Yesterday, 8 November 2006, at the Barcelona Meeting Point, Per-Åke Eriksson, Managing Director of the Swedish Property Federation and Chairman of the EPF EU REIT Committee, introduced the idea of creating an EU REIT. According to Eriksson, "The whole purpose of the EU is to work toward a level playing field where companies compete, not countries. The EU REIT is key to that."
EU REIT: The Way Forward
By Per-Åke Eriksson Managing Director of the Swedish Property Federation and Chairman of the EPF EU REIT Committee
The EU REIT idea
The EU REIT seems like a good idea: any investor can see the advantage of a single, tax-efficient pan-European property investment vehicle. But how could it happen? How could the EU pull it off? It's hard enough getting REITs in single countries. Isn't tax harmonisation at EU level particularly difficult?
The answer is that EU tax policy is on the way.. but not for everyone.
The organisation that I manage the Swedish Property Federation is a founding member of the European Property Federation (EPF), a body that works with the European authorities on EU property legislation. Our work in EPF helps us to see what's coming, and we see a Union emerging from crisis with the capacity to focus on policies where there's real EU added value. The changes are happening now.
It's this leaner, more focussed Europe that is giving the EU REIT a chance, because EU tax policy is part of the shake up.
Tax is a prime example of everything that's wrong with EU policy today: too much harmonisation where it's not needed, not enough where it is.
Why should the EU stop states from having low VAT rates on renovation and repair of housing or on rent? Why should it reserve this privilege for social housing? What possible interstate "distortion of competition" could there be for something as immobile as housing services? In my view, that's the kind of thing that has to go.
On the other hand, where there are major cross-border aspects to a business and cross-border property investment in Europe is accelerating exponentially the whole purpose of the EU is to work toward a level playing field where companies compete, not countries. The EU REIT is key to that.
The "tax harmonisation" aspect to the EU REIT shouldn't be a very big obstacle, because the goal should be to coordinate only the essentials, leaving each member state the freedom to adapt the other aspects to its particular taxation, housing and savings policies.
Europeans simply need to agree that no tax should be paid at company level on rental income or on capital gains if the capital gains are re-invested in property or distributed to shareholders as dividends. The origin of company income, or who the REIT is open to, or how much of the net income should be distributed, only need a flexible EU framework. Many important aspects such as gearing or the exit tax are eminently local in nature and shouldn't be covered by the EU at all.
Still, some countries don't want any kind of tax approximation because they see tax as fundamental to their national competitive advantage. For others, tax equates with national sovereignty just as the currency does.
The solution: Enhanced Cooperation
The solution is an EU Treaty provision called "enhanced cooperation": on a proposal from the European Commission and under the control of the European Parliament, some states go ahead and harmonise, but those who don't want to don't have to.
With enhanced cooperation, everybody wins. Countries with sovereignty concerns can stay out, but the beauty of the system, enshrined in the Treaties, is that they can change their minds and join at any time.
The process has already begun. The pioneer enhanced cooperation, now coming onto the assembly line, is the common consolidated EU corporate tax base. That makes sense: How can you compare tax "rates" if the tax bases differ?
The next logical step would be the corporate tax rates themselves, very likely not a single European rate but a band kee