This content is from: Spain

New legal and tax regime for Spanish REITs

On December 27 2012, the Spanish Government approved Law 16/2012, which provides for long-awaited reform of the legal and tax regime for Real Estate Investment Trusts (in Spain, Sociedades Cotizadas de Inversion en el Mercado Inmobiliario, or SOCIMIs).

Legal requirements to benefit from the SOCIMI regime

Legal form and minimum share capital

The SOCIMIs must have the legal form of a joint-stock company, with a minimum share capital of $5 million ($6.7 million). A SOCIMI may only have one class of shares and must expressly include in its legal name a reference to the fact that such entity is a SOCIMI.

Trading requirement

The stock of a SOCIMI must be traded on a regulated stock exchange or on a multilateral trading facility (MTF). Such regulated stock exchange or MTF must be located in Spain, or within the European Union or European Economic Area.

This trading requirement must be met during the whole fiscal year (without interruption) in which the special SOCIMI tax regime is applicable. In the first fiscal year in which the special SOCIMI tax regime is applicable, the listing requirement should be met from the date in which the company elects to apply such regime.

Also, the shares of the SOCIMI must be issued under registered form.

Corporate purpose

A SOCIMI must have as their main corporate purpose:

- The purchase and development of urban real estate property for rental purposes, including building rehabilitation, as set forth in the VAT provisions; and

- The holding of registered shares of "qualifying subsidiaries";

In that regard, qualifying subsidiaries include:

- Other SOCIMIs and foreign REITs that are listed, have issued registered shares (or equivalent rights) and have the same corporate purpose of the "parent SOCIMI" and which are subject to a similar mandatory dividend distribution requirement.

- Non-listed entities, Spanish-resident or not, that could be deemed to be assimilated to a SOCIMI (that is,entities whose main corporate purpose is the purchase of urban real estate property for rental purposes, that are subject to a similar mandatory dividend distribution regime and which meet the requirements imposed under the SOCIMI regime in respect of underlying investments), provided such entities are fully owned by one or more SOCIMI or qualifying foreign REITs and provided such entities do not hold participations in lower-tiered subsidiaries.

- Regulated real estate collective investment funds and companies.

Qualifying subsidiaries that are non-resident entities must be resident in countries with which Spain has a treaty or agreement providing for tax information exchange.

Finally, the law allows SOCIMIs to carry out ancillary activities, which must not exceed 20% of the revenues of the SOCIMI in each tax year, that do not fall under the scope of their main corporate purpose.

Qualifying assets for purposes of the SOCIMI regime

At least 80% of the SOCIMI's assets must be invested in:

- Urban real property to be leased;

- Land plots acquired for the development of urban real property to be leased afterwards, provided that the development of such property starts within three years as from the acquisition date; or

- Participations in "qualifying subsidiaries".

In the event the SOCIMI has subsidiaries that are deemed to be part of the same group of companies for Spanish corporate law purposes, the calculation of this 80% threshold will take into account the consolidated financial statements (with some specific rules).

In addition, please note that certain real estate assets may not qualify as "real estate property" for purposes of the SOCIMI regime.

Qualifying income

At least 80% of the income obtained by a SOCIMI in a given year must derive from rental income, and from dividends or capital gains in respect of qualifying shareholdings.

Minimum holding period

Real property acquired or developed by the SOCIMI must remain leased for at least three years. For purposes of such calculation, the period during which such property has been offered on lease may be included, up to one year. Participations in qualifying subsidiaries must be held for a minimum three-year period, too.

Certain special rules may apply in connection with the calculation of this minimum period required.

Mandatory dividend distribution

SOCIMIs will be subject to an annual mandatory dividend distribution requirement:

(i) 100% of the profits derived from dividends paid by qualifying subsidiaries.

(ii) At least 50% of the profits ultimately deriving from capital gains realised

upon the sale of real property or from the sale of participations in qualifying subsidiaries (assuming the minimum holding period requirement is met). The remainder must be reinvested in qualifying assets, within three years following the date of their sale. At the end of this three-year period, any gains not reinvested must be distributed.

(iii) At least 80% of other profits obtained.

The SOCIMIs must agree the dividend distributions of a given fiscal year within the six months following the closing of the year and must be paid within the month following the distribution agreement.

Applicability of the SOCIMI special tax regime for Spanish qualifying subsidiaries

Law 16/2012 allows Spanish-resident entities that are qualifying subsidiaries of a SOCIMI or of a foreign qualifying REIT to apply for the SOCIMI tax regime, provided that certain requirements are met.

Special SOCIMI tax regime

Entities entitled to the applicability of the SOCIMI tax regime

SOCIMIs and the Spanish-resident qualifying subsidiaries may elect to apply the SOCIMI tax regime. The election must be adopted by the entity's shareholders, and the Spanish Tax Authorities must be notified of such election before the last quarter of the tax year in which the SOCIMI tax regime is expected to apply. Such election will remain applicable until the taxpayer waives its applicability.

An entity eligible for the SOCIMI regime may apply for the special tax regime even if at the moment of the election such entity does not meet the eligibility requirements, provided it meets such requirements within two years (from the date the corresponding election is filed before the Spanish Tax Authorities).

Tax rules applicable to the entities qualifying for the SOCIMI tax regime

Corporate income tax

Law 16/2012 reshapes the SOCIMI tax regime by establishing that entities benefiting from the special SOCIMI tax regime will be taxed at a rate of 0% on profits obtained. Net operating losses, carryforwards and tax credits will not be available.

The tax burden will in principle be shifted to the investor level, though there may be an exception: where the entity benefiting from the SOCIMI tax regime distributes dividends to a shareholder holding a stake of at least 5% in the distributing entity, and such shareholder is either exempt from tax or subject to a reduced taxation (that is, at a rate lower than 10%), then a special 19% levy should be applicable at the SOCIMI level on the amount of the dividend distributed to such shareholder. This special levy does not apply where the shareholder is a SOCIMI. If the shareholder is a qualifying foreign REIT, the special levy will not apply to the amount attributable to the shareholders of the qualifying foreign REIT which own at least a 5% stake in such foreign REIT and are taxed at least at a 10% rate on dividend income they receive.

Investor-level taxes

Dividends paid out by a SOCIMI to its Spanish tax-resident shareholders (or to foreign shareholders with a permanent establishment (PE) in Spain holding the shares of the SOCIMI) out of qualifying income and gains will be generally subject to withholding tax (currently, at 21%). Such dividend income paid out of qualifying income and gains will be fully taxable at the level of the Spanish-resident investors (individuals or corporations) and at the level of a Spanish PE holding the investment in the entity benefiting from the SOCIMI regime. Dividends paid to non-resident investors that are qualifying foreign REITs may be exempt from withholding tax under the SOCIMI regime to the extent such dividends are attributable to shareholders meeting the requirements set forth above. Otherwise, such dividends paid to non-resident investors will be subject to withholding (though an exemption or reduction of such amount may be claimed in case the investor is entitled to the benefits of an applicable double tax treaty or the EU Parent-Subsidiary Directive).

In connection with capital gains derived from the sale of an investment in an entity benefiting from the SOCIMI regime, such gains should, in principle, be taxable in the hands of the investors. Capital gains realised by Spanish-resident corporate investors or by Spanish PEs will be fully subject to corporate income tax. When the selling investor is a Spanish-resident individual, such gain will be fully taxable under Spanish personal income tax rules. Capital gains obtained by non-resident investors without a PE will be subject to Spanish non-resident income tax (at 21%), but an exemption may be available under an applicable double tax treaty between Spain and the country of residence of such investor.

Jordi Domi­nguez (partner), Ivan Rabanillo (counsel) and Ãlvaro Hernandez (associate) are members of Latham & Watkins's tax practice, based in Madrid.

Disclaimer: Please note that this is a general summary providing for a highlight of the main tax and legal issues derived from the recent changes in the SOCIMI legal and tax regime, and it does not constitute tax advice. Readers should seek individualised advice in order to determine the applicability of this regime in their particular situations.

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