The new Spanish regime for property investment (SOCIMI) fails to capture the benefits of a true REIT structure and is a missed opportunity for the Spanish Government, according to the European Public Real Estate Association. EPRA views the 'REIT' label as unjustified since the SOCIMI regime has departed from the standard REIT model of tax exemption at the entity level. Instead, a reduced 18% flat rate is provided for qualifying net income, payable by the SOCIMI itself.
"The half-way option chosen by the Spanish Government appears to be motivated by the fear of a loss of tax revenue," said EPRA's Finance Director Gareth Lewis. The industry's view is that corporate tax and other onerous restrictions will limit the ability of the SOCIMI regime to attract new capital back into the Spanish market. This will deny Spain the benefits that REITs are capable of bringing, which have been witnessed in the more classical REIT markets.
"The reason REITs have been so successful in the more mature real estate markets, such as the US, Japan, the UK, France, the Netherlands, Belgium, Italy and Germany, is down to their ability to access a global pool of investment that comes from being part of a widely understood, transparent and well managed investment vehicle," Lewis continues.
There is a common misperception that REITs are introduced to save tax for property companies and therefore result in a loss of tax for local governments. EPRA argues that there is ample evidence to show that REIT regimes actually increase government tax receipts through increased taxation on the dividend flow to investors, resulting in an increase in transfer tax generation. The impact of accrued investments by the REITs also generates VAT, local property taxes, transaction costs and social charges etc.
As an example, it is estimated that the conversion to a SIIC (the French REIT equivalent) of Europe's largest REIT, Unibail-Rodamco, has resulted in a recurring contribution to the French government being multiplied by four through indirect taxation.
The classic REIT model that is proving so popular with governments and the market alike is the publicly listed, corporate structure that provides 'flow through' treatment of rental income whereby tax is effectively collected once at the shareholder level. The industry's view is that the double taxation arising from the fact that tax is imposed on the SOCIMI as well as on shareholders could significantly limit the ability of the Spanish regime to attract new capital back into Spain.
"Despite the good intentions surrounding the introduction of the Spanish SOCIMI, EPRA continues to think that Spain would highly benefit from adopting a real REIT regime based on the consistent common rule of taxation of profits at shareholder level," sums up EPRA CEO Philip Charls.
"The more successful REIT markets are those where governments have struck a healthy balance between tax revenue protection and creating a market that investors are comfortable with. The Spanish property sector deserves a more ambitious structure than the SOCIMI."