REPORTING

What would an
‘ideal REIT’ look like?

The flowering of REIT regimes in Europe is not the result of c­ oncerted

action by European institutions or governments. It is rather the
fruit of successful lobbying by industry groups and the competitive
­pressure that existing, and announced, REIT regimes exercise on the
political will of authorities in various European countries.

T
he general framework of the vari-
ous REIT regimes is to a large extent
similar, meaning that a certain Euro-
pean standard is developing. At the same
time there are still many technical differ-
ences among the various regimes. Many of
the requirements for benefiting from a given
REIT regime are motivated by governments’
fear of abuse and their concerns about the
loss of tax base in the international context,
and not primarily focused on the question
of how to create a flexible, transparent and
competitive regime.
In the aftermath of the financial crisis, gov-
ernments of the various European countries
start to understand that the fear of abuse
of REIT systems and leakage of tax base

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from the country is often the main reason
why a given REIT system will not ‘take off’
sufficiently, or will slow down. Legislators
should spend more time on the elements
that should make a REIT regime successful,
both nationally and internationally. A well
thought out system, preserving the right bal-
ance between having a competitive EU law-
compliant REIT regime and the protection
of the local tax base, should be a feasible
objective for European Governments. Too
many complicated tax and regulatory rules
run the risk of killing the goose that laid the
golden egg..
A well-balanced REIT regime may result in
higher standards of management and report-
ing, a more stable and robust property sec-
tor, a regular and reliable source of tax rev-
enue for the government and a liquid form
of investment in real estate for all. Also, at
a time when the European Commission is
taking steps to improve regulation, increase
transparency of the investment markets and
reduce the risk of future economic crisis,
positive steps to grow the public property
markets would go a long way to attain these
goals.
The ideal REIT regime
There is no standard definition of what a
REIT is. The definition used by the OECD is:
“A publicly listed property investment com-
panies that own, operate, develop and man-
age real estate assets for the purposes of
obtaining returns from rental income and
capital appreciation. REITs obtain special
‘tax-transparent’ status in return for meet-
ing certain obligations (high distribution
requirements, gearing restrictions, restric-
tions on development etc)”.
Too many complicated tax and regulatory rules run
the risk of killing the goose that laid the golden egg.
Global REIT Survey SUPPLEMENT
What would an ‘ideal REIT’ look like?
In defining the ideal European REIT regime,
I first take a look at the main characteristics
that form part of the general framework of a
REIT: 1) legal form 2) listing and sharehold-
ing conditions, 3) the activity or asset test,
4) leverage restrictions, 5) distribution lim-
its, 6) the conversion charge and the inter-
national outlook.
Legal form
The REIT should preferably have the form of
a stock company with limited liability that
is recognisable internationally (and not the
form of a trust, or the like).
Listing and shareholders conditions
There is always fear that REIT regimes will
be abused for private structures. The sim-
plest remedy for this is to impose a list-
ing requirement. All other shareholders’
requirements (like in Germany, UK and the
Netherlands) are often substantially com-
plicating the regime. The main reason for
most of these shareholders’ requirements
is to avoid that a limited group of (foreign)
private shareholders will be able to receive
REIT profits at a very low tax rate (or free of
any tax in the country of residence of the
REIT).
Scope of activities
A REIT regime should, of course, be restricted
to property investment activities, albeit
invest in a large spectrum of property assets.
The new German and UK regimes are still
suffering from too many regulatory rules
and restrictions (complicated asset tests,
etc). For example, in both the UK and Ger-
many, there are serious restrictions to the
holding of properties via partly owned sub-
sidiaries and partnerships. In the Nether-
lands, the scope of permitted activities is
still defined much too narrowly (only very
passive property investment is allowed),
blocking Dutch REITs to conduct certain
asset management activities.
In addition to property investments, a REIT
should be able to conduct certain related
businesses (cleaning company, project
development activities also for third parties,
etc). These activities should, of course, not
benefit from the ‘tax flow through’ REIT )
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REPORTING
treatment. The US concept of a ‘taxable REIT
subsidiary’ has proven to be successful and
is followed by various European countries
(in Germany, France and the UK it is possi-
ble to conduct taxable commercial activities
within certain limits).
Leverage
Many countries impose specific REIT lever-
age restrictions, to avoid the distributable
profit being eroded (which would reduce
the withholding tax claim on the distribu-
tion of profit). Today, you can probably say
that the finance restrictions have protected
REITs against excessive leverage which put
many non-REIT property funds in trouble as
a result of the financial crisis. It is probably
fair to say that the market expects that REITs
observe certain fairly conservative leverage
restrictions.
Distribution obligation
As a REIT is not paying corporate income
tax, it is important that its profits are distrib-
uted to the shareholders (where these profits
will be subject to tax). This is an incremental
part of the tax philosophy of a REIT. How-
ever, it should not be a requirement that a
REIT is obliged to distribute all of its cash.
For example, in the Netherlands, a REIT is
obliged to distribute 100% of its current profit
(excluding capital gains), while at the same
time, it is virtually impossible to depreciate
on immovable property! A distribution obli-
gation that covers around 80% of the distrib-
utable profit would be a better system.
Conversion regime
Most European countries have introduced a
special conversion regime (also referred to
as ‘exit tax’): allowing a company to con-
vert to a REIT and pay tax on the latent cap-
ital gains at a reduced rate of profit. France
even introduced an innovative system
whereby corporate groups are able to trans-
12 www.epra.com
“Achieving the right balance between a competitive
EU law-compliant REIT regime and the appropriate
level of protection of the local tax base is within the
grasp of European governments,” say Ronald Wijs.
fer real estate to a SIIC and pay tax on the
capital gain at half the normal tax rate (con-
version regime extended to transfers to
REITs). Such a sophisticated conversion
regime is an important tool to promote the
growth of the listed REIT sector. The UK
and Germany have followed France in this
respect.
International investments
A weakness in certain European regimes is
the lack of allowance for overseas invest-
ments. Many regimes are based on the idea
that a local REIT will only invest in local
properties and uncertainties arise as soon
as investments are made in foreign prop-
erties (which is often done via corporate
structures). The German, the UK and also
the French regimes seem to suffer from this
problem to a certain extent.
EU-compliant REIT tax system
As mentioned before, governments fear
that a more flexible REIT regime will open
the door to the erosion of the domestic tax
basis:
• foreign REITs being able to repatriate
property income free of local tax to their
home country;
• REITs distributing dividends to foreign
shareholders free of withholding tax.
In other words, there is fear that a too lenient
REIT regime would allow foreign REITs own-
ing local real estate or foreign shareholders of
a local REIT to extract income and gains from
real estate without paying any local tax.
The EPRA Taxation Committee designed
recommendations for a REIT tax treatment
that would allow national governments to
remove some of the anti-abuse limitations
that are hindering the growth of REITs and
at the same time giving security about the
revenue basis for local governments.
 Global REIT Survey SUPPLEMENT

What would an ‘ideal REIT’ look like?

The idea is not to create a uniform European
regime, but rather a practical concept con-
sisting of certain recommendations that EU
Member States could adopt and implement
in their law. The recommendations are built
on two key features:
• EU Member States could agree on a bi-
lateral or multilateral basis on certain
minimum criteria that must be satisfied
in order to be recognised in the other
country as a REIT. That is, a system of
mutual recognition based on certain min-
imum criteria is developed between cer-
tain Member States. These criteria should
basically concern the key characteristics
mentioned above (the typical ‘REIT crite-
ria’, like shareholders’ conditions, lever-
age restrictions, etc).
• For cross-border investments, an allocation
system is implemented for the withhold-
ing of tax by REITs. This system provides
for a fair allocation of the tax between the
situs state (where the property is located)
and the Member State where the REIT is
a resident. The European countries adopt-
ing the system of ‘mutual recognition’ may
also consider to amend their bilateral tax
treaties, so as to safeguard that foreign
shareholders of a domestic REIT always
pay a minimum withholding tax (at a rec-
ommended rate of 15%).
In essence, by agreeing with other Member
States on a minimum set of conditions and
a clear system for the collection and alloca-
tion of tax, certain uncertainties about the
tax basis will no longer exist. This will allow
Member-States to ‘put down their fences’,
thus helping their REITs to grow and expand
cross border. n

About the author

Ronald J.B. Wijs (1961), tax lawyer, has a

broad experience in European cross-border
corporate tax planning, in particular involv-
ing the Benelux countries, France, Germany and Switzerland. He focuses on
structuring of European private equity funds and investments for both Euro-
pean and American clients. He has broad experience in the field of struc-
turing and advising European property investment funds, in the private as
well as the listed sector (REITs). Furthermore, he regularly advises pension
funds in respect of the structuring of activities and investments.

He has worked at the Geneva office and headed the Paris office. Ronald is
a frequent speaker at seminars. He is a member of the International Fiscal
Association (IFA), the International Bar Association (IBA) and the Tax Trans-
parency Committee of the European Public Real Estate Association (EPRA).
He has written various articles on topics related to private equity and prop-
erty investment funds.

Ronald J.B. Wijs Tax Lawyer ronald.wijs@loyensloeff.com

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