BELGIAN REAL ESTATE INVESTMENT COMPANIES (vastgoedbevaks / sicaf immobilières) The Act of 4 December 1990 on financial transactions and financial markets (hereinafter the "Act of 4 December 1990") introduced a general legal framework for (a.o.) undertakings for collective investment of publicly sourced funds. It offered a number of alternative types of investment, from which collective investment undertakings had to choose one. Real estate investment was one of the available options. Drawing on the general principles outlined in the Act of 4 December 1990, the Royal Decree of 10 April 1995 on real estate investment companies (last amended on 21 June 2006 - hereinafter the "Regulatory Decree") established a set of detailed rules specifically aimed at undertakings for collective investment of publicly sourced funds in real estate. The Act of 20 July 2004 on certain types of collective investment portfolio management (hereinafter the "Act of 20 July 2004") replaces the Act of 4 December 1990 as framework act for collective investment undertakings. The principles contained in the Act of 4 December 1990 which were relevant to REICs have been largely reiterated in the Act of 20 July 2004. However, a new regulatory framework has been established in respect of management of collective investment undertakings (including REICs - see under 1.4.1, below). The Regulatory Decree has so far not been amended pursuant to the Act of 20 July 2004. Aspects of the regulatory and tax status of Belgian REICs are covered hereinafter, under 2 respectively. 1 and 1 Regulatory status 1.1 Scope The Regulatory Decree applies to undertakings for collective investment of publicly sourced funds in real estate. 1.1.1 Publicly sourced funds A collective investment undertaking is deemed to source funds from the public, if (i) its securities are admitted to trading on an organised market, or if (ii) it makes a "public securities offering". Any communication (irrespective of its form or means) constitutes a "securities offering", if it presents sufficient information on certain offered securities, as well as on the terms on which they are being offered (for purchase or subscription), i.e. sufficient to enable an investor to decide whether or not to purchase or subscribe to them. A securities offering is deemed to be "public" if it is aimed at more than 100 investors (other than professional or institutional investors). Offerings (i) to investors for a consideration of at least EUR 50,000 per investor and per type of security, or (ii) of securities whose denomination per unit is at least EUR 50,000, or (iii) of securities for a total consideration of less than EUR 100,000, are not considered to be public, even if aimed at more than 100 investors. 1
1.1.2 Investment in real estate "Real estate" is defined by the Regulatory Decree to include: (i) actual real property assets, as well as rights in rem to such assets (such as usufructs, building rights or long lease rights), (ii) voting shares in affiliated real estate companies, (iii) shares in other REICs or units in foreign undertakings for collective investment in real estate, (iv) publicly traded real estate certificates, (v) option rights in respect of real property, and (vi) financial leasehold rights to real property carrying a call option (onroerende leasing met koopoptie / location-financement immobilière avec option d achat). 1.2 Registration Before a company can start to operate as a REIC, it must be registered as a REIC with the Belgian regulator, the Banking Finance and Insurance Commission (hereinafter referred to as the "BFIC"). In order to be registered, (i) a REIC must obtain a licence from the BFIC, (ii) its articles of association must have been accepted by the BFIC (subsequent amendments to the articles will have to be approved by the BFIC as well), and (iii) its choice of depositary must have been accepted by the BFIC (see under 1.3.3, below). The license application must include an investment budget for the first two years of operation, which will be used by the BFIC to control the REIC s investment policy. 1.3 Organisation 1.3.1 Corporate characteristics A REIC must be organised as an investment company (as opposed to a common investment fund) of the closed-end type (in the sense that its shares are not repurchased or redeemed out of its assets at the request of its shareholders). The fact that REICs are closed-ended does not mean that they cannot repurchase their own shares at their own initiative: general conditions and procedures for share buy-backs apply. REICs must take the corporate form of a limited corporation (naamloze vennootschap / société anonyme) or a limited partnership (commanditaire vennootschap op aandelen / société en commandite par actions). In general, REICs are subject to general rules of company law, except where these are set aside by the Act of 20 July 2004 or the Regulatory Decree. REICs must have a paid-up capital of at least EUR 1,250,000. They must, as a rule, be incorporated for an indefinite term, and their registered seat and headquarters must be located in Belgium. 1.3.2 Promoters The individuals or entities controlling a REIC, or those acting as the REIC s agent for purposes of dividend payments, the sale or purchase of its securities or disclosure requirements, qualify as its promoters. The promoter status triggers (i) important liabilities in connection with certain investor protection mechanisms (see under 1.5.4, below), and (ii) substantial restrictions resulting from conflict of interest procedures (see under 1.4.2, below). 1.3.3 Depositary A REIC s securities and cash must be entrusted to a depositary. The depositary s duties are generally to (i) keep the securities and the cash, (ii) carry out the REIC s instructions in respect of these securities and cash, and in particular to deliver those securities which have been sold, to 2
pay for those which have been bought, to collects dividends and interest payments and to exercise rights attaching to those securities, and (iii) ensure that in transactions involving any of these securities, or any real property assets, the relevant consideration is remitted promptly or within customary time limits. The REIC s choice of depositary is subject to approval by the BFIC. The depositary s liability for the performance of its duties cannot be qualified, reduced or excluded (not even in the articles of association of the REIC). 1.3.4 Real property expert A REIC must appoint at least one real property expert. The expert s duty is to appraise certain of the real estate investments held by the REIC (or by companies controlled by it), i.e. (i) its actual real property assets, as well as its rights in rem to any such assets, (ii) its option rights in respect of real property, and (iii) its financial leasehold rights to real property carrying a call option (onroerende leasing met koopoptie / location-financement immobilière avec option d achat). The expert is required to appraise these assets on a continuous basis, at the end of each quarter of the REIC s financial year (the expert s year-end findings are binding for the purposes of the REIC s end-of-year financial statements). A specific ad hoc appraisal is required in the event the REIC issues new shares, applies for listing of shares, or repurchases its shares but not on the market. The expert s findings will not be binding, but the issue or repurchase price will have to be assessed and justified against them. If the issue, listing or repurchase of shares occurs within three months from the latest quarterly appraisal, no new ad hoc appraisal will be required if in the expert s opinion there have since not been any changes in the general economic climate or in the condition of the REIC s real estate assets. Any real estate asset that the REIC wants to acquire or transfer and which is of a type covered by the expert s appraisal duties, must be appraised ad hoc prior to completion of the transaction. The appraisal is binding in transactions with conflicted counterparties referred to under 1.4.2 below. The appraisal will in other instances not be binding, provided however that when the actual acquisition or transfer price deviates from the expert s appraisal by more than 10% (not in the REIC s favour), this will have to be explained in the REIC s half-year and/or end-of-year report. Assets which have been appraised in the latest quarterly appraisal, must not be appraised again if the latest appraisal is not older than three months at the time of acquisition or transfer, and if in the expert s opinion there have since not been any changes in the general economic climate or in the condition of the relevant real property asset. 1.4 Management and operations 1.4.1 General principles REICs must be managed in the exclusive interest of their shareholders. They must operate on the principle of risk-spreading, and in a way which ensures autonomous management. The REIC s day-to-day management must be monitored by two individuals who are a member of its board of directors. The Act of 20 July 2004 introduced a new regulatory framework in respect of management of REICs (and other collective investment undertakings - existing undertakings have to bring themselves in line with the new rules by 13 February 2007): 3
effective management of a REIC (not just the monitoring) will have to be entrusted to two individuals; a REIC can organise its own operational management, or it can outsource one or several functions of operational management to a third party (under strict conditions and under supervision of the BFIC), or it can outsource all of these functions to a specifically licensed management company (the REIC s choice of management company is subject to approval by the BFIC). Functions of operational management which are eligible for outsourcing have been specifically listed in the Act of 20 July 2004. 1.4.2 Conflicts of interest In addition to conflict of interest procedures established by general rules of company law, a number of specific rules aim at conflicts involving a REIC. (i) Prohibited arrangements and transactions In order to avoid conflicts of interest, a number of arrangements or transactions involving REICs are simply forbidden: the remuneration of directors of a REIC may not be linked to transactions pursued by it; the real property expert of a REIC may not in any transaction act as counterparty of the REIC (or a company controlled by it), or acquire any benefit from any transaction involving the REIC. This prohibition also extends to the directors and management of the expert; a specifically licensed management company to which all functions of operational management of a REIC have been entrusted, may not carry out on behalf of the REIC any transaction in which it has an interest of its own; and the promoters of a REIC, its depositary, companies who are connected to the REIC or to its promoters or depositary, as well as directors and management of the REIC or of its promoters or depositary, and directors and management of companies connected to the REIC or to its promoters or depositary, may not hold voting securities in any real estate company controlled by the REIC; (ii) Monitored transactions Transactions where either of the entities or individuals mentioned under the fourth dash of 1.4.2 (i) above, act as counterparty of the REIC (or a company controlled by it) or from which either of these entities or individuals acquire any benefit, are not forbidden but subject to a specific procedure: the transaction must be notified and justified to the BFIC in advance, and has to occur at arm s length; if the transaction relates to a real estate asset which is of a type covered by the appraisal duties of the REIC s real property expert (see under 1.3.4, above), the appraisal findings of the expert will be binding. 1.4.3 Investment policies (i) General principles The rule is that a REIC should only invest in real estate (as defined under 1.1.2, above). Investments in securities (other than those qualifying as real estate) or liquid assets are permitted, but only on a temporary or ancillary basis, and subject to conditions which must be stipulated in the REIC s articles of association. Only investments in publicly traded securities are allowed. Further regulatory restrictions apply. 4
(ii) Diversification A REIC must pursue a diversified investment portfolio. Its articles of association have to specify the criteria of diversification (such as in terms of type or location of real property). A REIC cannot (as a rule) invest more than 20% of its assets in a single real property asset or in several real property assets constituting a real property unit which is subject to the same investment risk. If within two years from its registration, a REIC fails to diversify its portfolio in accordance with the 20% requirement or in line with the criteria of diversification specified in its articles of association, a general shareholders meeting has to be called to deliberate and resolve either to wind-up the REIC (in which case the shareholders will be refunded - see under 1.5.4, below) or to adopt alternative measures. 1.4.4 Restrictive provisions In addition to the requirement to pursue a diversified investment portfolio, the business risk attaching to a REIC s operations is further reduced through a number of restrictive provisions: a REIC s ratio of debt-to-assets may not exceed 65%, and the annual charges related to such debt financing may not be higher than 80% of its operational and financial income (both ratios apply on a consolidated basis); a REIC may not act as real property developer; it may not grant any loans or act as guarantor to secure liabilities of a third party; it may not take part in a syndicate for firm or soft underwriting; it may not engage in any securities lending, except if specifically permitted in its articles of association, and subject to regulatory restrictions; it may engage (whether as lessor or as lessee) in financial lease arrangements (onroerende leasing / location-financement immobilière), but subject to regulatory restrictions; it may encumber its real property with mortgages or other surety rights, but only to obtain financing for its real property, and provided that not more than 40% of its real property portfolio and not more than 75% of the value of any single real property asset may be encumbered. 1.5 Shareholders 1.5.1 Classification Different classes of shares in a REIC can be created, including shares with preferential rights to dividend or other distributions, if specifically provided in the articles of association. There is no possibility to create different share compartments corresponding to specified categories of the REIC s assets. 1.5.2 Liquidity REICs must trade on a regulated market. When an existing privately held real estate investment company obtains REIC status, its controlling shareholders must within one year from registration launch a public offering to sell at least 30% of the REIC s shares. 5
1.5.3 Protection against dilution The shareholders of a REIC have a right of preferential subscription to newly issued shares which are being offered for cash. These preferential subscription rights cannot be restricted or withdrawn. The subscription price of new shares issued in return for a capital contribution in kind may not be lower than the 30-day average trading price of the REIC share. 1.5.4 Distributions and refunds 80% of the (adjusted) annual net revenues of the REIC have to be distributed to its shareholders as dividends. In certain instances, the promoters of a REIC will be obliged to reimburse to the (other) shareholders of the REIC all amounts paid by them to acquire shares of the REIC (including related fees and expenses). Such reimbursement may be required in the event the REIC raises capital from the public within two years from its registration: if the amounts raised are insufficient to meet the investment budget which was submitted to the BFIC as part of the licence application (see under 1.2, above), any person who did accept to contribute capital to the REIC must be refunded. Reimbursement will also be required if the REIC is wound up within two years from registration: in that case, all (other) shareholders must be reimbursed. 1.6 Reporting and disclosure obligations REICs must prepare half-year and end-of-year reports, in which they have to provide detailed information on (a.o.) their results, their investment policies and status of their investments, the inventory of their real property assets and the corresponding inventory value of their shares, the markets in which they are invested, decisions of their real property expert, important projects, rent payments which they have received, valuation methods and their liabilities. When REICs launch a public offering of securities, they must publish a prospectus, which has to be cleared by the BFIC before publication. An offering prospectus by a REIC is subject to the prospectus regulations contained in the Prospectus Act of 16 June 2006. In addition, REICs are subject to all disclosure requirements that generally apply to companies whose securities are traded on a regulated market. 1.7 Supervision The BFIC will exercise prudential control over the REIC through (a.o.) requests for information and on-site inspections. 2 Tax status 2.1 Income tax regime of REICs An existing company obtaining registration as a REIC, will because of its acquiring REIC status (for tax purposes) be deemed to have been liquidated. The liquidation entails, as a rule, a taxation of the latent capital gains on the assets of the company, of the tax-free reserves and of the taxable profits realised during the year of liquidation (this is the so-called "exit-tax"). The taxable amount will be taxed at 17%. 6
REICs are subject to the normal corporate tax rate, i.e. 33.99%. However, the taxable basis of a qualifying REIC is limited to disallowed expenses1 (except write-offs and capital losses on shares) and any abnormal or gratuitous advantages granted to the REIC. The above implies that a qualifying REIC is not taxed on dividend income, interest income, income from real estate, capital gains on any type of assets, or any other investment income (such as profits derived from swap transactions). REICs are, as a general rule, exempt from withholding taxes for all types of movable income they receive, whether of foreign or Belgian source. However, no withholding tax exemption applies to payments on zero bonds. Further, dividends distributed on shares will only be exempt provided the REIC has held more than 20% of the shares of the Belgian distributing company for an uninterrupted period of at least one year. Where applicable and subject to certain conditions, Belgian withholding tax is fully creditable against corporate tax and the excess of withholding tax is reimbursable. 2.2 Income tax regime of REIC shareholders 2.2.1 Dividends (i) Withholding tax Dividends distributions by a REIC will, in principle, be subject to a 15% withholding tax. However, dividends distributed by a REIC may be exempt under the following conditions: an exemption from dividend withholding tax can be applied for distributions to a corporate investor resident in an EU-Member State with a shareholding of at least 20% in the distributing investment company held or kept for an uninterrupted period of at least one year; another exemption applies in respect of dividends of Belgian source paid to a non-resident saver who does not conduct any profit-making activity and who is exempt from tax in its country of residence. Among others, dividends distributed to foreign pension funds may benefit from that exemption. finally, dividends distributed by a REIC are exempt from withholding tax, irrespective of the beneficiary, provided that at least 60% of the REIC s real estate assets consist of residential real estate located in Belgium. As a REIC is subject to corporate tax, the withholding tax reductions and exemptions provided for by double tax treaties apply. (ii) Income tax The applicable tax regime will depend on the type of investor (individual, corporate, non-profit entities (e.g. pension funds) and on whether or not it is a Belgian resident. Non-residents without establishment in Belgium or with a Belgian establishment to which shares of the REIC have not been allocated: no income tax is due in Belgium by nonresident investors (individual, corporate or non-profit making) on dividends received from the REIC. 1 Usually, REICs have few disallowed expenses, if any. However, the 2004 Corporate Tax Reform made the regional taxes disallowed expenses. This will adversely affect REICs since they are generally subject to important regional taxes in respect of real estate they hold. 7
Belgian corporate investors: the dividends derived from a REIC will, as a general rule, be fully taxable in the hands of a Belgian corporate investor. Belgian corporate investors are entitled to a foreign tax credit with respect to foreign withholding tax levied on foreign source interest and redistributed by the REIC as dividends. Belgian individual investors: the withholding tax constitutes a final tax in the hands of Belgian individual investors. The individual investors are therefore not obliged to report the income in their income tax return. Belgian non-profit making entities: Belgian non-profit making entities, such as pension funds set up in the form of an ASBL, are, as a rule, subject to the legal entities income tax. The 15% withholding tax on the dividends constitutes a final tax for such entities. If the withholding tax was not levied, the legal entity itself must pay the withholding tax. 2.2.2 Capital gains (i) Non-residents without establishment in Belgium or with an establishment to which shares have not been allocated Capital gains realised on the REIC shares are not taxable in Belgium (except for non-resident investors realising gains on important participations, if this rule has not been excluded under applicable tax treaties). (ii) Belgian corporate investors Capital gains on REIC shares realised by a Belgian corporate investor are, as a general rule, fully taxable. Capital losses are, in principle, not deductible. (iii) Belgian individual investors As a general rule, capital gains realised by Belgian individuals on shares held within the scope of normal management of one s private estate are not taxable. Stock will be deemed held as a private asset when it is held purely for investment purposes. Shares will only constitute business assets of which the gains qualify as business income subject to the progressive income tax rates if the investor was engaged in securities trading in a professional way. Taxation of the realised gain may, however, occur if the sale of shares (i) has a purely speculative character; (ii) has been done outside the scope of the normal management of one s private estate, or (iii) in case of the realisation of a capital gain on important participations. In such a case, the capital gain will be taxed at a flat rate of 33%, increased by municipal taxes or, in case of the realisation of a capital gain on an important participation, at a flat rate of 16.5%, increased by municipal taxes. (iv) Belgian non-profit making entities Capital gains realised on REIC shares are not taxable (except in the case of capital gains on important participations). 2.2.3 Acquisition of its own shares or liquidation of a REIC (i) Withholding tax Proceeds of the liquidation of a REIC and proceeds of the acquisition of its own shares are, as a general rule, exempt from the 10% withholding tax applicable in case of liquidation or acquisition of own shares. 8
(ii) Income tax For non-resident investors (without an establishment in Belgium or with an establishment to which REIC shares have not been allocated), resident individual and non-profit making investors (like pension funds), no taxation will arise upon the acquisition of its own shares by a REIC or upon its liquidation, be the proceeds characterised as dividends or as capital gains, contrary to Belgian corporate investors who will be taxable on the proceeds received. 2.3 Other taxes 2.3.1 Capital contribution Capital contributions in cash to a REIC are not subject to registration taxes. 2.3.2 Stock exchange tax A transaction on REIC shares is subject to the stock exchange tax on the following conditions: the transaction on the secondary market is a taxable event; such a transaction is entered into or settled in Belgium; with the intervention of a professional intermediary. Upon sale, exchange or any transfer for consideration of shares in a REIC, a tax on stock exchange transactions is due at the rate of 1.7%, subject to a maximum of 500 per transaction and per party. A separate tax is due from each party to any such transaction (the seller and the purchaser, the transferor and the transferee), both collected by the professional intermediary. An exemption applies for certain investors, such as (among others) banks or stock brokers, insurance companies, pension funds, institutions for collective investment and non-residents. 2.3.3 Tax on the physical delivery of bearer shares A tax of 0.60% is due upon the physical delivery of REIC bearer shares made in Belgium through a professional intermediary. This tax is uncapped. 2.3.4 Annual subscription tax A REIC is subject to a 0.07% annual subscription tax (and to 0.08% as per 1 January 2008). The taxable basis is the inventory value on 1 January. *Linklaters De Bandt Summary note on Belgian REICs 4 October 2006 * * 9