A real estate investment trust (REIT) is a corporation that owns, operates or finances income producing real estate. REITs generate income through the collection of rents and the sale of properties they own over the long term. Mortgage REITs invest in mortgages or mortgage-backed securities related to commercial and / or residential properties.
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 look at the REIT rules in some countries as examples.
We discuss the tax implications of REITs in different jurisdictions below.
The rules of the REIT are governed by the Qatar Financial Center (QFC legislation). In accordance with sub-rule (2), a QFC commercial real estate fund is a real estate investment trust (REIT) if:
- (a) the fund is a closed-end system;
- (b) the fund is listed on the Qatar Stock Exchange or other regulated stock exchange;
- (c) the constituting documents of the fund and the Prospectus indicate that:
- (i) if the fund invests in vacant land for development purposes, the total value of such investments in vacant land must not exceed 20% of the net asset value of the fund;
- (ii) except to enable the fund to meet its liquidity needs, the fund will not borrow, nor enter into any other transaction which will give rise to a financial obligation, if the total borrowings or obligations of the fund exceed 50% of the value of the fund. of its net assets;
- (iii) the fund will distribute to unitholders at least 80% of its audited annual net income (adjusted to exclude any capital gain at fair value).
It is mandatory for a REIT fund to be listed on the Qatar Stock Exchange. Furthermore, the fund may not borrow more than 50% of its net assets and is required to distribute 80% of its audited net income. A fund may distribute more than 80% of its net income without any approval from unitholders. However, prior authorization is required if the fund decides to distribute less than 80% of its net income. The rules also require that 75% of the value of assets be invested in at least three income-generating investments, and that a maximum of 30% of the value of assets can be invested in assets under development.
A special investment fund is an exempt vehicle (article 82 (3) (b)), so that a QFC entity that is a special investment fund can opt for exempt status under article 82 of the QFC tax regulations. A special investment fund is defined by article 84 as a QFC entity which is:
- not a registered fund within the meaning of section 83;
- managed by a QFC approved entity; and
- established for one of the authorized activities listed in Article 84 (2).
Authorized activities include “making investments, including real estate investments”. Any distributions paid out of profits generated while a special investment fund is exempt are themselves exempt from QFC tax in the hands of the beneficiary.
The QFC Regulation has not developed specific rules regarding the constitution of REITs or similar real estate investment vehicles. However, to the extent that they are established under existing or new regulations, it is considered that Article 82 (2) (c) will have the effect of rendering most of these investment vehicles tax exempt. in the QFC, provided that it is managed by an approved QFC entity (Article 82 (1) (b)).
After analyzing this provision, REIT funds are exempt from corporation tax and the distribution of net income is also not taxed in the hands of the beneficiary. There is no withholding tax on the distribution of the net income of a special investment fund.
REITs are organized as trusts, authorized by the Hong Kong Securities & Futures Commission (SFC). REITs must be publicly traded and follow the listing rules specified by the SFC. The REIT may own real estate, directly or indirectly, through host structures that are legally and beneficially owned by the REIT. The REIT is expected to invest primarily in real estate located in Hong Kong or overseas. The REIT is expected to hold its interest in the real estate for at least two years, unless consent for an early disposal is obtained from investors by special resolution at its general meeting. A REIT is required to distribute 90% of its income as dividend income to its investors.
- A REIT authorized by the SFC is exempt from income tax under Section 26A (1A) of the Inland Revenue Ordinance. If the REIT owns real estate directly in Hong Kong and derives rental income from such property, the rental income will be subject to Hong Kong property tax. The normal rate of property tax is 15%.
- Where a REIT holds real estate indirectly through a special purpose vehicle, that vehicle will be subject to income tax. As of April 1, 2018, a two-tier profit tax regime applies. The profit tax rate for the first HK $ 2 million ($ 257,000) of corporate profits is 8.25%, while the standard profit tax rate of 16.5% applies to profits exceeding HK $ 2 million.
- Income from real estate located outside Hong Kong is exempt from profit tax and property tax.
- Dividends paid by special purpose entities are exempt from income tax.
- There is no withholding tax on interest, dividend or distribution payments from a REIT.
- The distribution of dividends from a REIT received by an investor is not subject to any tax in Hong Kong.
- Gains on the sale of units of a REIT are exempt from income tax. An investor carrying on a commercial or commercial activity consisting in the acquisition and disposal of units of a REIT is subject to income tax.
- An ad valorem stamp duty (AVD) is applicable on the agreement for the sale and purchase of residential properties. The AVD rate for residential real estate transactions is 15%, applicable to any instrument entered into, as of November 5, 2016, for the sale and purchase or transfer of residential properties, unless otherwise expressly provided or provided.
- When a residential property is acquired by a Permanent Resident of Hong Kong (HKPR) who is acting on his own behalf and does not own any other residential property in Hong Kong at the time of acquisition, the transaction will be exempt from the AVD rate of 15% and will only be subject to the DSA at the Scale 2 rates, that is to say at a preferential rate. However, as of April 12, 2017, the exemption will not apply if the purchaser of HKPR acquires more than one residential property under a single instrument, and the 15% rate will apply even if the The buyer / assignee is an HKPR acting on their behalf and does not own any other residential property in Hong Kong at the time of acquisition. The DSA on non-residential real estate transactions is payable upon signature of the sales contract as of February 13, 2013.
A Singapore REIT, or S-REIT, is organized as a mutual fund and is governed by the collective investment scheme. It must have a minimum market capitalization of SG $ 300 million ($ 221 million) based on issue price and issued share capital after the invitation when seeking a listing. At least 25% of the share capital must be held by a minimum of 500 public shareholders.
S-REITs are permitted to invest in real estate assets located inside or outside Singapore. At least 75% of the property must be invested in income producing assets. S-REITs are not permitted to invest in vacant land or mortgages (except for mortgage backed securities). Investments in unfinished real estate development should not exceed 10% of the total property value of the REIT. 90% of the income of an S-REIT must be distributed in any fiscal year.
Unitholders receiving distribution income will benefit from tax transparency treatment. Under this treatment, a trustee will not be taxed in respect of S-REIT’s income. However, any tax is levied at the level of the unitholder. Any undistributed income will be taxed at the S-REIT level. Foreign source dividend income received by an S-REIT may qualify for tax exemption. If the foreign source income is not eligible for the tax exemption, or if the income is in the nature of interest income on a shareholder loan, the S-REIT can request an exemption from the Tax Authority. from Singapore.
There is no withholding tax applicable on the distribution of dividends to individuals or to companies incorporated in Singapore. However, there would be a withholding tax on dividends distributed to non-residents non-individuals at 10%. The tax at the rate of 17% (corporation tax in force) will be applicable on the distribution to all other persons.
Distributions made on income taxed at the REIT level, capital gains, income from the holding of foreign property which is exempt under Article 13 (8) or Article 13 (12) of the Singapore corporate income tax law and dividends will be exempt in the hands of unitholders. Unitholders who are not residents of Singapore are subject to a final withholding tax of 10%.
The following stamp duty is applicable:
- 3% on non-residential property and 4% on residential property in Singapore on purchase consideration or market value, whichever is greater;
- an additional buyer’s stamp duty applies to purchases of residential real estate (including residential land) in addition to the stamp duty mentioned in the point above:
- 25% for purchases of any residential property by entities;
- the seller’s stamp duty is imposed at a rate of 0% to 12% on residential properties, depending on how long the seller holds the property;
- the seller’s stamp duty is imposed from 0% to 15% on industrial property, depending on the length of time the seller holds the property.
An S-REIT must also register for the Goods and Services Tax (GST) and collect 7% GST on rental income and related income from its real estate ownership, property management and related activities.
REIT rules are dynamic and different geographic jurisdictions have developed different regulations. Investors looking to invest in a REIT should analyze the tax implications and the rate of return they will receive after factoring in the tax cost. The above jurisdictions have signed tax treaties with other countries, and investors should also assess whether there is treaty relief. Investors may attempt to obtain advance rulings, if any, based on the REIT rules in force in the jurisdiction in which the investment is made.
Disclaimer: The content of this article is intended for general information purposes. You should always seek professional advice before acting. No responsibility is taken for any loss due to any action taken or refrained as a result of its contents.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Rajeev Agarwal is Head of Global Taxation at Qatar Navigation QPSC based in Qatar.
The author can be contacted at: [email protected]