Baker & McKenzie reports on the publication of new REIT law in Spain

New Spanish REITs regime

On 27 October 2009, Spanish Law 11/2009 governing Spanish REITs (entitled, “Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario”, or “SOCIMIs”) has been published in the Spanish Official Gazette.

The new law covers tax periods beginning 1 January 2009.

Law 11/2009 introduces a new tax model that converts SOCIMIs into a unique type of REIT (unknown in comparative law). Under this new tax model, SOCIMIs will be taxed at a flat 18% tax rate that will operate as a final tax for non-residents and Spanish resident individuals, as generally neither of them will be taxed (nor will they suffer any Spanish withholding taxes) on dividends and capital gains derived from their investment in a SOCIMI.

Some of the main legal and tax features of SOCIMIs are:

• Legal form: SOCIMIs will need to take the form of a listed joint stock corporation (Sociedad Anónima). A minimum share capital of Euro 15 million will be required.

• Corporate purpose: Their main activity will have to be the acquisition and development of urban real estate assets to be rented by the SOCIMI (residential, offices, retail, hotels or parking lots, among others). Investment in other SOCIMIs, foreign REITs and Spanish or foreign qualifying subsidiaries as well as shares or units of real estate Collective Investment Schemes governed by Spanish Law 35/2003 will also be allowed.

• Asset test: At least 80% of their assets will have to be those described above.

• Revenue test: At least 80% of the SOCIMI’s revenues must be derived from eligible assets.

• Distribution obligations:

– 90% of profits obtained from rental activities and ancillary income.

– 50% of profits derived from the transfer of qualifying property and holdings (undistributed profits must be reinvested in eligible assets within three years, as of the date of transfer).

– 100% of profits stemming from (i) dividends distributed by SOCIMIs, REITs or other qualifying entities and (ii) income taxed at the standard Corporate Income Tax rate (see below).

• Shareholder structure: A minimum free float of 25% will be required; however, there will be no maximum ownership percentage.

• Maximum leverage: 70%.

• Minimum holding period: Qualifying assets are generally subject to a minimum three year holding period (seven years in the case of buildings developed by the SOCIMI).

• Asset diversification: SOCIMIs must own at least three properties, any of which must not represent more than 40% of the total asset value upon acquisition.

• Taxation of SOCIMI: SOCIMIs will be taxed under the Corporate Income Tax Regime at a reduced 18% flat rate applicable to income derived from qualifying assets. Nevertheless, SOCIMIs will be taxed at the standard rate of 30% on income stemming from non-qualifying assets. No entry or exit tax will be applicable.

• Taxation of SOCIMI’s shareholders: The taxation will depend on the status of the SOCIMI’s shareholder:

– Spanish corporate shareholder or non-resident with a Spanish PE[1]: dividends and capital gains will be grossed up and taxed at the standard 30% rate, with a right to an 18% deduction of the income included in the shareholder’s taxable base (with certain exceptions). Thus, the shareholder will bear an effective 12% taxation, which, together with the 18% tax rate borne by the SOCIMI, will give rise to a 30% effective tax rate for the SOCIMI/shareholder.

– Spanish resident individual: dividends and capital gains derived from its investment in the SOCIMI will be exempt[2].

– Non-resident without PE: will be subject to the same rules applicable to Spanish resident individuals. However, shareholders resident in tax havens will be taxed on dividends and capital gains at an 18% rate.

• SOCIMI election: Both newly incorporated companies and existing listed companies will be able to elect for SOCIMI status.

Spanish Real Estate Funds (FII[3]) and Companies (SII[4]) can be transformed and elect for SOCIMI status.

In addition, the new law also introduces a major change in FII and SII which are taxed at 1% tax rate, with no distribution obligations. Although FIIs and SIIs are very efficient tax deferral vehicles (the shareholder is only taxed when he receives a dividend or when he redeems/transfers his participation in the SII or FII), they have traditionally not been successful, as they require that at least 50% of the SII or FII total assets be residential assets.

The new law eliminates such minimum threshold for residential investments. As a result, Spanish FIIs and SIIs will become much more attractive and a fierce competitor for SOCIMIs.

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