Real Estate Investment Trusts: Tax Implications for Investors
A real estate investment trust (REIT) is a company that owns, operates or finances real estate. Equity REITs generate income by collecting rent on and from the sale of the properties they own over the long term. Mortgage REITs invest in mortgages or mortgage securities that are tied to commercial and / or residential real estate.
There are a number of requirements that listed REITs must meet, depending on the regulations of the jurisdiction in which they operate; In this article, we will examine REIT rules in specific countries by way of example.
In the following, we examine the tax effects of REITs in various legal systems.
The REIT rules are governed by the Qatar Financial Center (QFC legislation). According to sub-rule (2), a QFC retail real estate fund is a Real Estate Investment Trust (REIT) if:
- (a) the Fund is a closed-end fund;
- (b) the Fund is listed on the Qatar Stock Exchange or any other regulated exchange;
- (c) the constitutional documents and prospectus of the Fund state:
- (i) if the Fund invests in undeveloped land for development purposes, the total value of such undeveloped land investments may not exceed 20% of the value of the net assets of the Fund;
- (ii) Other than to enable the Fund to meet its liquidity needs, the Fund will not borrow or enter into any other transaction that gives rise to a financial obligation if the Fund’s total borrowing or obligations are 50% of the value of. exceed his or her net worth;
- (iii) the Fund will distribute to Shareholders at least 80% of its audited annual net income (adjusted for any capital gains at fair value).
Listing a REIT fund on the Qatar Stock Exchange is mandatory. In addition, the Fund may not absorb more than 50% of its net assets and must distribute 80% of its audited net income. A Fund may distribute more than 80% of its net income without the consent of its shareholders. However, prior approval is required if the Fund decides to distribute less than 80% of its net income. The regulations also require that 75% of the asset be invested in at least three income generating investments and a maximum of 30% of the asset may be invested in assets under development.
A special investment fund is an exempt vehicle (Article 82 (3) (b)), so a QFC entity that is a special investment fund may choose exemption status under Article 82 of the QFC tax rules. A special investment fund is defined as a QFC unit in accordance with Article 84, i.e.:
- not a registered fund within the meaning of Article 83;
- managed by an approved QFC entity; and
- was established for one of the permitted activities listed in Article 84 paragraph 2.
Permitted activities include “making investments, including investing in real estate”. Any distributions from the profits accruing during the exemption of an investment fund are exempt from QFC tax for the recipient.
The QFC regulation has not developed any specific rules for establishing REITs or similar real estate investment vehicles. However, insofar as they are established under existing or new regulations, it is assumed that Article 82 (2) (c) will result in most of these investment vehicles being tax-exempt in the QFC, unless this is the case administered by an approved QFC entity (Article 82 (1) (b)).
When considering this provision, REIT funds are exempt from corporation tax and the profit distribution is not taxed by the recipient. No withholding tax is payable on the distribution of net income from an investment fund.
REITs are incorporated as trusts and authorized by the Hong Kong Securities & Futures Commission (SFC). REITs must be listed on the stock exchange and follow the listing rules set by the SFC. The REIT can hold real estate, directly or indirectly through special purpose vehicles, that is legally and economically owned by the REIT. The REIT should primarily invest in real estate located in Hong Kong or overseas. The REIT should hold its stake in the real estate for at least two years, unless the investors’ consent to the early sale is obtained by a special resolution of its general meeting. A REIT is required to distribute 90% of its income to its investors as dividend income.
- A REIT approved by SFC is exempt from profit tax under Section 26A (1A) of the Financial Resources Ordinance. If the REIT holds real estate directly in Hong Kong and generates rental income from such real estate, the rental income is subject to property tax in Hong Kong. The standard rate of property tax is 15%.
- If a REIT holds real estate indirectly through a special purpose vehicle, that company is subject to profit tax. From April 1, 2018, a two-stage profit tax rate regulation will apply. The corporate income tax rate on the first HK $ 2 million ($ 257,000) in corporate profits is 8.25%, while the standard corporate income tax rate of 16.5% applies to profits over HK $ 2 million.
- Income from real estate outside Hong Kong is exempt from corporate income tax and property tax.
- Dividends paid by special purpose vehicles are exempt from income tax.
- There is no withholding tax on any transfer of interest, dividends, or distributions from a REIT.
- The distribution of dividends from a REIT received by an investor is not subject to Hong Kong tax.
- Profits from the sale of shares in a REIT are exempt from profit tax. An investor who engages in a business that consists of buying and selling shares in a REIT is subject to profit tax.
- The value stamp tax (AVD) is levied on the purchase contract for residential property. The AVD rate for residential real estate transactions is 15% and applies to all instruments executed on or after November 5, 2016 for the sale and purchase or transfer of residential real estate, unless expressly excluded or otherwise provided.
- If home ownership is purchased by a Hong Kong Permanent Resident (HKPR) who is acting on their own behalf and who does not own any other Hong Kong residential property at the time of purchase, the transaction will be exempt from the 15% AVD. and are only subject to AVD at tier 2 tariffs, ie a reduced tariff. However, effective April 12, 2017, the exemption does not apply if the HKPR buyer purchases more than one residential property under a single instrument, and the 15% rate applies even if the buyer / transferee is a HKPR based on his side is acting on its own behalf and has no other Hong Kong residential property at the time of purchase. The AVD for non-residential real estate transactions is due when the purchase agreement is signed on or after February 13, 2013.
A Singaporean REIT or S-REIT is constituted as an investment fund and is subject to collective investment schemes. It must have a minimum market capitalization of SG $ 300 million ($ 221 million) based on the issue price and post-invitation share capital if listing is sought. At least 25% of the share capital must be held by at least 500 public shareholders.
S-REITs are allowed to invest in real estate-related assets in or outside of Singapore. At least 75% of the property should be invested in high-yielding assets. S-REITs are not allowed to invest in vacant land or mortgages (with the exception of mortgage-backed securities). Investments in unfinished real estate developments should not exceed 10% of the value of the REIT’s entire property. 90% of the income of an S-REIT should be distributed in each financial year.
Unitholders who receive distribution income are entitled to tax transparency treatment. With this treatment, a trustee is not taxed on S-REIT income. However, a tax may be levied at the shareholder level. Income that is not distributed is taxed at the S-REIT level. Dividend income from foreign sources that an S-REIT receives can claim a tax exemption. If income from overseas sources is not eligible for tax exemption, or if the income is interest income on a shareholder loan, the S-REIT can apply to the Singapore Tax Authority for an exemption.
No withholding tax is payable on the distribution of dividends to natural or Singapore incorporated companies. However, a withholding tax of 10% would be levied on dividends paid to non-resident non-natural persons. A tax of 17% (current corporate income tax) is levied on the distribution to all other persons.
Distributions on REIT-level taxable income, capital gains, income from ownership of overseas real estate exempted under Section 13 (8) or Section 13 (12) of the Income Tax Act, and dividends from Singapore companies are in the hands of. except unit owner. Non-Singapore resident corporate shareholders are subject to a final withholding tax of 10%.
The following stamp duty applies:
- 3% on non-residential real estate and 4% on residential real estate in Singapore as purchase price or market value, whichever is greater;
- When purchasing residential property (including residential property), an additional buyer’s stamp duty applies in addition to the stamp tax mentioned in the previous point:
- 25% for corporate home purchases;
- The seller’s stamp duty is 0% to 12% on residential property, depending on how long the seller holds the property;
- The seller’s stamp duty is 0% to 15% on industrial property, depending on how long the seller holds the property.
An S-REIT must also register for goods and services tax (GST) and collect 7% GST on rental and related income from its property ownership, property management and related activities.
REIT rules are dynamic and different geographic jurisdictions have different regulations. Investors looking to invest in a REIT should analyze the tax implications and the return they will get after taking tax costs into account. The above jurisdictions have tax treaties with other countries, and investors should also assess whether tax treaties provide relief. Investors may seek preliminary rulings, if available, based on the REIT rules of the jurisdiction in which the investment is made.
Disclaimer: The content of this article is provided for general informational purposes. You should always seek professional advice before acting. No responsibility is taken for any loss resulting from actions taken or omitted as a result of the content.
This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.
Rajeev Agarwal is Head of Global Tax at Qatar Navigation QPSC, based in Qatar.
The author can be contacted at: [email protected]