TAXATION AND OTHER ISSUES OF REITs
By: Euney Marie J. Mata-Perez on June 20, 2019
First of 2 parts)
It has been almost ten years since the passage of Republic Act No. 9856, or An Act Providing the Legal Framework for Real Estate Investment Trust and for Other Purposes (REIT Act of 2009). However, up to this date, no REIT has been established in our country.
In the recent 3rd APAC REIT Investment Summit held in Solaire Resort & Casino, most of the discussants expressed their view that the Philippines is already ripe for the REIT.
With our fast-growing real estate market and real estate sector, and the recent recording of highest prices in land and condominium properties, the Philippine market may indeed be ripe for the REIT. But we leave the market analysis to the market experts. For this article, we revisit the tax and other regulatory issues which may be critical in the establishment of a REIT.
A REIT is a stock corporation established in accordance with the Corporation Code and rules of the Securities and Exchange Commission (SEC). Its primary purpose is to own income-generating real estate assets. (Although designated as a ’trust’, it does not have the same technical meaning as the ‘trust’ defined under existing laws and regulations.)
Owning shares in a REIT is an alternative way for the public to invest in the real estate sector without the need of directly owning the underlying assets. In a REIT, investors benefit from a mixed portfolio of assets and should be able to manage ownership and management risks arising from the investment.
A REIT must a) be a public company with a minimum paid-in capital of P300 million, b) be listed in and maintain its listing status with our Philippine Stock Exchange, and, c) upon and after listing, have at least 1,000 public shareholders each owning at least 50 shares of any class of shares, who in the aggregate, own at least one-third of the REIT’s outstanding capital stock. At least 75 percent of its assets must be property and must be income-generating.
Although a REIT is subject to the regular corporate income tax, it is entitled to several tax incentives, which we discuss below.
VAT– In the past, the main challenge to the establishment of REIT was the imposition of value-added tax (VAT) on the transfer of real assets to the REIT in exchange for its shares. This view was confirmed by the Bureau of Internal Revenue (BIR) in Revenue Regulations No. 13-11. However, TRAIN 1 (Republic Act No. 10963) confirmed that transfers of property for shares for ’control’ under Section (40)(C)(2) of the Tax Code are exempt from VAT. The amendment introduced by TRAIN (Tax Reform for Acceleration and Inclusion) 1 settled the issue of whether or not the transfer of assets for control (where a transferor, alone or together with other persons not exceeding four, gains control in the transferee) is subject to VAT. (Please see our article on this on April 05, 2018). With this tax stumbling block removed, REIT establishment should now be viable from a VAT perspective.
Dividends–The other main tax benefit of a REIT is the tax deductibility of dividends paid to its stockholders. Generally, dividends distributed from retained earnings or post-tax income is not a deductible expense for tax purpose. The REIT Act of 2009, however, allows such dividend distribution to be deducted from a REIT’s taxable income. The law also mandates REITs to declare as dividends at least 90 percent of its distributable income.
Other incentives–REIT is entitled to the following additional tax incentives: 1) 50 percent documentary stamp tax (DST) on the transfer of real property to it, including the sale or transfer of any and all security interest thereto; and 2) exemption from capital gains tax, income tax, DST, and creditable withholding tax on the transfer of real property to a REIT.
So, what are the other regulatory issues in REIT establishment?
The other issues for a REIT establishment from a regulatory viewpoint is its minimum public ownership (MPO) requirement and the qualifications imposed on its fund managers and property managers.
Under the REIT Act of 2009, the MPO should not go below one-third of the total outstanding capital stock of a REIT. However, the SEC in Memorandum Circular No. 2 (2011) increased the MPO requirement to 40 percent in the first year from listing, which requirement is to increase to two-thirds within three years from listing. Such MPO is very high and could be difficult to meet. Moreover, a REIT’s enjoyment of tax incentives is conditioned on its compliance with this MPO requirement. (By regulation, the BIR requires REITs to put the tax benefits/savings in escrow).
We understand that officials of the Department of Finance, SEC, and the BIR are in discussions to possibly reduce the MPO requirement. Such a move would be very much welcomed by the real estate sector, which is looking forward to using the REIT as its investment vehicle.
On the qualifications of the fund manager and the property manager, the SEC just published draft rules for comments. We shall tackle these draft rules in our next column.
More to follow . .
From the The Manila Times website on June 20, 2019