OECD REITs Report and Model Convention Update Luis Nouel, IBFD Amsterdam
Agenda Treaty entitlement of REITS Distributions Capital gains Cross-border situations
General characteristics of REITs REITS varies from country to country. The 2008 report specifies that in general REITS are: Formed as companies, trusts or contractual or fiduciary arrangements; Widely held; Income from long-term investment in immovable property; Distribute most of that income annually; and Do not pay income tax: Tax exemption Flow-through Dividend Deduction Exemption for Eligible Income Taxation on Net Asset Value
Treaty entitlement Wording of Art. 1 of the OECD Model requires person + resident Can a REIT be a person? Can it be a Resident? Entitlement is important, not only for application of the treaty provisions to the income of the REIT, but also as regards the application of tax treaties to the distributions of a REIT.
Distributions Art. 10 OECD Model 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed... Payer must be a company resident in the source country
Alternative wording on Art. 10 - policy considerations Country R No common treatment: Companies Art. 10 Others depends Country S REITCo Country where the immovable property is located should have primary right to tax, so... Income from immovable property or dividends?
Alternative wording on Art. 10 - policy considerations Large Investor Dividend income may be regarded as nothing more than the allocation of income derived primarily from immovable property to a share underlying income Small Investor Just looking for a return on an investment No limitation on source taxation Limitation on source as portfolio equity investment
Alternative wording on Art. 10 corporate REITS 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State (other than a beneficial owner of dividends paid by a company which is a REIT in which such person holds, directly or indirectly, capital that represents at least 10 per cent of the value of all the capital in that company), the tax so charged shall not exceed:...
Alternative wording on Art. 10 corporate REITS (cont)... a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends (other than a paying company that is a REIT); b) 15 per cent of the gross amount of the dividends in all other cases.
Distributions InvestCo1 InvestCo2 15% 2% Country R Country S Unlimited taxation Art.10(2) Modified REITCo Limited taxation at source 15% Art. 10(2)b
Alternative wording on Art. 10 Special cases Optional wording of Art. 10(1) for non-resident corporate REITS: Dividends paid by a company which is a resident, or a REIT organized under the laws, of a Contracting State to a resident of the other Contracting State may be taxed in that other State. Optional wording of Art. 10(2) for non-corporate REITS For the purposes of this Convention, where a REIT organized under the laws of a Contracting State makes a distribution of income to a resident of the other Contracting State who is the beneficial owner of that distribution, the distribution of that income shall be treated as a dividend paid by a company resident of the first-mentioned State.
Capital Gains Gains obtained by large investors should be treated as per Art. 13(4) Gains obtained by small investors should be treated as gains from securities rather than an indirect holding in immovable property Art.13(5) Shares of REITCo InvestCo1 InvestCo2 Shares of REITCo 15% 2% Country R Country S Unlimited taxation Art. 13(4) Taxation restricted by Art. 13(5) REITCo
Capital Gains - Flow-through REIT Units InvestCo1 InvestCo2 REIT Units 15% 2% Country R Country S REIT Unlimited taxation Art. 13(1) S-R treaty
Cross border investments InvestCo1 InvestCo2 15% 2% Country X Country R Unlimited taxation? Art.10(2) Modified REITCo Limited taxation at source - 15% Country S Unlimited taxation Art. 6
Cross border investments InvestCo1 InvestCo2 Country Y 15% 2% Country X Unlimited taxation? REITCo1 Limited taxation at source - 15% Country R 15% Unlimited taxation? REITCo2 Country S Unlimited taxation Art. 6
Thank you l.nouel@ibfd.org