NEXIA International Tax Conference Geneva 2006 Member of Real Estate Investment Trusts („REITs“) – general overview and the development in Germany Norbert

NEXIA International Tax Conference Geneva 2006

Member of

Real Estate Investment Trusts („REITs“)

– general overview and the development in Germany

Norbert NeuGerman CPACertified Tax Adviser

[email protected]

Partner ofDHPG Dr. Harzem & Partner KG, BonnMember of Nexia Deutschland GmbH

Folie 2 WP/StB Dr. Norbert Neu 2006

I. What is a REIT?

II. REITs - the global perspective

III. REITs - the German approach (“G-REIT”)

1. Current state of discussion

2. Regulatory conditions

3. Tax issues

IV. Sum up and the Nexia perspective

Structure


I. What is a REIT?- characteristics -

Legal Structures Corporation or Trust usually public, but private as well

Allowed types of assets Investments in real estate and/or loans to finance real estate (Equity REITs,

Mortgage REITs, Hybrid REITs) other assets allowed (normally 25 % max.)

Allowed types of earnings From property activities (lending, possibly development, services, trading); other earnings allowed (normally 25 % max.)

Allowed application of profits Distribution to shareholders retention of profits allowed (normally 5-10 % max.)

Tax treatment Dividend payments as deductible expenses tax exemption of company


I. What is a REIT?- alternatives and distinctive features -

Alternatives Direct investment Partnerships Listed real estate companies Open-end funds

Distinctive features Nature of business Legal form Regulatory background Corporate governance Taxation


I. What is a REIT?





3. Tax issues


Structure


II. REITs – the global perspective- development -

Introduced in the USA in the late 1960’s

Also established in Canada, South-America, Asia and Australia

Increasing acceptance in Europe Belgium, Netherlands, Italy, Luxembourg, Spain Introduction in France in 2003 Introduction expected in the UK in the near future Discussions in Germany


II. REITs – the global perspective- geographical extension -


II. REITs – the global perspective- experiences in the United States -

Nearly 200 publicly traded US-REITs

2/3 of US-REITs traded on national stock exchanges

2/3 institutional investors, 1/3 private investors

Assets ~ 500 billion US-$


II. REITs – the global perspective- characteristics for investors -

Low volatility of market prices

Constant cash flow

Quick and easy exit

Conservative investment


I. What is a REIT?





3. Tax issues


Structure


III. REITs – the German approach (‘”G-REIT”)1. Current state of discussion

Private initiative of banks, insurance companies and the Federal Ministry of Finance

Strengthening of competitiveness of Germany as financial center

Creating a new kind of investment for domestic and foreign investors

Transfer of publicly owned properties (residential use) to the market (€ 100 billion)

Germany as biggest market of commercial property in Europe (€ 1,500 billion)

Ongoing discussion Different views in new government Tax issues as potential deal breaker (?)


III. REITs – the German approach2. Regulatory conditions

a) Business activities

b) Legal form and accounting

c) Profit distribution

d) Capital structure

e) Structure of shareholders



a) Business activities

Core business (ring fenced) Purchase, construction, sale, rent and lease of real estate > 75% of assets consist of real estate; > 75 % of earnings

derive from main business activities; restrictions for sales

Ancillary activities with G-REIT status (ring fenced) Support of main business activities (administration

etc.) Conservative investment of liquid funds

Other activities (non-ring fenced) Conducted by subsidiaries Activities restricted



b) Legal form and accounting

German corporation (“Aktiengesellschaft” [“AG”]) with both registered seat and place of management and control in Germany

Listed at German stock exchange

Financial statements in accordance with IFRS



c) Profit distribution

Principle at least 90 % of profit to be distributed to shareholders Distribution quota measured according to IFRS

Exceptions Capital gains: Reinvestment possible Valuation gains: Excluded



d) Capital structure

Authorized capital > € 5 million

Overall capitalization > € 50 million

No legal restriction for debt-equity-ratio

But factual restriction because of high distribution quota



e) Structure of shareholders

Min. 25 % free float

Maximum holding requirement in discussion < 10 % tax reasons (see below)


III. REITs – the German approach3. Tax issues

a) One-time taxation on foundation

b) Ongoing taxation of G-REIT

c) Ongoing taxation of German shareholders

d) Ongoing taxation of foreign shareholders



a) One-time taxation on foundation

Taxes on income Realization of hidden reserves in real estate, even if no

transfer of property, but only qualification of existing listed company as G-REIT

Tax advantages– Only 50 % of the difference between market value and

book value taxable– Tax deferral (tax payment over a 4-years-period, no

interest)– Only applicable for a restricted time after introduction of

REIT-legislation

Real estate transfer tax If actual transfer of property to another entity Tax rate = 3.5 %



b) Ongoing taxation of G-REIT

Principle G-REIT not subject to tax Rents deriving from foreign property (direct investments

or investments in foreign property companies) taxable abroad

standard tax regime for subsidiaries with auxiliary activities

Breakdown of profits Basket 1: Tax-free Basket 2: Taxed abroad Basket 3: Taxed on the level of subsidiaries




Basket 1 (tax-free) Dividend fully taxable No half-income system for individuals, no tax-exemption for

corporations Basket 2 (taxed abroad)

Direct investments– Imputation of foreign tax (no treaty or treaty with imputation

system): dividend fully taxable, foreign tax credit– Exemption of foreign income (treaty with exemption method):

dividend tax exempt Investments in foreign Real Property Companies: Half-income

system for individual, tax-exemption for corporate shareholders Basket 3 (taxed on the level of domestic subsidiaries)

Half-income system for individual, tax-exemption for corporate shareholders of G-REIT

Imputation of tax withheld by subsidiaries




100 % taxable(foreign tax credit)

95 % tax-free (corporate) or 50 % tax-free (individual)

100 % tax exempt

100 % taxable(foreign tax credit)

G-REIT

Domestic REIT Income(ring fenced business)

Domestic Non-REIT Income(non-ring fencedbusiness)

Foreign income, tax exempt in Germany

Foreign income, taxable in Germany




Parent Subsidiary Directive: Not applicable because of tax exemption of G-REIT

Tax treaties: Applicable because of treaty entitlement of G-REIT

Taxation right for state of residence of the shareholder

Limited withholding tax on dividends for Germany

– Individual shareholders: usually 15 % – Corporate shareholders: usually 5 %




Problem No tax on income of G-REIT in Germany Only low withholding tax on dividends, if any Tax leakage

Possible Solutions Revisions of double tax treaties

– No reduction or only limited deduction of withholding taxes in case of REITs (example: Art. 10 of the tax treaty between Germany and the United States)

– Difficult and time consuming, results doubtful Qualification of dividends as rental income (different models) Maximum holding requirement (< 10 %) EURO-REIT-Directive

Ongoing discussions


I. What is a REIT?





3. Tax issues


Structure



Sum up Trend to REITs Taxation of foreign shareholders as potential deal breaker in

Germany

The Nexia perspective Information of clients about developments (UK, Germany) Cross-border consulting of clients regarding investments in

REITs Assisting companies to found REITs REITs as clients

Documents

NEXIA International Tax Conference Geneva 2006 Member of Real Estate Investment Trusts („REITs“) – general overview and the development in Germany Norbert