NEXIA International Tax Conference Geneva 2006 Member of Real Estate Investment Trusts („REITs“)...
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Transcript of NEXIA International Tax Conference Geneva 2006 Member of Real Estate Investment Trusts („REITs“)...
NEXIA International Tax Conference Geneva 2006
Member of
Real Estate Investment Trusts („REITs“)
– general overview and the development in Germany
Norbert NeuGerman CPACertified Tax Adviser
Partner ofDHPG Dr. Harzem & Partner KG, BonnMember of Nexia Deutschland GmbH
Folie 2 WP/StB Dr. Norbert Neu 2006
I. What is a REIT?
II. REITs - the global perspective
III. REITs - the German approach (“G-REIT”)
1. Current state of discussion
2. Regulatory conditions
3. Tax issues
IV. Sum up and the Nexia perspective
Structure
Folie 3 WP/StB Dr. Norbert Neu 2006
I. What is a REIT?- characteristics -
Legal Structures Corporation or Trust usually public, but private as well
Allowed types of assets Investments in real estate and/or loans to finance real estate (Equity REITs,
Mortgage REITs, Hybrid REITs) other assets allowed (normally 25 % max.)
Allowed types of earnings From property activities (lending, possibly development, services, trading); other earnings allowed (normally 25 % max.)
Allowed application of profits Distribution to shareholders retention of profits allowed (normally 5-10 % max.)
Tax treatment Dividend payments as deductible expenses tax exemption of company
Folie 4 WP/StB Dr. Norbert Neu 2006
I. What is a REIT?- alternatives and distinctive features -
Alternatives Direct investment Partnerships Listed real estate companies Open-end funds
Distinctive features Nature of business Legal form Regulatory background Corporate governance Taxation
Folie 5 WP/StB Dr. Norbert Neu 2006
I. What is a REIT?
II. REITs - the global perspective
III. REITs - the German approach (“G-REIT”)
1. Current state of discussion
2. Regulatory conditions
3. Tax issues
IV. Sum up and the Nexia perspective
Structure
Folie 6 WP/StB Dr. Norbert Neu 2006
II. REITs – the global perspective- development -
Introduced in the USA in the late 1960’s
Also established in Canada, South-America, Asia and Australia
Increasing acceptance in Europe Belgium, Netherlands, Italy, Luxembourg, Spain Introduction in France in 2003 Introduction expected in the UK in the near future Discussions in Germany
Folie 7 WP/StB Dr. Norbert Neu 2006
II. REITs – the global perspective- geographical extension -
Folie 8 WP/StB Dr. Norbert Neu 2006
II. REITs – the global perspective- experiences in the United States -
Nearly 200 publicly traded US-REITs
2/3 of US-REITs traded on national stock exchanges
2/3 institutional investors, 1/3 private investors
Assets ~ 500 billion US-$
Folie 9 WP/StB Dr. Norbert Neu 2006
II. REITs – the global perspective- characteristics for investors -
Low volatility of market prices
Constant cash flow
Quick and easy exit
Conservative investment
Folie 10 WP/StB Dr. Norbert Neu 2006
I. What is a REIT?
II. REITs - the global perspective
III. REITs - the German approach (“G-REIT”)
1. Current state of discussion
2. Regulatory conditions
3. Tax issues
IV. Sum up and the Nexia perspective
Structure
Folie 11 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach (‘”G-REIT”)1. Current state of discussion
Private initiative of banks, insurance companies and the Federal Ministry of Finance
Strengthening of competitiveness of Germany as financial center
Creating a new kind of investment for domestic and foreign investors
Transfer of publicly owned properties (residential use) to the market (€ 100 billion)
Germany as biggest market of commercial property in Europe (€ 1,500 billion)
Ongoing discussion Different views in new government Tax issues as potential deal breaker (?)
Folie 12 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach2. Regulatory conditions
a) Business activities
b) Legal form and accounting
c) Profit distribution
d) Capital structure
e) Structure of shareholders
Folie 13 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach2. Regulatory conditions
a) Business activities
Core business (ring fenced) Purchase, construction, sale, rent and lease of real estate > 75% of assets consist of real estate; > 75 % of earnings
derive from main business activities; restrictions for sales
Ancillary activities with G-REIT status (ring fenced) Support of main business activities (administration
etc.) Conservative investment of liquid funds
Other activities (non-ring fenced) Conducted by subsidiaries Activities restricted
Folie 14 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach2. Regulatory conditions
b) Legal form and accounting
German corporation (“Aktiengesellschaft” [“AG”]) with both registered seat and place of management and control in Germany
Listed at German stock exchange
Financial statements in accordance with IFRS
Folie 15 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach2. Regulatory conditions
c) Profit distribution
Principle at least 90 % of profit to be distributed to shareholders Distribution quota measured according to IFRS
Exceptions Capital gains: Reinvestment possible Valuation gains: Excluded
Folie 16 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach2. Regulatory conditions
d) Capital structure
Authorized capital > € 5 million
Overall capitalization > € 50 million
No legal restriction for debt-equity-ratio
But factual restriction because of high distribution quota
Folie 17 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach2. Regulatory conditions
e) Structure of shareholders
Min. 25 % free float
Maximum holding requirement in discussion < 10 % tax reasons (see below)
Folie 18 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach3. Tax issues
a) One-time taxation on foundation
b) Ongoing taxation of G-REIT
c) Ongoing taxation of German shareholders
d) Ongoing taxation of foreign shareholders
Folie 19 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach3. Tax issues
a) One-time taxation on foundation
Taxes on income Realization of hidden reserves in real estate, even if no
transfer of property, but only qualification of existing listed company as G-REIT
Tax advantages– Only 50 % of the difference between market value and
book value taxable– Tax deferral (tax payment over a 4-years-period, no
interest)– Only applicable for a restricted time after introduction of
REIT-legislation
Real estate transfer tax If actual transfer of property to another entity Tax rate = 3.5 %
Folie 20 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach3. Tax issues
b) Ongoing taxation of G-REIT
Principle G-REIT not subject to tax Rents deriving from foreign property (direct investments
or investments in foreign property companies) taxable abroad
standard tax regime for subsidiaries with auxiliary activities
Breakdown of profits Basket 1: Tax-free Basket 2: Taxed abroad Basket 3: Taxed on the level of subsidiaries
Folie 21 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach3. Tax issues
c) Ongoing taxation of German shareholders
Basket 1 (tax-free) Dividend fully taxable No half-income system for individuals, no tax-exemption for
corporations Basket 2 (taxed abroad)
Direct investments– Imputation of foreign tax (no treaty or treaty with imputation
system): dividend fully taxable, foreign tax credit– Exemption of foreign income (treaty with exemption method):
dividend tax exempt Investments in foreign Real Property Companies: Half-income
system for individual, tax-exemption for corporate shareholders Basket 3 (taxed on the level of domestic subsidiaries)
Half-income system for individual, tax-exemption for corporate shareholders of G-REIT
Imputation of tax withheld by subsidiaries
Folie 22 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach3. Tax issues
c) Ongoing taxation of German shareholders
100 % taxable(foreign tax credit)
95 % tax-free (corporate) or 50 % tax-free (individual)
100 % tax exempt
100 % taxable(foreign tax credit)
G-REIT
Domestic REIT Income(ring fenced business)
Domestic Non-REIT Income(non-ring fencedbusiness)
Foreign income, tax exempt in Germany
Foreign income, taxable in Germany
Folie 23 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach3. Tax issues
d) Ongoing taxation of foreign shareholders
Parent Subsidiary Directive: Not applicable because of tax exemption of G-REIT
Tax treaties: Applicable because of treaty entitlement of G-REIT
Taxation right for state of residence of the shareholder
Limited withholding tax on dividends for Germany
– Individual shareholders: usually 15 % – Corporate shareholders: usually 5 %
Folie 24 WP/StB Dr. Norbert Neu 2006
III. REITs – the German approach3. Tax issues
d) Ongoing taxation of foreign shareholders
Problem No tax on income of G-REIT in Germany Only low withholding tax on dividends, if any Tax leakage
Possible Solutions Revisions of double tax treaties
– No reduction or only limited deduction of withholding taxes in case of REITs (example: Art. 10 of the tax treaty between Germany and the United States)
– Difficult and time consuming, results doubtful Qualification of dividends as rental income (different models) Maximum holding requirement (< 10 %) EURO-REIT-Directive
Ongoing discussions
Folie 25 WP/StB Dr. Norbert Neu 2006
I. What is a REIT?
II. REITs - the global perspective
III. REITs - the German approach (“G-REIT”)
1. Current state of discussion
2. Regulatory conditions
3. Tax issues
IV. Sum up and the Nexia perspective
Structure
Folie 26 WP/StB Dr. Norbert Neu 2006
IV. Sum up and the Nexia perspective
Sum up Trend to REITs Taxation of foreign shareholders as potential deal breaker in
Germany
The Nexia perspective Information of clients about developments (UK, Germany) Cross-border consulting of clients regarding investments in
REITs Assisting companies to found REITs REITs as clients