REIT Vademecum

Transcription

1 REIT Vademecum

2 GERMAN REAL ESTATE INVESTMENT TRUST ( G-REIT ) Accounting In addition to the G-REIT s obligation to prepare individual accounts for the corporation and its subsidiaries according to the German Commercial Code ( HGB ), the G-REIT must establish individual or consolidated accounts in accordance with IFRS ( International Financial Reporting Standards ). The additional preparation of accounts according to IFRS shall provide international investors with economic data established according to an internationally accepted accounting standard. Asset structure requirements As G-REITs shall primarily engage in the acquisition and management (leasing and letting) of real estate, at least 75% of a G-REIT s assets, as determined by IFRS, must consist of real estate. Participation in REIT service corporations is limited to 20% of a G-REIT s assets. Noncompliance with these requirements could lead to tax sanctions against the G-REIT. Closed-end real estate fund An alternative investment form that allows investors the indirect investment into real estate. Closed-end real estate funds are partnerships, and as such they are tax transparent according to the German Income Tax Act ( Einkommensteuergesetz ). Shares in the partnership can normally only be sold on the secondary market, which is frequently quite illiquid. Apart from the legal structure, economically, the main difference between closed-end real estate funds and G-REITs is the closed-end real estate fund s lower fungibility of shares and a different risk/return-profile. Corporate form G-REITs must be stock corporations ( Aktiengesellschaft ) under the German Stock Corporation Act ( Aktiengesetz ). Like other stock corporations, G-REITs are bound by all applicable provisions governing stock corporations, such as the German Commercial Code ( HGB ) and security trading laws. 2

3 Double tax treaty ( DTT ) International treaties between Germany and other states formed with the purpose of avoiding taxation of the same tax object both in the state of source and in the state of residence ( double taxation ). Most DTTs limit the tax rate on profit distributions in the state of source, generally to 15%. If a shareholding exceeds a certain threshold specified in the relevant DTT (the lowest threshold presently is 10%), the tax rate allowable under the DTT can be even lower than 15% ( international affiliation privilege ). In order to avoid circumvention of the taxation of a G-REIT s profit distributions by the application of the international affiliation privilege, the REIT-Gesetz limits individual ownership of shares in a G-REIT to less than 10%. Exit tax Tax privilege created to promote the formation of G-REITs and the sale of real estate to G-REITs. When a corporation becomes eligible for the REITspecific tax privilege, all hidden reserves have to be disclosed. Similarly, a sale of real estate to a Pre-REIT or G-REIT might result with the seller realizing hidden reserves. The disclosure and realization of hidden reserves increases the taxable income and thereby the tax burden of the selling entity or converting corporation. Under the exit-tax regime, only 50% of the hidden reserves included in the real estate realized by the sale or conversion are taxable, provided that the sale or the conversion occurs after December 31, 2006 and before January 1, Additionally, in the case of a sale of real estate to a Pre-REIT or G-REIT, the seller must have owned the real estate for a minimum of five years as of January 1, In case of a conversion of a corporation into a G-REIT, the real estate must have been acquired or constructed by the converting corporation prior to January 1, In order not to lose the exit-tax privilege the Pre-REIT/G-REIT has to comply with certain minimum holding requirements with regard to the real estate after its acquisition or conversion. Fair value The market value of an asset. The fair value of an asset can differ from the value assigned it on the company s balance sheet (its book value ). In the REIT Vademecum 3

4 event that the fair value of an asset exceeds its book value, such difference constitutes hidden reserves of an asset. The fair value is usually the basis for valuing assets pursuant to IFRS. Federal Central Tax Office ( Bundeszentralamt für Steuern ) The Federal Central Tax Office ( Bundeszentralamt für Steuern ) is a German tax authority with diverse duties and responsibilities in the area of national and international taxation. The supervision of G-REITs is one of these duties and responsibilities. Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht / BaFin ) The Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht, in short BaFin ) is a German authority that supervises the German financial industry and the securities trading with the purpose of ensuring the efficiency, integrity and stability of the German financial system. With respect to securities trading, the BaFin shall prevent insider trading and other malpractices and therefore has to be notified of, inter alia, certain securities transfers. Therefore, stock corporations have to inform the BaFin in the event that certain shareholding thresholds are reached ( notification of shareholding thresholds). Flat-rate withholding tax ( Abgeltungsteuer ) Beginning on January 1, 2009, a 25% flat-rate withholding tax will apply to, inter alia, dividend distributions that accrue after December 31, 2008 and to capital gains earned by the disposal of shares that are acquired after December 31, 2008 (there exist various exceptions to this time range). The new flat-rate withholding tax applies if the relevant shares are owned as private property; it does not apply if they are owned as business assets. German Commercial Code ( Handelsgesetzbuch / HGB ) G-REITs are subject to the German Commercial Code ( Handelsgesetzbuch, in short, HGB ), which sets forth the accounting principles of business entities, such as stock corporations. The accounting principles of the 4

5 HGB adhere to a principle of precaution that prohibits the capitalization of assets at a higher value than their acquisition costs. This avoids the disclosure of unrealized profits but might lead to hidden reserves. Balance sheets prepared according to the HGB will be used as the basis for taxation and for the calculation of the minimum dividend distribution requirement according to the REIT-Gesetz. G-REIT Abbreviation for German Real Estate Investment Trust. Established primarily by the REIT-Gesetz effective January 1, The REIT-Gesetz sets forth the legal framework that a G-REIT must adhere to regarding, inter alia, corporate form, minimum share capital, listing requirement, and minimum dividend distribution. As of September 1, 2008, two G-REITs were listed with the German stock exchange alstria office REIT-AG and Fair Value REIT-AG with an aggregate market capitalization of approximately 600 million EUR. In Germany, the G-REIT constitutes an alternative to other forms of indirect investment in real estate such as closed-end real estate funds, open-end real estate funds and real estate stock corporations. The foremost difference between these forms of indirect investment and the G-REIT is their different risk/return profile. As of September 1, 2008, about 15 corporations have either qualified for the Pre-REIT-status or expressed their intention to qualify as a G-REIT in the future. Hidden reserves The difference between the book value and the higher fair value of an asset. In the event that an asset with a fair value higher than its book value is disposed of, the hidden reserves are realized as capital gains and have to be taxed. The taxation of hidden reserves realized in the course of a sale of real estate to a Pre-REIT/ G-REIT or through the conversion of a corporation into a G-REIT will be reduced under certain circumstances by the exit tax. In the event that the G-REIT disposes of real estate and thereby realizes hidden reserves, any capital gains are tax exempt at the corporate level due to the tax privilege. REIT Vademecum 5

6 IFRS ( International Financial Reporting Standards ) Accounts prepared pursuant to the IFRS serve primarily to deliver information to potential investors to help them make investment decisions, as opposed to the HGB balance sheets, which are primarily established for creditor protection purposes. IFRS tries to make accounts more transparent, e.g., by allowing the capitalization of assets at their fair value. Regarding most of the REIT-specific thresholds (e.g., asset structure requirements, income requirements, or leverage) the REIT-Gesetz provides for the obligation to value investment real estate by its fair value according to IFRS. Income requirements At least 75% of a G-REIT s earnings, as determined by IFRS, must be derived from its primary activity the acquisition, managing (leasing and letting), and disposing of real estate. If the G-REIT holds shares in a REIT service corporation, the income from such REIT service corporation may not exceed 20% of the G-REIT s total income. Infringements might lead to tax sanctions against the G-REIT. Land tax ( Grundsteuer ) Land tax ( Grundsteuer ) is a annual tax on the ownership of real estate and buildings. Tax base is the assessed value ( Einheitswert ); the tax rate ranges from 2.6 for family homes to 6.0 for agricultural properties. G-REITs are not exempt from land tax. Leverage A G-REIT s real estate assets must be backed with at least 45% equity (both numbers determined by IFRS). A G-REIT s non-real estate assets can be fully debt-financed. Infringements might lead to tax sanctions against the G-REIT. Limitation on maximum shareholding No single shareholder may directly hold a share in the G-REIT of 10% or more. This limitation shall ensure that foreign investors cannot invoke a double tax treaty, and its attached international affiliation privilege, thereby 6

7 reducing German withholding tax under the general provisions of double tax treaties from 10%-15% to 5% or even 0% under the international affiliation privilege. A shareholder may indirectly hold more than 10% in the G-REIT by interposing several subsidiaries. On a corporate level, a continuous breach of this limitation can lead to severe tax sanctions, which might indirectly be detrimental to shareholders. As minority shareholders have only limited influence on the G-REIT s compliance with this restriction, the REIT- Gesetz requires that a G-REIT s articles of association include a compensation clause for shareholders with a share of less than 3% in the company s voting rights. On a shareholder level, the REIT-Gesetz restricts shareholders rights to shareholdings below 10%. Limitation on the company s objectives As the REIT-Gesetz considers the purpose of a G-REIT to be primarily the leasing and letting of real estate, a G-REIT s articles of association must limit its objectives to the acquiring, holding, managing (leasing and letting), and disposing of immovable assets as well as to the participation in real estate partnerships and real estate companies inclusive of REIT service corporations. Excluded from the permitted scope of the company s objectives are investments in residential real estate built prior to January 1, 2007 and trading in real estate. Listing requirement All shares of a G-REIT must be listed with an organized market in a European Union member state or in another treaty state of the European Economic Area. Market capitalization Economic size equal to a stock corporation s number of shares outstanding multiplied by the current price per share. Minimum dividend distribution A G-REIT has to distribute to its shareholders at least 90% of its annual profits, as determined under the German accounting principles provided for in the HGB. Infringements might lead to tax sanctions against the G-REIT. REIT Vademecum 7

8 Minimum freefloat In order to secure liquid markets, the REIT-Gesetz provides that at least 15% of a G-REIT s shares must be held by shareholders with direct or indirect voting rights in the G-REIT s of less than 3%. At the time the G-REIT is admitted to the stock exchange, this threshold has to be 25%. Minimum holding requirement The exit tax can be revoked retroactively, e.g., if the Pre-REIT/ G-REIT does not hold the property acquired under the exit-tax privilege for at least four years. In such event, the Pre-REIT/G-REIT, as the acquirer of the real estate, will be liable vis-à-vis the tax authority and alongside the disposer of the real estate for any tax that results from the retroactive loss of the exit tax. Minimum share capital The minimum share capital of a G-REIT is EUR 15 million. Net Asset Value ( NAV ) A parameter for the valuation of an entity s assets. NAV is the market value of the assets minus the value of the liabilities. In the event that the fair value of a real estate asset is below its NAV, the difference is called the NAV Discount ; if it is higher, it is called the NAV Premium. Notification of shareholding thresholds As the G-REIT is subject to the German Securities Trade Act ( Wertpapierhandelsgesetz ), it is obligated to notify the Federal Financial Supervisory Authority ( BaFin ) if a single shareholder reaches the following shareholding thresholds: 5%, 10%, 25%, 50%, and 75%. In addition, the REIT-Gesetz sets forth additional notification thresholds of 3%, 80%, and 85%. Open-end real estate fund Open-end real estate funds are an alternative investment form used to indirectly invest in real estate. Open-end real estate funds are treated as tax transparent. The activities of capital investment companies are subject to the regulations of the Code on Investments ( Investmentgesetz ), which sets 8

9 forth certain regulations concerning a fund s structure, permitted investments, and so on. Shares in a capital investment company can be redeemed to the capital investment company in exchange for the redemption price. The main difference between this form of investment and the G-REIT is the open-end real estate fund s limitation on investments set forth in the Code on Investments and the different risk/return-profile. Pre-REIT The first stage of a G-REIT, which is subject to the REIT-specific exittax provision without enjoying the full tax privilege of a G-REIT. In order to qualify as a Pre-REIT, a stock corporation needs to have its statutory seat in Germany and must be registered with the Federal Central Tax Office ( Bundeszentralamt für Steuern ) as a Pre-REIT. At the end of the fiscal year following the year of registration, and at the end of each subsequent fiscal year, a Pre-REIT must comply with the REIT-specific legal requirements regarding limitation on the company s objectives, asset structure requirements, and income requirements. The Pre-REIT must apply to the Federal Central Tax Office ( Bundeszentralamt für Steuern ) to be admitted to the stock market as a G-REIT within three years after its registration. Upon request, this application period can be extended for one additional year. In the event that the Pre-REIT does not timely comply with the requirements for registration as a G-REIT, the Pre-REIT will lose its exit-tax status. Prospectus A precondition for the listing of shares of G-REITs on the regulated market of a German stock exchange or an organized market in another member state of the European Union is the filing of a prospectus and its approval by the Federal Financial Supervisory Authority ( BaFin ). The prospectus shall give potential investors sufficient information about the G-REIT to gain insight regarding the company s structure, its corporate bodies, its assets and liabilities, its financial and market situation, and any potential risks and chances, as well as information about shareholders rights. REIT Vademecum 9

10 Real estate stock corporation ( Immobilien-AG ) An alternative investment form that allows indirect investment in real estate. In contrast to open-end real estate funds, the real estate stock corporation is not tax transparent and may invest in real estate without being limited in its investments by the Code on Investments ( Investmentgesetz ). The main difference between the real estate stock corporation and the G-REIT is the real estate stock corporation s lack of tax privilege and a different risk/return-profile. Registered name The name of a G-REIT must include either the term REIT-Aktiengesellschaft or REIT-AG. These names are protected by law; corporations other than G-REITs may not bear this name. Registered office A G-REIT must have its registered office as well as its place of management in Germany. This ensures that G-REITs are German tax residents and that they are not resident abroad for the purpose of a double taxation treaty. REIT Abbreviation for Real Estate Investment Trust. From the investor s perspective, a REIT constitutes an investment form for the indirect investment in real estate and has been established in more than 20 international jurisdictions since the 1960s. In Germany, the G-REIT was introduced in 2007 through the REIT-Gesetz. One internationally common characteristic of REITs is that they are treated as tax-transparent or tax exempt entities so that profits and dividends are taxed at the investors level. In order to qualify for this tax privilege on a company level, a REIT usually has to comply with certain legal requirements, such as investments into real estate, source of income, and minimum dividend distribution to investors. 10

11 REIT index The Deutsche Börse AG has introduced two indices for the REIT segment: (i) the RX REIT All Share Index for all domestic and foreign REITs listed in the General Standard or Prime Standard segment of the Deutsche Börse AG, and (ii) the RX REIT Index showing the performance of the 20 largest REITs listed in the Prime Standard segment of the Deutsche Börse AG. REIT service corporation A G-REIT can offer real estate-related services to third parties only by forming a REIT service corporation, 100% of which must be held by the G-REIT. A G-REIT s investment in a REIT service corporation is subject to the limitation on maximum shareholding and income requirements. REIT-Gesetz Gesetz über deutsche Immobilien-Aktiengesellschaften mit börsennotierten Anteilen, in short, REIT-Gesetz. This law is the major legal source for G-REITs and was enacted in June 2007, retroactive to January 1, The legislative purpose for the introduction of the G-REIT was to promote the attractiveness of the German capital markets internationally by introducing an internationally compatible investment form that has proven successful in other countries for more than 40 years. In connection with the exit-tax provision, G-REITs also serve as an investment vehicle for German companies to mobilize their real estate and thereby increase their equity. Residential real estate Real estate that was built before January 1, 2007 and serves a predominantly residential purpose (meaning that the real estate is used more than 50% permanently and privately for residential purposes). G-REITs may not invest in residential real estate due to the G-REIT s limitation on the company s objectives. Risk/return profile An analysis model for investments that examines the return of an investment in comparison to its volatility. Broadly speaking, the model assumes that REIT Vademecum 11

12 higher investment returns correlate with higher volatility or risk of financial loss. Economic models suggest that the risk/return profile of G-REITs will rank between the risk/return profile of direct investments in real estate or open-end real estate funds with a relatively low return combined with a low volatility on the one side, and the risk/return-profile of real estate stock corporations or so-called opportunity funds with a high return combined with a high volatility on the other side. Therefore, the risk/return profile of G-REITs might be unique in comparison to alternative investment forms. Shareholder taxation Corresponding with the tax privilege of G-REITs at the corporate level, all dividends and profits from disposal of shares in G-REITs are fully taxed at the shareholder level. Dividends are deemed to be profits from capital investments, not from leasing. Capital gains from disposal of a private shareholding that at no time during the previous five years equaled or exceeded 1% are taxable only if they were held for less than one year. If the shareholder held at least 1% of the shares in a G-REIT at any point in time during the previous five years or if the shares were acquired as business assets, capital gains earned by the sale of the shares are always fully taxable. Neither the half-income method for individuals nor the 95% dividend exemption for corporations under German tax law applies. Profit distributions are subject to a withholding tax at a rate of 20%. Beginning January 1, 2009, the flat-rate withholding tax ( Abgeltungsteuer ) will apply to G-REITs, profit distributions and to capital gains on share disposals. Shares All of a G-REIT s shares must be voting shares of the same class and may only be issued if paid in full. Shareholders are not entitled to demand certificates. G-REITs need to issue global deeds. Tax privilege The main characteristic of a G-REIT is that the income taxation is shifted from the corporate level to the shareholder level ( shareholder taxation). A G-REIT is exempt from German corporate income tax, from the solidarity 12

13 surcharge, and from the trade tax. However, the G-REIT remains subject to other taxes, such as real estate transfer tax, land tax, and value added tax. The tax privilege commences (retroactively) at the beginning of the fiscal year in which the stock corporation is listed in the trade register as a G-REIT. Tax sanctions Depending on the type, seriousness, and duration of any infringement of the requirements that are set forth by the REIT-Gesetz, the tax authority may impose sanctions against the G-REIT that can range from fines to the G-REIT s loss of its tax privilege. Tax transparent If an entity is tax transparent, its income is directly attributed to its investors and thus solely taxed at the investors level instead of at the entity s level. Trading in real estate Trading in real estate is not allowed for G-REITs. Sales will be deemed to be trading if the revenues from such sales within the last five years account for more than half the value of the G-REIT s average real estate portfolio during that time, determined pursuant to IFRS. Withholding tax All dividends distributed by a G-REIT to its shareholders are subject to withholding tax at a rate of 20% plus a 5.5% solidarity surcharge. Such withholding tax is credited to the income tax liability of domestic shareholders; withholding tax payable on behalf of foreign shareholders is a flat tax. If a double tax treaty allows only for a tax rate lower than 25%, the foreign shareholder may, under certain circumstances, apply for a partial reimbursement of withholding tax. Beginning January 1, 2009, the withholding tax on profit distributions will be a flat-rate withholding tax. REIT Vademecum 13

14 INTERNATIONAL REITS A-REIT (Australia) Introduced in As of August 1, 2008 approximately 65 A-REITs were listed with the Australian stock exchange, with a total market capitalization of approximately 80 billion AUD (equivalent to approximately 45 billion EUR). Any unit trust may qualify for acknowledgement as an A-REIT. No requirements exist as to minimum capital and listing with the stock exchange. Canadian REIT Introduced in As of August 1, 2008 approximately 30 Canadian REITs ( Mutual Fund Trusts / MFTs ) were listed with the Canadian stock exchange, with a total market capitalization of approximately 23 billion CAD (equivalent to approximately 15 billion EUR). Any unit trust may qualify for acknowledgement as a Canadian REIT. Minimum capital requirements for Canadian REITs exist. The Canadian REIT must be listed with the Canadian stock exchange to avoid a redemption right of the unit holders. FBI ( Fiscale Beleggingsinstelling ; The Netherlands) Introduced in As of August 1, 2008 six FBIs were listed with the Dutch stock exchange, with a total market capitalization of approximately 8 billion EUR. Any Dutch public company, Dutch limited liability company, openended investment fund or comparable foreign legal entity may qualify for acknowledgement as an FBI. Certain minimum capital requirements exist dependent on the legal form of the FBI. FBIs are not required to be listed with the Dutch stock exchange but if it is listed, it is exempt from certain shareholder requirements. J-REIT (Japan) Introduced in As of August 1, 2008 approximately 40 J-REITs were listed with the Japanese stock exchange, with a market capitalization of approximately 3,500 billion JPY (equivalent to approximately 23 billion EUR). A corporation or trust may qualify for acknowledgement as a J-REIT. A 14

15 J-REIT requires a minimum of JPY 100 million (approximately 650,000 EUR) of share capital. Listing requirements for the J-REIT do not exist. SIIC ( Société d Investissements Immobiliers Cotée ; France) Introduced in As of August 1, 2008 approximately 45 SIICs were listed with the French stock exchange, with a market capitalization of approximately 45 billion EUR. Any corporation or other company with its capital divided into shares taxable under French corporate tax may qualify for acknowledgement as a SIIC. SIICs require at least 15 million EUR of share capital. The SIIC must be listed with the French stock exchange. UK-REIT (U.K.) Introduced in As of August 1, 2008 approximately 20 UK-REITs were listed with the U.K. stock exchange, with a total market capitalization of approximately 22 billion GBP (equivalent to approximately 27 billion EUR). Any close-ended company taxable under U.K. law may qualify as a UK-REIT. The UK-REIT must be listed with the stock exchange and must have at least 50,000 GBP (approximately 62,000 EUR) of share capital. US-REIT (U.S.) Introduced in As of December 31, 2007 approximately 150 US-REITs were listed with the U.S. stock exchange, with a total market capitalization of approximately 300 billion USD (equivalent to approximately 210 billion EUR). Any legal U.S. entity taxable as a domestic corporation managed by a board of trustees or directors and with freely transferable shares may qualify for acknowledgement as a US-REIT. Requirements for US-REITs as to minimum capital and listing with a stock exchange do not exist. REIT Vademecum 15

16 Morgan Lewis is a leading international law firm with more than 1,400 lawyers in 22 offices worldwide. For further information on our German and international real estate practice please contact Dr. Christian Zschocke or Ulf-Gerson Kemper at: realestate@morganlewis.de For further information on our U.S. real estate practice please contact Eric L. Stern at: estern@morganlewis.com For all other information please contact us at: frankfurtoffice@morganlewis.de Morgan, Lewis & Bockius LLP Guiollettstraße Frankfurt am Main Tel Fax: