovells.com T +39 06 67582322 ●● ●● ●● Laura Laureti laura.laureti@lovells.com T +39 06 67582350 ●● SIIQ tax regime applies to Italian resident company that is listed, with maximum 2% shareholders, or is controlled by a SIIQ Company must mainly carry on a real estate lease activity SIIQ regime imposes tax on notional capital gain on entry to regime Income from lease related activity exempt in hands of real estate company Dividends deriving from lease related activity subject to 20% withholding tax Contributions of real property to real estate company subject to 20% substitutive tax and TOGC VAT treatment for contribution of group of leased properties Increase in rate of withholding tax for REIFs and restriction of relief for family REIFs REIFs have no requirements for property to be leased, to distribute REIF income nor to hold property for three years when property contributed to fund. 13 International Tax Newsletter – Issue 4 of 2008 The Polish alternative to the Real Estate Investment Trust Poland does not have a specific REIT regime, but it is possible to use the tax advantageous investment fund structure to invest in real estate. Zbigniew Marczyk explores this form of investment. INVESTMENT FUNDS – AN OUTLINE OF THE INSTITUTION REIT companies are developing dynamically in many European countries and the Polish real property market has been booming for several years, following Poland’s accession to the European Union in 2004. Despite this, so far the Polish legislator has not decided to introduce regulations of this kind. Therefore, Polish law currently does not provide for a specific institution intended exclusively for investment on the real property market. However, it should be noted that the situation for investors planning to carry out indirect investments in real estate is not that hopeless, as such investments can be successfully carried out with the use of the investment fund structure. An investment fund is a special type of legal person whose business activity exclusively consists in investing funds collected from investors (in exchange for participation units or certificates) in certain securities, money-market instruments and other proprietary rights. Polish investment funds operate under the special Act on Investment Funds dated 27 May 2004. Since the investment fund is, in fact, only a specific collection of financial assets, it is established and later managed and represented by a separate legal entity – an investment fund society, which receives certain remuneration for its activities. As mentioned above, investment funds can be established for the purposes of various investments in numerous financial assets. The investment strategy of most investment funds operating in Poland is based on investment in securities, first of all, shares in other companies and bonds (although the method of investment depends on the investment strategy of the particular fund, which can be more or less aggressive). Since investment funds offer quite a large number of investment possibilities, the funds are also frequently used for investments on the real property market. For investment in real estate, the so-called closedend investment funds are used. As investment in real properties are usually quite capital-intensive, indirect investment through an investment fund makes it possible for a large group of investors to participate in such investments, as in the case of REITs. An unquestionable advantage of investment funds is their special tax status, which is discussed below. TAX STATUS OF AN INVESTMENT FUND An investment fund, being a separate legal entity, is subject to the regulations of the Polish Corporate Income Tax Act. However, by virtue of a special provision contained in this Act, investment funds operating on the basis of the above-mentioned Polish Act on Investment Funds are exempt from income tax in Poland. This means that irrespective of the source of the profits earned by the fund (such as the dividend obtained from a company in which the fund holds shares, or income from the sale of real property held by the fund, or rent from leasing such real property), the income obtained by an investment fund is not subject to taxation. It should be underlined that, as opposed to companies of the REIT type, tax exemption of Polish investment funds does not depend on the necessity to regularly distribute a specific part of the profits by the fund to the investors. In other words, such exemption is applicable irrespective of what part of profit in a given period is paid to the investors, and even whether any profit was distributed in a given period. From this vantage point, Polish investment funds can operate in a more flexible manner than the REIT companies which, in order to obtain tax exemption, have to distribute a specific part of their income to the investors. The use of investment funds for the purpose of investing in real property can be based on both direct investment in real property (that is, acquisition and disposal of real property, deriving income from rents), as well as on investing in shares of SPVs which invest in real property. As specified above, the income obtained by an investment fund within the framework of direct investment in real property is exempted from taxation on the part of the fund. An identical situation occurs with regard to the income obtained by the fund from investing in real property through SPVs, so that the dividend obtained from such companies by the fund is exempt from taxation on the part of the fund. What is more, as an example of a specific structuring of the investment, investing through an SPV also enables the SPV to use tax optimisation procedures. Assuming that an SPV is established as a limited joint-stock partnership (in which an investment fund holds 99% of shares, for example), such partnership will be transparent for the purposes of income tax. This means that the income received by the partnership will not be taxed on the part of the partnership itself, but on the part of its shareholders. Bearing in mind, however, that the main shareholder of an SPV is the investment fund, exempt from income tax, the income received from the investment in real property through an SPV will also not be taxed on the part of the fund (a small part of the partnership’s income would only be taxed on the part of the general partner who, for this reason, should have as minimal an interest in the company as possible). 14 International Tax Newsletter – Issue 4 of 2008 The Polish alternative to the Real Estate Investment Trust continued… The income obtained by the investment fund (be it from direct investment in real property or through a limited joint-stock partnership being an SPV), will be basically taxed only at the moment when the profit is paid to the investors (most frequently as a result of redemption of their certificates or fund participation units). It should be borne in mind that in the case of foreign investors investing in Polish investment funds, additional tax optimisation could be considered to reduce taxation in Poland. The manner of taxing the income received by such investors from Polish funds may depend, in any case, on the provisions of a relevant double taxation treaty concluded between Poland and the country of tax residence of a given investor (Poland has concluded over 80 such double taxation treaties). As follows from the above analysis, even though Poland has so far not implemented specific regulations concerning REIT companies, the institution of an investment fund – already existing in Poland – makes it possible to invest in real property in a tax-advantageous way. Such a structure has both specific advantages as compared to a typical REIT such as no necessity to regularly distribute the profits, as well as specific disadvantages such as incurring additional costs connected with remuneration paid in favour of the investment fund society managing such fund. Nevertheless, despite the lack of a specific regulation for the real-property funds in Poland, the existing regulations concerning investment funds make it possible to reach the principal objectives, which are tax advantageous planning of investments in real property, as well as ensuring a participation in such a fund by a wide group of investors. Zbigniew Marczyk is a Senior Associate in Lovells’ International Tax Practice, based in our Warsaw office. n Zbigniew Marczyk zbigniew.marczyk@lovells.com T +48 22 529 2 954 Key Points ●● ●● ●● ●● Poland does not have a specific REIT regime but closed-end investment fund structure can be used instead Profits of investment fund not subject to Polish tax Investment through SPV by investment fund transparent Only tax is on distributions received by investors in investment fund and no requirement to distribute before final redemption of units in fund. 15 International Tax Newsletter – Issue 4 of 2008 Real estate investment corporations and real estate investment funds in Spain Lucía Vázquez and Miguel Baz describe the REITs regime and the recent draft of the Bill of Law regarding Spanish REITs, the Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario (“SOCIMIs”), published by the Spanish Ministry of Economy and Tax. Spanish tax legislation establishes two vehicles for collective investments in real estate: the Real Estate Investment Corporation and the Real Estate Investment Fund (referred to in this article as “REITs”). REITs are regulated by the Collective Investment Institution Law (Law 35/2003, of November 4) and their tax regime is basically regulated in the Spanish Corporate Income Tax Law. REITS REGIME REIT’s incorporation must be authorised by the National Securities Exchange Commission (“CNMV”), so that the listing of REITs on the CNMV Administrative Registry is mandatory. REITs can be incorporated under two legal forms: corporations and funds. A Real Estate Investment Corporation must be organised as a company that must have the legal form of a limited company (that is, “SA”). By contrast, a Real Estate Investment Fund is a structure without legal personality similar to a “trust” but with special features. The initial capital or investment of each must amount to €9 million and the management of both entities must be in Spain. The company or fund must have a minimum of 100 shareholders and there is no difference between resident and non-resident shareholders. The capital may be divided into different investment categories. In this case, the minimum number of shareholders for each category of investment should not be less than 20 and the minimum capital would have to be €2.4 million. REITs are obliged to invest in urban real estate for rental activities. In this regard, at least 50% of the assets must consist of residential real estate and/or residences for students or elderly people. Such real estate may be located in Spain or elsewhere. A minimum investment period of three years is required. Additionally, REITs which hold residential property development for rental could apply the special tax regime. However, some additional requirements have to be met in this case. The investments may not exceed the 20% threshold and according to this threshold, 20% of the total assets of this type of REITs have to be rented or offered for rental during a minimum seven year period. Finally, no minimum percentage of profit distribution is required. TAX TREATMENT AT THE LEVEL OF REIT Corporate Tax Profits and capital gains are subject to the Spanish Corporate Income Tax (“CIT”) at the tax rate of 1%. Taking into consideration such favourable special tax regime, REITs cannot benefit from regular tax credits. Other taxes There is an exemption from Capital Duty (1%) on incorporation, capital increase, mergers or spinoffs. Additionally, there is a 95% exemption from Transfer Tax and Stamp Duty for residential real estate acquired for rental purposes. TAX TREATMENT AT THE SHAREHOLDER’S LEVEL Spanish resident shareholder ●● Corporate shareholder and permanent establishments (“PEs”) Profits distributed by REITs and capital gains derived from the sale of REITs shares must be included in the shareholder’s taxable base which is subject to the general Spanish CIT rate (30%). Tax credit for avoiding double taxation is not applicable. ●● Individual shareholder Capital gains and profit distributions are taxed at the 18% rate. However there is an annual exemption for the first €1,500 of profit distributions income. Non-resident shareholder In this case, it is necessary to analyse whether or not REITs are entitled to be protected by Double Tax Treaties and if the Parent-Subsidiary Directive would be applicable. Firstly, from a Spanish tax standpoint and as a general rule, REITs could be entitled to apply Treaty protection since a Treaty applies to resident persons in one or both Contracting States. In this sense, the term “person” includes an individual and a company and the term “company” would usually mean any body corporate that is considered as such for tax purposes. For Spanish CIT purposes, REITs are regarded as entities and they are subject to CIT. For this reason, REITs should be entitled to Treaty protection. If this is the case, profit distributions should in principle be taxed at the corresponding reduced tax rate established by the Treaty for dividends. On the other hand, capital gains deriving from the sale of REITs shares should not be subject to Spanish taxation. However, capital gains may be taxed in the country where the REIT is resident if and to the extent there is a “real estate company” anti-abuse clause or a similar clause in the relevant Treaty (that is, entities whose real estate constitutes more than 50% of their total assets are considered real estate companies). In such a case, if more than 50% of the assets of the REIT consisted of real estate located in Spain, the capital gain could be taxed in Spain. 16 International Tax Newsletter – Issue 4 of 2008 Real Estate Investment Corporations and Real Estate Investment Funds in Spain continued… Notwithstanding the above rules, the new Commentaries to the OECD Model Tax Convention (2008 update) have dealt for the first time with the tax treatment of REITs in connection with Treaties. In this regard, the possibility is foreseen of introducing several rules in the Treaties in order to establish a special tax regime for REITs and their shareholders In particular, in relation to profit distributions, the Contracting States are allowed to distinguish between small investors with an interest lower than 10%, who may benefit from the reduced rate provided by the Treaty, and large investors, who would not benefit from any reduced rate. As regards capital gains, the aforementioned anti-abuse clause could only be applicable to large investors. Secondly, the following requirements have to be met for the ParentSubsidiary Directive to apply: ●● ●● ●● distributing and recipient entities must take one of the forms listed in the Annex to the Directive. Spanish entities must be entities with their own legal personality, public bodies which operate under private law or other entities constituted under the Spanish legislation and subject to Spanish CIT entities must be considered resident in the corresponding EU Member State for tax purposes and not considered resident for tax purposes outside the EU entities must be subject to Spanish CIT without being exempt or having the option of being exempt. REITs (whether incorporated as corporations or funds) fulfil all the above requirements since they are resident in Spain for tax purposes and are taxable entities subject to CIT. If the Parent-Subsidiary Directive is applicable, profit distributions should not be subject to withholding tax in Spain provided that the investor holds an interest of, at least, 10% (as from 1 January 2009) for an interrupted period of one year. Finally, if neither a Tax Treaty nor the Parent-Subsidiary Directive is applicable, the Spanish tax treatment of a REIT’s foreign shareholders would be as follows: ●● ●● Corporate shareholder not acting in Spain through a PE – Capital gains and profits distributed by REITs are subject to Spanish taxation at 18% tax rate Individual shareholder – Capital gains and profits distributed by REITs are subject to Spanish taxation at 18% tax rate. However, there is an annual exemption for the first €1,500 of profit distributions to individual EU residents. SOCIMIS REGIME As mentioned above, the draft law regulating real estate investment companies has recently been presented by the Spanish government. This new regime would be an alternative to the existing one. SOCIMIs must be limited companies (“SA”) which must be listed on a regulated Spanish market or that of a European Union or European Economic Space Member State. The share capital of a SOCIMI must amount to €15 million, and they will only be permitted to issue a single class of shares. Basically, the purpose of a SOCIMI must be the acquisition and development of urban real estate assets to be rented out or the holding of participations in the capital stock of other SOCIMIs or of other similar entities not resident in tax havens. Additionally SOCIMIs may carry out other ancillary activities. At least 85% of their total assets must consist of urban property used for leasing located in Spain or in countries or territories with which there exists an effective exchange of tax information, and investment in other SOCIMIs or similar entities (that is, foreign REITs). SOCIMIs will be obliged to directly own at least three real estate properties, none of them representing more than 40% of its total assets. As regards profit distributions, by contrast to the existing REITs regime, SOCIMIs (and other qualifying Spanish subsidiaries) will be obliged to distribute: ●● ●● ●● 100% of dividends distributed by qualifying subsidiaries and from non-qualifying activities at least 90% of the profits derived from qualifying rental activities and other ancilla