New status for B-REITs
An alternative for Belgian Bevak/Sicafi?
The Act of 12 May 2014 (of which the text was published 30 June 2014) introduces the “regulated real estate company” status (Gereglementeerde Vastgoedvennootschap – GVV / Société Immobilière Réglementée - SIR). In accordance with the Royal Decree of 13 July 2014, this new legal status is effective since 16 July 2014.
The aim of the introduction of the GVV/SIR is to offer an alternative for real estate investment companies1 to avoid the qualification as “Alternative Investment fund” or “AIF” and thus, while still benefitting from the same beneficial REIT tax regime, to avoid having to adhere to the regulations and additional legal framework imposed by the Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD).
In other words, as of now, a Belgian real estate investment company either qualifies as an investment fund or a “GVV/SIR”. Existing bevaks/sicafis can obtain this new status at the latest on 30 November 2014. A tax neutral switch is provided for. Current shareholders have the right to exit (however subject to severe restrictions), given the different legal position of the shareholders in the GVV/SIR.
First game changer since 2010
Since the introduction of a highly beneficial tax regime for Belgian REITs in 1995, the real estate sector has become even more a major pillar of the Belgian economy than it was before. The regulatory environment of REITs, however, becomes more and more stringent. The expected entry into force of the Belgian law implementing AIFMD now threatened to narrow the straight jacket on Belgian REITs even further (e.g., MIFID inspired general operating conditions, additional framework on leveraging, EU passport requirement etc.). The Belgian legislator was not convinced that the AIFMD would provide any added value for real estate investment companies altogether.
Moreover, compared to other European REITs, the Belgian ones tend to have an investment portfolio that is less diversified and have a smaller (stock) market capitalization. This ownership structure could conflict with the new AIFMD directive, which aims to protect minority shareholders.
The introduction of the GVV/SIR in Belgian law, the first big game changer since the implementation of the Royal Decree of 7 December 2010, now allows a tailor-made legal status to safeguard the economic position of the REITs from undesired effects of the AIFMD, and to level the playing field between the Belgian listed real estate investment companies and REITs based in other EU countries.
Bevak/sicafi or GVV/SIR?
At first, the rules applicable to a GVV/SIR appear to be quite similar to those applicable to existing bevaks/sicafis. One of the most eye-catching differences can be found in the new definition of activities a GVV/SIR is allowed to pursue.
The new GVV/SIR has no mere investment purpose embedded in its articles of association, but has to develop a (long term) strategy, taking into account the company’s interest and allowing its activities to cover the entire value chain of the real estate sector. The GVV/SIR is allowed to exercise all activities related to the construction, (re)building, renovation, development, acquisition, alienation, management and exploitation of real estate.
Given the importance for the Belgian economy, and as it is also the case for the current Belgian bevaks/sicafis, the GVV/SIR will be supervised by the FSMA (Financial Services and Markets Authority). Moreover, most other financial and legal rules regulating real estate investment companies are also applicable for the new GVV/SIR.
‘Yes’ to the tax benefits, ‘No’ to the regulatory straight jacket
It is the legislator’s intention to make the GVV/SIR subject to the same tax regime as investment companies. Like existing Belgian bevaks/sicafis, the GVV/SIR will in principle be subject to corporate income tax and therefore be able to benefit from the various double taxation treaties.
In practice, however, both bevaks/sicafis and GVV/SIRs are virtually tax transparent and thus will only be taxed on the abnormal or gratuitous advantages received and certain unreported and disallowed expenses. The tax transparency of the REIT mainly results in shifting the taxation from the REIT level to its shareholders (principally through a dividend withholding tax and through the exclusion of the distributed dividends from the application of the participation exemption in the hands of Belgian corporate shareholders). Depending on the facts at hand, foreign shareholders may even be in a more beneficial position (withholding tax reduced under a treaty, full local participation exemption, ...).
Although the explanatory Memorandum of the Act explicitly states that there will be no big changes in taxation of the GVV/SIR, the current text provides that the government is not authorized to exempt the dividend from the GVV/SIR from withholding tax. Consequently, the existing exemptions which were formerly introduced by a Royal Decree may no longer apply. If this position is maintained, foreign investors may be affected.
At last, in the Belgian legislator’s eager to apply the same tax treatment on GVV/SIRs and bevaks/sicafis, in fact the same gaps in legislation were copied into the articles governing the GVV/SIRs tax status. Indeed, existing discussions amongst others as to the non-provision of a tax neutral transfer of a branch of activities by a Belgian REIT or the voluntary exit of the REIT status, remain unsolved. The government has also not taken the opportunity to facilitate a more dynamic role of the real estate sector. In this perspective, the REIT stays in the same straight jacket, and may leave foreign investors in doubt.
New design, better look?
We welcome the new law for its aim to avoid the unnecessary application of the AIFMD Act, which could have a considerable impact on existing Belgian real estate investment companies and disturb the level playing field between several European countries.
Case by case, existing Belgian bevaks/sicafis should investigate if a shift to the new regime is possible or favorable. Each REIT will interpret the new rules in view of its own market approach, resulting in different positions as to their willingness or need to step into this new structure.
EY has a team of tax, legal and financial specialists that have been following these new regulations closely. Do not hesitate to reach out to us or to your tax contact for further questions or assistance.
1 In this tax alert, the notion ‘real estate investment company’ is used in reference to the Belgian bevak/sicafi (and not to other, more general, real estate corporate structures).