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Investors Take Note: Spanish REITs Introduce Lower Rate Tax – from 30% to 19%

28 Jan 2010

There's been a major tax change submitted to the Spanish Parliament for the implementation of the Real Estate Investment Trust (the Spanish equivalent of REITs known as "SOCIMIs") regime in Spain. The basic feature of the special tax regime for SOCIMI is that they will be subject to 19% CIT instead of the regular 30% tax rate.

Dividends distributed to non-resident investors will be tax exempt. There is an obligation to distribute dividends annually. Capital gains obtained by non-resident investors on the sale of their participations in the SOCIMI would be partially tax exempt in Spain.

Taxand Spain looks at the features of the new SOCIMI and identifies how multinationals can take advantage of this by exploring potential tax planning opportunities with REITs in your territories of operation.

This Law has introduced a new regime in Spain, including most notably the following features;
SOCIMIs are defined as companies whose main business must be to:

  • acquire and develop urban real estate for leasing purposes
  • hold interests in the capital stock of other SOCIMIs or, subject to the fulfillment of certain conditions, in the equity of other similar foreign entities not residing in tax havens
  • hold interests in real estate collective investment vehicles regulated in Law 35/2003, of November 4, 2003 (the entities described above are known as "Eligible Entities").

According to this new Law, SOCIMIs must meet the following requirements:

  • they must have a minimum capital stock of EUR15 million and their shares must belong to the same class and be admitted to trading on a regulated market in Spain or in any other EU or EEA Member State uninterruptedly throughout the tax period
  • their external financing may not exceed 70% of their assets
    at least 80% of their assets must be urban real estate for leasing purposes, land lots for developing such real estate, provided that development commences within three years following their acquisition, and interests in the capital or equity of Eligible Entities
  • at least 80% of the income for the tax period corresponding to each specific fiscal year, excluding gains from the transfer of holdings and of real estate used in the pursuit of the main corporate purpose and after completion of the minimum holding period described below, must be derived from the leasing of real estate and from dividends or shares in income from holdings in Eligible Entities
  • their real estate assets must be leased out for at least three years (or seven in the case of real estate developed by the SOCIMI). SOCIMIs must own at least three properties among their assets, none of which may, at the time of their acquisition, account for more than 40% of the SOCIMI's assets
  • they must distribute, in the form of dividends, at least (a) 90% of the income not derived from the transfer of real estate and holdings in Eligible Entities or from ancillary activities, (b) 50% of the income derived from the transfer of real estate and holdings in Eligible Entities after completion of the minimum holding period, and subject to reinvestment of the remaining 50% in other real estate or holdings within three years following the transfer date, and (c) 100% of the income from dividends or shares in income distributed by Eligible Entities.

A SOCIMI that fulfills the above requirements may elect to apply the special tax regime established in the new Law and detailed below:

  • the Spanish corporate income tax rate will be 19%, although in certain exceptional cases the general rate of 30% will apply (e.g. to income obtained from leasing real estate to other group entities)
  • the SOCIMI will only be taxed when it distributes dividends
  • the SOCIMI cannot elect to apply the consolidated tax regime
  • a tax credit for the reinvestment of extraordinary income can be taken.

SOCIMIs will forfeit the special tax regime and become subject to the general corporate income tax regime if certain circumstances arise, such as exclusion from trading on regulated markets or the failure to distribute dividends.

Lastly, we highlight an important change ushered in by the new Law, namely, the elimination of one of the requirements for real estate collective investment vehicles (whether in the form of real estate investment funds or real estate investment companies) to qualify for the special tax regime for such vehicles, the tax rate for which is 1%: previously, more than 50% of the vehicle's assets had to consist of residential dwellings, student accommodation, or rest homes for the elderly.

With the elimination of this requirement (already effective for 2009), the regime for real estate collective investment vehicles--barely a success story in the Spanish market until now--will, we predict, enjoy a resurgence.

Taxand's Take

The new tax regimes prove advantageous to those looking to invest in Spain. Multinationals can effectively cut the tax paid on their investments by over a third. The rules established for SOCIMIs will make them an interesting platform from which non-resident entities can make real estate investments.

Should multinationals be looking at Spain as a potential location for real estate investments, we believe that this is an excellent occasion to explore potential tax planning opportunities with REITs in your respective jurisdictions. We are already working for some French and Dutch REIT already present in Spain.

These new regimes (for SOCIMIs and modified collective investment vehicles) open up new business and tax opportunities in Spain in what can be classed a badly-hit real estate industry.

Your Taxand contacts for further queries are:
Pedro Saavedra
T. +34 91 514 52 00

Jos? Ignacio Ripoll
T. +34 91 514 52 00

Taxand's Take Author