German REITs Update. First draft law
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1 German REITs Update. First draft law Real Estate Investment Trusts ( REITs ) A REIT is a vehicle that invests in property and enjoys a measure of protection from corporate and trade tax in return for an obligation to distribute a significant amount of the vehicle s cash flows to shareholders. REITs have been an important part of the real estate markets in the United States since 1960 and in Australia since They have existed in Holland and Belgium since 1969 and 1995 respectively and, more recently, have been launched in the Far East in early 2000 and in France in The UK will introduce REITs in Broadly, the aim of a REIT is to provide returns to investors that mirror returns an investor would expect if it owned the property directly. This could be achieved with various models. Basically the REIT does not pay any profit taxes on its rental income or capital gains, but instead the tax burden is shifted to the shareholder/investor, who pays tax on the distribution it receives from the REIT. Further, the REIT should provide a means for investors to participate in these returns by acquiring shares in the REIT without having to raise the prohibitively high levels of capital required to acquire property directly. Listed REITs provide liquidity by enabling the shares in the REIT (rather than the asset) to be traded. Contents Real Estate Investment Trusts ( REITs ) 1 Where are we now? 1 German REIT Team 6 Where are we now? The Ministry of Finance published the long awaited German draft legislation ( Referentenentwurf ) on the G REIT on 26 September. The current timetable for the implementation of the G REIT is uncertain, however the plan is that the G REIT legislation should come into force on 1 January In case of delays in the legislative process and final agreement in early spring 2007, the ministry has already announced retrospective implementation. However, no political decision has been reached because the draft has not passed the upper house ( Bundestag ). The legislator wants to position the G REIT as an additional and legally distinct alternative to the well established open ended real estate investment funds ( offene Immobilienfonds ). The current wording contains a separate September 2006
2 REIT framework ( REIT Rahmengesetz ) and some additional measures to promote the G REIT. The draft includes the following key points: 1 Company Stock Corporation with legal and factual seat as well as unlimited tax liability in Germany. Should likewise be possible for a European Company (Societas Europaea, SE) with the same features. Not regulated by German supervisor ( Bafin ). Minimum stated capital 15 million. Single class of shares with voting rights. Designation REIT-AG or REIT-Aktiengesellschaft in company name. Establishment by creation of a stock company or by transformation in REIT AG pursuant to transformation act ( Umwandlungsgesetz ). Listing on a recognised EU/EEA stock exchange. Application for listing within 3 years after establishment of REIT AG required. Pre REITs (meeting all conditions other than 15 million for REIT status minimum stated capital and listing) are possible, but no private REITs. Disposals of real estate assets to Pre REITs are taxed favourably (see below). The REIT must distribute at least 90 per cent of its profits within 12 months after the end of the accounting period. These profits are calculated pursuant to the German Commercial Code (HGB), but it is possible to exclude any depreciation when calculating these profits. Special reserve for investment purposes in cases of capital gains is possible. Income test: At least 75 per cent of the total profits (income and capital gains) must be profits from real estate, calculated pursuant to IFRS. Asset test: At least 75 per cent of the total assets must be real estate, likely calculated pursuant to IFRS (the wording is unclear in this point). Obviously the G REIT must not own 25% of its total assets in participations, which would avoid holding structures. 2 Entry Charge and Exit Tax No entry charge or conversion tax on the fair market value of the real estate assets. Only 50 per cent of ordinary tax base (purchase price minus book value minus sale expenses) as exit tax when selling real estate assets held longer than 10 years to G REITs or Pre REITs (and open ended real estate funds). This is to encourage the realisation of hidden reserves in September 2006
3 real estate assets. Only applicable until This privileged taxation also applies in case of sale and lease back structures and when converting into a REIT. No privileges regarding Real Estate Transfer Tax ( Grunderwerbsteuer ). Former tax exempt housing companies may apply for the taxation of untaxed retained earnings independent of the establishment of a REIT until the end of 2007 and are taxed upon application with a tax rate of 7.5 per cent (plus 5,5% solidarity surcharge thereon) on their EK02 baskets. 3 Shareholder Structure No direct shareholding of 10 per cent or more. This rule is designed to avoid the application of reduced withholding tax rates for non German REIT investors according to many Double Taxation Treaties. Indirect holdings of more than 10 per cent are possible (but would generate no tax benefits). At least 15 per cent of the shareholding must be free float (participations of less than 3 per cent count as free float). Compliance with these rules shall be monitored via (extended) notification requirements. A shareholder has to notify the company as well as the federal regulatory authority (BaFin) in case its interest in the company reaches, exceeds or falls below of 3, 5, 10, 25, 50, 75, 80 or 85% of voting rights in the company. A squeeze out of minority shareholders is available in the same way as for other German stock corporations, but the minimum shareholding of the majority shareholder requesting the squeeze out is reduced to 85% of shares in the company. 4 Debt Funding Restriction Leverage up to a maximum 60 per cent of all assets (calculated pursuant to IFRS), as long as funding is on arm s length terms and possible according to the articles of association ( Satzung ). This rule aims to achieve reasonable distributions for the shareholders and motivates equity injections in case of new investments. 5 Harmful Activities Trading is not allowed: Trading means that the turnover of the traded real estate assets within a five year period exceeds the average value of all real estate assets of the G REIT within the same five year period by 50 per cent. This calculation is likely to be made pursuant to IFRS (the wording is unclear in this point). First draft law 3
4 It is possible for a REIT to carry out activities connected with Real Estate for third parties. These activities have to be provided by separate 100 % subsidiaries of the REIT, which are fully taxable. The assets of and the income deriving from those subsidiaries must not exceed 20 % of the assets / income of the REIT, calculated pursuant to IFRS 6 Taxation and Sanctions at REIT Level Total exemption from corporate and trade tax ( Körperschaftsteuer und Gewerbesteuer ). Penalties for breaching the asset, income and distribution tests are as follows, subject to the assessment of the the fiscal authorities: (i) 1 to 3 per cent on assets breaching the 75% limit; (ii) 10 to 20 per cent on the gross profits exceeding the 75% limit; and (iii) 20 to 30 per cent on the amount by which the minimum distribution rule is breached. These penalties do not qualify as taxes and thus the Parent Subsidiary Directive is inapplicable. Loss of REIT status is possible in cases of persistent breach. No specific corporate law sanctions; in particular, a shareholder owning directly more than 10 per cent of shares does not lose any dividend or voting rights. However, he may not apply for the Parent Subsidiary Directive or Double Tax Treaty benefits. 7 German Taxation at Shareholder Level Distributions taxable in the hands of German tax resident shareholders without any privileges, no half income method for private shareholders, no 95% tax exemption for dividends to corporations. REIT required to withhold tax of 25% (plus 5.5 per cent solidarity surcharge thereon) on distributions. However, some shareholders are entitled to receive distributions gross and some others enjoy reduced withholding tax rates. German tax resident shareholders are entitled to credits or refunds for the withholding tax. For non German tax residents the German withholding tax is basically final, but reductions according to Double Taxation Treaties and depending on the shareholdings are possible. A reduction of withholding tax to zero according to the Parent Subsidiary Directive is not possible, because the German REIT is not designed as an entity with unlimited tax liability (and shareholdings of more than 10 per cent in a REIT are not allowed). Capital gains on share disposals are tax exempt in case of private investors. September 2006
5 8 Topic REITs Topic REITs (REITs with a portfolio of e.g. hotels, shopping centres, warehouses, health care buildings, infrastructure) are possible, even with sale and lease back structures. REITs with flats and housing portfolios ( Wohnungs-REITs ) are possible, although this is still being heavily discussed in the government. 9 Important Other Points Non German REITs are legally defined for the first time. German investors in Non German REITs will be taxed in same manner as they would be taxed in case of investing in a G REIT. German CFC rules are tightened to avoid interposing non German holding companies between G REITs and German investors First draft law 5
6 Amsterdam 22nd Floor, World Trade Centre Amsterdam Zuidplein XV Amsterdam Tel: (31 20) Fax: (31 20) Berlin Rankestraße Berlin Tel: (49-30) Fax: (49-30) Brussels Rue Brederode 13 B Brussels Tel: (32-2) Fax: (32-2) Köln Börsenplatz Köln Tel: (49-221) Fax: (49-221) Frankfurt am Main Mainzer Landstraße Frankfurt am Main Tel: (49-69) Fax: (49-69) German REIT Team For Real Estate Investments in Germany we have formed a dedicated team: capital market, corporate and tax lawyers with extensive experience in the structuring and handling of complex capital market transactions, in particular IPOs; real estate lawyers with expertise on large-scale portfolio acquisitions and tax-optimised financing; investment management experts with extensive funds know-how. We have been actively participating in the current German REIT debate and we are working closely with our clients to discuss opportunities for conversion and for the creation of new vehicles in Germany. We have developed solutions for various models and structural questions that will arise. For more information please contact: Dr. Florian Schultz Michael Steinbrecher Direct Dial: Direct Dial: florian.schultz@linklaters.com michael.steinbrecher@linklaters.com Dr. Herbert Harrer Christoph Vaupel Direct Dial: Direct Dial: herbert.harrer@linklaters.com christoph.vaupel@linklaters.com Alexander Vogt Dr. Harald Gesell Direct Dial: Direct Dial: alexander.vogt@linklaters.com harald.gesell@linklaters.com London One Silk Street London EC2Y 8HQ Tel: (44-20) Fax: (44-20) Madrid Calle Zurbarán, 28 E Madrid Tel: (34) Fax: (34) München Prinzregentenplatz München Tel: (49-89) Fax: (49-89) New York 1345 Avenue of the Americas New York, NY Tel: (1) Fax: (1) Paris 25 rue de Marignan Paris Tel: (33) Fax: (33) This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editors. Linklaters. All Rights reserved 2006 Please refer to for important information on the regulatory position of the firm. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com 6
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