New Law for Real Estate Investment Companies Takes Effect

Transcription

1 Volume 56, Number 7 November 16, 2009 New Law for Real Estate Investment Companies Takes Effect by Jordi Domínguez and Iván Rabanillo Reprinted from Tax Notes Int l, November 16, 2009, p. 506

2 Reprinted from Tax Notes Int l, November 16, 2009, p. 506 New Law for Real Estate Investment Companies Takes Effect Spain has enacted a law that provides for a new special tax and legal regime for some real estate investment companies (sociedades cotizadas de inversión en el mercado inmobiliario, or SOCIMIs). Law 11/2009 was published in the official gazette on October 27. The government expects the new SOCIMI regime to make Spain a more attractive location for real estate investment, especially as neighboring countries already provide advantageous tax regimes for real estate investment trusts. Following is a brief description of the main tax and legal features of the new SOCIMI regime. I. Special SOCIMI Tax Regime A. Corporate Form and Purpose SOCIMIs are listed joint-stock companies (sociedades anónimas) that must have as their main corporate purpose: 1) The purchase and development of urban real estate for rental purposes. 2) The holding of shares of other SOCIMIs or of nonresident entities that are subject to a requirement similar to the one applicable to SOCIMIs in connection with the mandatory dividend distribution (described in more detail below). 3) The holding of shares of regulated real estate collective investment funds and companies. 1 4) The holding of registered shares in other resident or nonresident entities that have as their main corporate purpose the purchase of urban real estate for rental purposes, that are subject to 1 It should be noted that regulated real estate collective investment funds and companies have not been a popular option for investors in Spanish real estate. Although those entities are subject to an advantageous tax regime (for example, they are subject to a 1 percent corporate income tax rate), their regulation is far stricter than the regulation contemplated by the SOCIMI law. COUNTRY DIGEST a regime similar to the one applicable to SOCI- MIs in connection with the mandatory distribution of dividends, and that meet requirements relating to investments and leverage (also described in more detail below). These subsidiaries must not hold participations in other lower-tier subsidiaries or engage in real estate development activities. Also, all of the shares of the subsidiaries must be owned by other SOCIMIs or by similar nonresident entities (such as the ones described in the second condition above). The nonresident entities referred to above in the second and fourth conditions must be resident in countries with which Spain has a treaty or other agreement providing for an exchange of tax information. The law allows SOCIMIs to carry out other ancillary activities that do not fall under the scope of their main corporate purpose. However, the ancillary activities must not account for more than 20 percent of the revenues of the SOCIMI in each tax year. 2 B. Entities Entitled to the Regime SOCIMIs and the Spanish resident qualifying subsidiaries referred to in Section I.A, condition 4 above may qualify for the SOCIMI tax regime. The decision to apply the SOCIMI regime must be adopted during the shareholders meeting, and the qualifying entity must notify the Spanish tax authorities before the last quarter of the tax year in which the SO- CIMI tax regime is to be applied. The SOCIMI election will remain applicable until the taxpayer waives its applicability. According to a transitional provision in Law 11/ 2009, an entity may apply for the special tax regime even if, at the moment of the election, the entity does not meet the eligibility requirements, provided that it meets the requirements within two years of the date that the SOCIMI election is filed with the tax authorities. 2 The law also contains provisions relating to the right to acquire real estate and to certain accounting principles. TAX NOTES INTERNATIONAL NOVEMBER 16,

3 COUNTRY DIGEST Reprinted from Tax Notes Int l, November 16, 2009, p. 506 C. Tax Rules Entities benefiting from the SOCIMI tax regime generally are subject to the Spanish corporate income tax (CIT) rules applicable to other Spanish resident entities. However, the following special rules apply: Twenty percent of the income derived from residential property leasing will be exempt from CIT, provided that more than 50 percent of the company s assets consist of residential property. The CIT base corresponding to qualifying income (see Section II.B) is equivalent to the proportion between: the amount of dividends distributed to the SOCIMI shareholders on profits obtained in the same tax year (or prior years reserves, as the case may be); and the profits obtained by the SOCIMI in the same tax year (in principle, qualifying taxable income obtained by an entity benefiting from the SOCIMI tax regime will be taxed at a rate of 18 percent). For nonqualifying income, the CIT base of the SOCIMI corresponds to the full amount of nonqualifying income obtained. 3 Such nonqualifying income will be taxed at the ordinary CIT rate (30 percent). For purposes of applying the ordinary CIT rate, the following items of income will be treated as nonqualifying income: capital gains relating to real property and participations, if the minimum holding period required is not met; capital gains relating to real property and participations, if the purchaser is a related party or is resident in a country that does not have an exchange of information agreement in force with Spain; rental income if the tenant is a related party or is resident in a country that does not have an exchange of information agreement in force with Spain; and transactions that do not give rise to a profit or loss because of the applicability of Spanish generally accepted accounting principles. Dividends paid by an entity benefiting from the SOCIMI tax regime are not subject to withholding taxes. It should be noted that the SOCIMI tax regime is not compatible with other special CIT regimes (such as the consolidated tax regime). However, the standard 3 Note that nonqualifying income is not subject to the mandatory dividend distribution rules described in Section II.G. CIT rules for tax credits and reductions apply, except for the tax credit for reinvestment of extraordinary income. 4 It should also be noted that the calculation of the CIT due by a SOCIMI will be carried out in connection with the nonqualifying income obtained by the SOCIMI, as of the last day of the SOCIMI s tax year; or in connection with qualifying income, as of the date that the shareholders of the SOCIMI decide to carry out a dividend distribution. In tax years in which the SOCIMI incurred losses or did not have reserves to distribute, the CIT will be assessed as of the last day of the SOCIMI s tax year. 5 D. Shareholders of a Qualifying Entity Dividends Dividends paid out of qualifying income obtained by an entity entitled to the benefits of the SOCIMI tax regime are subject to the following rules: If the recipient of the dividend is a Spanish resident CIT payer or a Spanish permanent establishment of a nonresident entity, the income to be recognized by the shareholder is the amount reached by multiplying the dividend by a ratio of 100 to 82. The CIT due (at a rate of 30 percent) will be lowered because of the applicability of a tax credit equivalent to 18 percent of the taxable income recognized. The effective CIT rate for the shareholder will thus be 12 percent. To illustrate, assuming a profit of 100 at the SOCIMI level, the tax costs for a SOCIMI and its shareholders would be as follows: SOCIMI CIT: 18 percent; CIT shareholders: (82 x 100/82) x 30 percent - 18 percent = 12 percent; and combined tax cost: 30 percent. 6 If the recipient of the dividend is a Spanish resident individual, the dividend will be fully exempt at the level of the shareholder. 4 The tax credit for reinvestment of extraordinary income may amount to as much as 6 percent of the gain obtained in connection with the transfer of real estate and qualifying participations, provided that the transactions are carried out within a specific time frame. 5 Note that the moment of calculation of the CIT liability is not relevant regarding the SOCIMI s obligation to file its CIT return. In any case, the SOCIMI s CIT return must be filed within 25 days following the six-month period after the last day of the SOCIMI s tax year. For example, if the tax year of a SO- CIMI is the calendar year, its CIT return must be filed before July 25 of the following year. 6 Dividends paid out of nonqualifying income are subject to the ordinary CIT rate (30 percent) at the shareholder level but could be entitled to the ordinary double tax credit under CIT rules. 2 NOVEMBER 16, 2009 TAX NOTES INTERNATIONAL

4 Reprinted from Tax Notes Int l, November 16, 2009, p. 506 COUNTRY DIGEST If the recipient of the dividend is a nonresident person without a PE in Spain, the dividend will be fully exempt from Spanish taxes (provided the recipient is not resident in a country that does not have an exchange of information agreement with Spain). Capital Gains Capital gains derived from the transfer of shares in an entity entitled to the benefits of the SOCIMI tax regime will be subject to the following rules: If the shareholder realizing a capital gain is a Spanish resident CIT payer or a Spanish PE of a nonresident entity, the determination of the capital gain to be recognized by the shareholder will depend on whether the gain can be deemed to correspond to reserves derived from qualifying income or nonqualifying income. If the capital gain is deemed to correspond to undistributed reserves derived from qualifying income (taxed at a rate of 18 percent), the taxable gain that will be subject to CIT at the shareholder level will correspond to 100/82 of the amount of the gain obtained. The final CIT burden will be lowered because of the applicability of a double tax credit that may be equivalent to 18 percent of the amount of the taxable gain recognized. The effective CIT rate for the shareholder will thus be 12 percent. Capital gains corresponding to reserves ultimately related to nonqualifying income will be subject in full to the ordinary CIT rate of 30 percent. The final CIT burden may be lowered because of the applicability of a double tax credit under the ordinary CIT. Capital losses incurred will not be deductible if the shares were acquired from a related party (up to the amount of the exempt income obtained by that party at the time of the first transfer). If the shareholder realizing a capital gain is a Spanish resident individual, the capital gain may be exempt at the shareholder level for an amount equivalent to the difference between 10 percent of the shares acquisition value multiplied by the number of years during which the transferred entity was entitled to the SOCIMI tax regime, and the amount of the tax-exempt dividends obtained by the taxpayer during the period of his investment. 7 If the shareholder realizing a capital gain is a nonresident person without a PE in Spain, the 7 The exemption may not apply if the shares transferred were acquired from a related party (to the extent of the loss realized by the related party on that transfer). same rules applicable to Spanish resident individuals will apply (provided that the shareholder is not resident in a country that does not have an exchange of information agreement with Spain). The nonexempt capital gain will be, in principle, subject to nonresident income tax (currently, at a rate of 18 percent), although an exemption may be available under the provisions of an applicable double tax treaty. Corporate Reorganizations Corporate restructurings that meet the definition of qualifying reorganizations for purposes of Spain s taxneutral regime based on the EU mergers directive, and that are carried out for purposes of allowing the incorporation of one or more entities that could qualify for the SOCIMI regime (or the conversion of an existing entity into a SOCIMI), will be deemed to have been carried out for valid economic reasons (a requirement for applying such a tax-neutral regime). E. Transfer Tax and Capital Duty SOCIMIs that acquire residential property for purposes of leasing and that acquire land for purposes of developing residential property that will be leased are entitled to a 95 percent reduction on the amount of transfer tax levied on such purchases (the applicable transfer tax rate generally is 7 percent, depending on the region where the transferred property is located), provided that the assets are held for the minimum holding period described in Section II.C. Moreover, capital contributions into the share capital of SOCIMIs (both in cash and in kind) are exempt from Spain s 1 percent capital duty. II. Legal Requirements A. Qualifying Assets At least 80 percent of a SOCIMI s assets must be invested in: urban real property (including Spanish or foreign assets, under some circumstances) that will be rented; land acquired for the development of urban real estate that will be rented afterward, provided that the development of the property starts within three years of the acquisition date; and participations in entities that meet the requirements described in Section I.A, conditions 2-4. If a SOCIMI has subsidiaries that are deemed to be part of the same group of companies for Spanish corporate law purposes, the calculation of the 80 percent threshold will take into account the consolidated financial statements. Moreover, it is required that the SO- CIMI have at least three real estate assets, and none of them should account for more than 40 percent of the total value of the SOCIMI s assets. TAX NOTES INTERNATIONAL NOVEMBER 16,

5 COUNTRY DIGEST Reprinted from Tax Notes Int l, November 16, 2009, p. 506 Notably, some real estate assets do not qualify as real estate property for purposes of the SOCIMI regime. These include property leased under an agreement that may be regarded as a financial leasing agreement, and some assets that are related to roads, highways, airports, harbors, the production of electricity or gas, oil refineries, or nuclear plants. B. Qualifying Income At least 80 percent of the income obtained by a SO- CIMI in a given year must come from rental income and dividends or capital gains from participations in entities that meet the requirements described in Section I.A, conditions 2-4. Under some circumstances, income derived from the sale of qualifying participations or qualifying real estate is not taken into account for purposes of the 80 percent threshold. In the case of a group of companies for Spanish corporate law purposes (with the SOCIMI being the top holding company), the amounts will be calculated based on the consolidated financial statements. C. Minimum Holding Period In principle, real estate owned by a SOCIMI must be rented (or offered for rent) for a minimum of three years. If the real estate was developed by the SOCIMI, the minimum period is seven years. Participations in entities that meet the requirements described in Section I.A, conditions 2-4, must be held for a minimum threeyear period as well. Special rules may apply in connection with the calculation of this minimum period. D. Listing Requirements A SOCIMI must be listed on a Spanish stock exchange or an EU or European Economic Area stock exchange, without interruption, during the whole tax year in which the special SOCIMI tax regime is applicable. During the first year in which the special SO- CIMI tax regime is applicable, the listing period should begin on the date that the company elects to apply the regime. 8 The listing requirement also applies to lower-tier SOCIMIs or nonresident subsidiaries described in Section I.A, condition 2. E. Minimum Capital SOCIMIs must have minimum share capital amounting to 15 million. Corporate rules are provided for the valuation of in-kind real estate asset contributions. F. Classes of Shares SOCIMIs may not have different classes of shares. 8 In any event, one must consider the transitional period described in Section I.B. G. Mandatory Dividend Distribution SOCIMIs and the Spanish-resident qualifying subsidiaries referred to in Section I.A, condition 4, that have elected to benefit from the special SOCIMI tax regime will be required to distribute dividends to their shareholders annually. As a general rule, the dividends must amount to at least: 90 percent of the SOCIMI s ordinary profits (that is, profits derived from rental income and ancillary activities); 50 percent of the profits derived, during the aforementioned holding period, from capital gains in connection with the sale of real property or of participations in qualifying subsidiaries (the remainder must be reinvested in the qualifying assets described in Section II.A within three years following the transfer, after which any income not reinvested must be distributed); or 100 percent of the profits derived from dividend income from other SOCIMIs or other qualifying subsidiaries. H. Limitations to Third-Party Indebtedness Third-party indebtedness may not exceed 70 percent of the total assets of a SOCIMI. If a SOCIMI has subsidiaries that are deemed to be a part of the same group of companies for Spanish corporate law purposes, the calculation of this 70 percent threshold will take into account the consolidated financial statements. III. Entry Into Force According to Law 11/2009, the provisions governing the SOCIMI tax regime apply to tax years beginning on or after January 1, However, companies with fiscal years that coincide with the calendar year will not be in a position to elect to apply the SOCIMI regime in fiscal 2009 because such an election must be filed with the tax authorities before September 30, Consequently, companies with fiscal years that coincide with the calendar year may apply the SO- CIMI regime only for years beginning on or after January 1, IV. Other Aspects It should be noted that the SOCIMI regime includes detailed rules in connection with information reporting requirements and the implications of the election to apply the SOCIMI tax regime, an eventual waiver from the SOCIMI tax regime, and nonqualification for the benefits of the SOCIMI regime because of noncompliance with mandatory eligibility requirements. Please note that this is a general summary that highlights the main tax and legal issues pertaining to the recent enactment of the SOCIMI regime, and it does 4 NOVEMBER 16, 2009 TAX NOTES INTERNATIONAL

6 Reprinted from Tax Notes Int l, November 16, 2009, p. 506 COUNTRY DIGEST not constitute tax advice. Readers should seek individualized advice to determine the applicability of this regime to their particular situations. Jordi Domínguez and Iván Rabanillo, Latham & Watkins LLP, Madrid TAX NOTES INTERNATIONAL NOVEMBER 16,