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Real Estate Investment Trusts: Tax Implications for Investors

Oct. 6, 2021, 7:00 AM

A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.

There are a number of requirements that listed REITs need to satisfy, depending upon the regulations of the jurisdiction in which they operate; in this article we will examine REIT rules in certain countries as examples.

We examine below the tax implication of REITs in different jurisdictions.

Qatar

REIT rules are governed by the Qatar Financial Center (QFC Legislation). As per sub rule (2), a QFC retail property fund is a real estate investment trust (REIT) if:

  • (a) the fund is a closed ended scheme;
  • (b) the fund is listed in the Qatar Stock Exchange or another regulated exchange;
  • (c) the fund’s constitutional documents and Prospectus state that:
    • (i) if the fund invests in vacant land for the purpose of development, the total value of those investments in vacant land must not exceed 20% of the value of the fund’s net assets;
    • (ii) except to enable the fund to meet with its liquidity requirements, the fund will not borrow, or enter into any other transaction that will result in a financial obligation, if the fund’s total borrowings or obligations will exceed 50% of the value of its net assets;
    • (iii) the fund will distribute to unitholders at least 80% of its audited annual net income (adjusted to exclude any fair value capital gains).

It is mandatory for a REIT fund to list on the Qatar Stock Exchange. Moreover, the fund cannot borrow more than 50% of its net assets and is required to distribute 80% of its audited net income. A fund can distribute more than 80% of its net income without any approval from unit holders. However, prior approval is required if the fund decides to distribute less than 80% of its net income. The rules also require that 75% of asset value be invested in at least three income-generating investments, and a maximum of 30% of asset value can be invested in the assets under development.

A special investment fund is an exempt vehicle (Article 82(3)(b)), so a QFC Entity that is a special investment fund may elect for exempt status under Article 82 of the QFC tax regulations. A special investment fund is defined by Article 84 as a QFC Entity that is:

  • not a registered fund within Article 83;
  • managed by an approved QFC entity; and
  • established for one of the permitted activities listed in Article 84(2).

The permitted activities include “making investments, including investments in property.” Any distributions paid out of the profits arising whilst a special investment fund is exempt are themselves exempt from QFC tax in the hands of the recipient.

The QFC regulation has not developed specific rules covering the establishment of REITs or similar property investment vehicles. However, to the extent that they are established either under existing or new regulations, it is considered that Article 82(2)(c) will have the effect of making most of those investment vehicles exempt from tax in the QFC, subject to it being managed by an Approved QFC Entity (Article 82(1)(b)).

On analysis of this provision, REIT funds are exempted from corporate tax and distribution of net income is also not taxed in the hands of the recipient. There is no withholding tax on distribution of net income from a special investment fund.

Hong Kong

REITs are formed as trusts, authorized by the Hong Kong Securities & Futures Commission (SFC). REITs must list on the stock exchange and follow listing rules specified by the SFC. The REIT may hold real estate, directly or indirectly, through special purpose vehicles that are legally and beneficially owned by the REIT. The REIT should primarily invest in real estate properties which are located in Hong Kong or overseas. The REIT should hold its interest in the real estate properties for at least two years, unless consent for earlier disposal is obtained from investors by way of special resolution at its general meeting. A REIT is obligated to distribute 90% of its income as dividend income to its investors.

  • A REIT that is authorized by the SFC is exempted from profits tax under Section 26A(1A) of the Inland Revenue Ordinance. If the REIT is holding real estate directly in Hong Kong, and derives rental income from such properties, the rental income will be subject to property tax in in Hong Kong. The standard rate of property tax is 15%.
  • When a REIT holds real estate properties indirectly through a special purpose vehicle, such vehicle will be subject to profits tax. With effect from April 1, 2018, a two-tiered profits tax rates regime applies. The profits tax rate for the first HK$2 million ($257,000) of corporate profits is 8.25%, while the standard profits tax rate of 16.5% applies for profits exceeding HK$2 million.
  • Income derived from real estate situated outside of Hong Kong is exempt from profit tax and property tax.
  • Dividends paid by special purpose vehicles are exempt from profits tax.
  • There is no withholding tax on remittance of interest, dividends or distribution from a REIT.
  • Distribution of dividends from a REIT received by an investor is not subject to any tax in Hong Kong.
  • Gains on the sale of units of a REIT are exempted from profits tax. An investor carrying on trade or business consisting of acquisition and disposal of units of a REIT is subject to profits tax.
  • Ad valorem stamp duty (AVD) is applicable on agreement of sale and purchase of the residential properties. The AVD rate for residential property transactions is 15%, applicable to any instrument executed, on or after Nov. 5, 2016, for the sale and purchase or transfer of residential property, unless specifically exempted or provided for otherwise.
  • Where residential property is acquired by a Hong Kong permanent resident (HKPR) who is acting on their own behalf and does not own any other residential property in Hong Kong at the time of acquisition, the transaction will be exempt from the AVD rate of 15% and will only be subject to AVD at Scale 2 rates, i.e., a concessional rate. However, with effect from April 12, 2017, the exemption will not apply if the HKPR buyer acquires more than one residential property under a single instrument, and the rate of 15% will apply even if the purchaser/transferee is a HKPR acting on their own behalf and does not own any other residential property in Hong Kong at the time of acquisition. AVD on nonresidential property transactions is payable upon the execution of the agreement for sale on or after Feb. 13, 2013.

Singapore

A Singaporean REIT, or S-REIT, is constituted as a unit trust and is governed by the collective investment scheme. It must have a minimum market capitalization of SG$300 million ($221 million) based on issue price and post-invitation issued share capital when seeking a listing. At least 25% of the share capital must be held by a minimum of 500 public shareholders.

S-REITs are allowed to invest in real estate-related assets located in or outside of Singapore. At least 75% of the property should be invested in income-producing assets. S-REITs are not allowed to invest in vacant land or mortgages (except for mortgaged-backed securities). Investments in uncompleted property development should not exceed 10% of the value of the total property of the REIT. 90% of the income of an S-REIT should be distributed in any financial year.

Unit holders receiving distribution income will qualify for tax transparency treatment. Under this treatment, a trustee will not be taxed in respect of S-REIT income. However, tax if any is levied at unit holder level. Any income which is not distributed will be taxed at S-REIT level. Foreign-sourced dividend income received by an S-REIT can claim tax exemption. If foreign-sourced income does not qualify for tax exemption, or the income is in the nature of interest income on a shareholder’s loan, the S-REIT can apply for exemption from the Singapore Tax Authority.

There is no withholding tax applicable on distribution of dividends to individuals or companies incorporated in Singapore. However, there would be withholding tax on dividends distributed to nonresident non-individuals at 10%. Tax at the rate of 17% (current corporate tax) will be applicable on distribution to all other persons.

Distributions made from income taxed at REIT level, capital gains, income originating from holding foreign properties which is exempted under Section 13(8) or Section 13(12) of the Income Tax Act and dividend from Singapore companies will be exempted in the hands of unit holders. Corporate unit holders who are not residents of Singapore are subject to final withholding tax of 10%.

The following stamp duty is applicable:

  • 3% on nonresidential property, and 4% on residential property in Singapore on purchase consideration or market value, whichever is higher;
  • additional buyer’s stamp duty applies to purchases of residential property (including residential land) in addition to the stamp duty mentioned in the above point:
    • 25% for purchases of any residential property by entities;
  • seller’s stamp duty is imposed at 0% to 12% on residential property, depending upon how long the seller is holding the property;
  • seller’s stamp duty is imposed at 0% to 15% on industrial property, depending upon how long the seller is holding the property.

An S-REIT must also register for goods and services tax (GST) and collect 7% GST from the rental and related income derived from its property holding, property management and related activities.

Way Forward

REIT rules are dynamic and different geographic jurisdictions have come up with different regulations. Investors who are looking to invest in a REIT should analyze the tax implications and rate of return that will be received by them after considering the tax cost. The above jurisdictions have executed tax treaties with other countries, and investors should also make an assessment of whether there is any relief provided by tax treaty. Investors may try to obtain advance rulings, if available, based on the REIT rules prevailing in the jurisdiction in which investment is made.

Disclaimer: The content of this article is intended for general information purposes. You should always seek professional advice before acting. No responsibility is taken for any loss because of any action taken or refrained from in consequence of its contents.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Rajeev Agarwal is head of global tax with Qatar Navigation QPSC based out of Qatar.

The author may be contacted at: rajeagar2012@gmail.com

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