REIT Vademecum

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GERMAN REAL ESTATE INVESTMENT TRUST (“G-REIT”)
Accounting
In addition to the ⁄G-REIT’s obligation to prepare individual accounts for
the corporation and its subsidiaries according to the ⁄German Commercial Code (“HGB”), the G-REIT must establish individual or consolidated
accounts in accordance with ⁄IFRS (“International Financial Reporting
Standards”). The additional preparation of accounts according to IFRS shall
provide international investors with economic data established according to
an internationally accepted accounting standard.
Asset structure requirements
As ⁄G-REITs shall primarily engage in the acquisition and management
(leasing and letting) of real estate, at least 75% of a G-REIT’s assets, as
determined by ⁄IFRS, must consist of real estate. Participation in ⁄REIT
service corporations is limited to 20% of a G-REIT’s assets. Noncompliance
with these requirements could lead to ⁄tax sanctions against the G-REIT.
Closed-end real estate fund
An alternative investment form that allows investors the indirect investment
into real estate. Closed-end real estate funds are partnerships, and as such
they are ⁄tax transparent according to the German Income Tax Act (“Einkommensteuergesetz”). Shares in the partnership can normally only be sold
on the secondary market, which is frequently quite illiquid. Apart from the
legal structure, economically, the main difference between closed-end real
estate funds and ⁄G-REITs is the closed-end real estate fund’s lower fungibility of shares and a different ⁄risk/return-profile.
Corporate form
⁄G-REITs must be stock corporations (“Aktiengesellschaft“) under the Ger-
man Stock Corporation Act (“Aktiengesetz”). Like other stock corporations,
G-REITs are bound by all applicable provisions governing stock corporations, such as the ⁄German Commercial Code (“HGB”) and security trading
laws.
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Double tax treaty (“DTT”)
International treaties between Germany and other states formed with the
purpose of avoiding taxation of the same tax object both in the state of
source and in the state of residence (“double taxation”). Most DTTs limit the
tax rate on profit distributions in the state of source, generally to 15%. If a
shareholding exceeds a certain threshold specified in the relevant DTT (the
lowest threshold presently is 10%), the tax rate allowable under the DTT
can be even lower than 15% (“international affiliation privilege”). In order to
avoid circumvention of the taxation of a ⁄G-REIT’s profit distributions by the
application of the international affiliation privilege, the ⁄REIT-Gesetz limits
individual ownership of shares in a G-REIT to less than 10%.
Exit tax
Tax privilege created to promote the formation of ⁄G-REITs and the sale of
real estate to G-REITs. When a corporation becomes eligible for the REITspecific ⁄tax privilege, all ⁄hidden reserves have to be disclosed. Similarly,
a sale of real estate to a ⁄Pre-REIT or G-REIT might result with the seller
realizing hidden reserves. The disclosure and realization of hidden reserves
increases the taxable income and thereby the tax burden of the selling entity
or converting corporation. Under the exit-tax regime, only 50% of the hidden
reserves included in the real estate realized by the sale or conversion are
taxable, provided that the sale or the conversion occurs after December 31,
2006 and before January 1, 2010. Additionally, in the case of a sale of real
estate to a Pre-REIT or G-REIT, the seller must have owned the real estate
for a minimum of five years as of January 1, 2007. In case of a conversion
of a corporation into a G-REIT, the real estate must have been acquired or
constructed by the converting corporation prior to January 1, 2005. In order
not to lose the exit-tax privilege the Pre-REIT/G-REIT has to comply with
certain ⁄minimum holding requirements with regard to the real estate after
its acquisition or conversion.
Fair value
The market value of an asset. The fair value of an asset can differ from the
value assigned it on the company’s balance sheet (its “book value”). In the
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event that the fair value of an asset exceeds its book value, such difference
constitutes ⁄hidden reserves of an asset. The fair value is usually the basis
for valuing assets pursuant to ⁄IFRS.
Federal Central Tax Office (“Bundeszentralamt für Steuern”)
The Federal Central Tax Office (“Bundeszentralamt für Steuern”) is a German
tax authority with diverse duties and responsibilities in the area of national
and international taxation. The supervision of ⁄G-REITs is one of these
duties and responsibilities.
Federal Financial Supervisory Authority (“Bundesanstalt für
Finanzdienstleistungsaufsicht”/“BaFin”)
The Federal Financial Supervisory Authority (“Bundesanstalt für Finanzdienstleistungsaufsicht,” in short “BaFin”) is a German authority that supervises the German financial industry and the securities trading with the purpose of ensuring the efficiency, integrity and stability of the German financial
system. With respect to securities trading, the BaFin shall prevent insider
trading and other malpractices and therefore has to be notified of, inter alia,
certain securities transfers. Therefore, stock corporations have to inform the
BaFin in the event that certain shareholding thresholds are reached (⁄notification of shareholding thresholds).
Flat-rate withholding tax (“Abgeltungsteuer”)
Beginning on January 1, 2009, a 25% flat-rate withholding tax will apply
to, inter alia, dividend distributions that accrue after December 31, 2008
and to capital gains earned by the disposal of shares that are acquired after
December 31, 2008 (there exist various exceptions to this time range). The
new flat-rate withholding tax applies if the relevant shares are owned as
private property; it does not apply if they are owned as business assets.
German Commercial Code (“Handelsgesetzbuch”/“HGB”)
⁄G-REITs are subject to the German Commercial Code (“Handelsgesetz-
buch”, in short, “HGB”), which sets forth the accounting principles of business entities, such as stock corporations. The accounting principles of the
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HGB adhere to a principle of precaution that prohibits the capitalization of
assets at a higher value than their acquisition costs. This avoids the disclosure of unrealized profits but might lead to ⁄hidden reserves. Balance
sheets prepared according to the HGB will be used as the basis for taxation
and for the calculation of the ⁄minimum dividend distribution requirement
according to the ⁄REIT-Gesetz.
G-REIT
Abbreviation for “German Real Estate Investment Trust”. Established primarily by the ⁄REIT-Gesetz effective January 1, 2007. The REIT-Gesetz sets
forth the legal framework that a G-REIT must adhere to regarding, inter
alia, ⁄corporate form, ⁄minimum share capital, ⁄listing requirement, and
⁄minimum dividend distribution. As of September 1, 2008, two G-REITs
were listed with the German stock exchange – alstria office REIT-AG and Fair
Value REIT-AG with an aggregate ⁄market capitalization of approximately
600 million EUR. In Germany, the G-REIT constitutes an alternative to other
forms of indirect investment in real estate such as ⁄closed-end real estate
funds, ⁄open-end real estate funds and ⁄real estate stock corporations.
The foremost difference between these forms of indirect investment and the
G-REIT is their different ⁄risk/return profile. As of September 1, 2008, about
15 corporations have either qualified for the ⁄Pre-REIT-status or expressed
their intention to qualify as a G-REIT in the future.
Hidden reserves
The difference between the book value and the higher ⁄fair value of an
asset. In the event that an asset with a fair value higher than its book value
is disposed of, the hidden reserves are realized as capital gains and have to
be taxed. The taxation of hidden reserves realized in the course of a sale of
real estate to a ⁄Pre-REIT/⁄G-REIT or through the conversion of a corporation into a G-REIT will be reduced under certain circumstances by the ⁄exit
tax. In the event that the G-REIT disposes of real estate and thereby realizes
hidden reserves, any capital gains are tax exempt at the corporate level due
to the ⁄tax privilege.
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IFRS (“International Financial Reporting Standards”)
Accounts prepared pursuant to the IFRS serve primarily to deliver information
to potential investors to help them make investment decisions, as opposed
to the ⁄HGB balance sheets, which are primarily established for creditor
protection purposes. IFRS tries to make accounts more transparent, e.g., by
allowing the capitalization of assets at their ⁄fair value. Regarding most of
the REIT-specific thresholds (e.g., ⁄asset structure requirements, ⁄income
requirements, or ⁄leverage) the ⁄REIT-Gesetz provides for the obligation to
value investment real estate by its fair value according to IFRS.
Income requirements
At least 75% of a ⁄G-REIT’s earnings, as determined by ⁄IFRS, must be
derived from its primary activity – the acquisition, managing (leasing and
letting), and disposing of real estate. If the G-REIT holds shares in a REIT
service corporation, the income from such ⁄REIT service corporation may
not exceed 20% of the G-REIT’s total income. Infringements might lead to
⁄tax sanctions against the G-REIT.
Land tax (“Grundsteuer”)
Land tax (“Grundsteuer”) is a annual tax on the ownership of real estate and
buildings. Tax base is the assessed value (“Einheitswert”); the tax rate ranges
from 2.6‰ for family homes to 6.0‰ for agricultural properties. ⁄G-REITs
are not exempt from land tax.
Leverage
A ⁄G-REIT’s real estate assets must be backed with at least 45% equity
(both numbers determined by ⁄IFRS). A G-REIT’s non-real estate assets
can be fully debt-financed. Infringements might lead to ⁄tax sanctions
against the G-REIT.
Limitation on maximum shareholding
No single shareholder may directly hold a share in the ⁄G-REIT of 10%
or more. This limitation shall ensure that foreign investors cannot invoke a
⁄double tax treaty, and its attached international affiliation privilege, thereby
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reducing German ⁄withholding tax under the general provisions of double
tax treaties from 10%-15% to 5% or even 0% under the international
affiliation privilege. A shareholder may indirectly hold more than 10% in the
G-REIT by interposing several subsidiaries. On a corporate level, a continuous breach of this limitation can lead to severe ⁄tax sanctions, which might
indirectly be detrimental to shareholders. As minority shareholders have only
limited influence on the G-REIT’s compliance with this restriction, the ⁄REITGesetz requires that a G-REIT’s articles of association include a compensation clause for shareholders with a share of less than 3% in the company’s
voting rights. On a shareholder level, the REIT-Gesetz restricts shareholders’
rights to shareholdings below 10%.
Limitation on the company’s objectives
As the ⁄REIT-Gesetz considers the purpose of a ⁄G-REIT to be primarily
the leasing and letting of real estate, a G-REIT’s articles of association must
limit its objectives to the acquiring, holding, managing (leasing and letting),
and disposing of immovable assets as well as to the participation in real
estate partnerships and real estate companies inclusive of ⁄REIT service
corporations. Excluded from the permitted scope of the company’s objectives are investments in ⁄residential real estate built prior to January 1, 2007
and ⁄trading in real estate.
Listing requirement
All shares of a ⁄G-REIT must be listed with an organized market in a European
Union member state or in another treaty state of the European Economic Area.
Market capitalization
Economic size equal to a stock corporation’s number of shares outstanding
multiplied by the current price per share.
Minimum dividend distribution
A ⁄G-REIT has to distribute to its shareholders at least 90% of its annual
profits, as determined under the German accounting principles provided for in
the ⁄HGB. Infringements might lead to ⁄tax sanctions against the G-REIT.
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Minimum freefloat
In order to secure liquid markets, the ⁄REIT-Gesetz provides that at least
15% of a ⁄G-REIT’s shares must be held by shareholders with direct or
indirect voting rights in the G-REIT’s of less than 3%. At the time the G-REIT
is admitted to the stock exchange, this threshold has to be 25%.
Minimum holding requirement
The ⁄exit tax can be revoked retroactively, e.g., if the ⁄Pre-REIT/⁄G-REIT
does not hold the property acquired under the exit-tax privilege for at least
four years. In such event, the Pre-REIT/G-REIT, as the acquirer of the real
estate, will be liable vis-à-vis the tax authority and alongside the disposer of
the real estate for any tax that results from the retroactive loss of the exit tax.
Minimum share capital
The minimum share capital of a ⁄G-REIT is EUR 15 million.
Net Asset Value (“NAV”)
A parameter for the valuation of an entity’s assets. NAV is the market value
of the assets minus the value of the liabilities. In the event that the ⁄fair
value of a real estate asset is below its NAV, the difference is called the “NAV
Discount”; if it is higher, it is called the “NAV Premium.”
Notification of shareholding thresholds
As the ⁄G-REIT is subject to the German Securities Trade Act (“Wertpapierhandelsgesetz”), it is obligated to notify the ⁄Federal Financial Supervisory
Authority (“BaFin”) if a single shareholder reaches the following shareholding
thresholds: 5%, 10%, 25%, 50%, and 75%. In addition, the ⁄REIT-Gesetz
sets forth additional notification thresholds of 3%, 80%, and 85%.
Open-end real estate fund
Open-end real estate funds are an alternative investment form used to indirectly invest in real estate. Open-end real estate funds are treated as ⁄tax
transparent. The activities of capital investment companies are subject to
the regulations of the Code on Investments (“Investmentgesetz”), which sets
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forth certain regulations concerning a fund’s structure, permitted investments, and so on. Shares in a capital investment company can be redeemed
to the capital investment company in exchange for the redemption price.
The main difference between this form of investment and the ⁄G-REIT is the
open-end real estate fund’s limitation on investments set forth in the Code
on Investments and the different ⁄risk/return-profile.
Pre-REIT
The first stage of a ⁄G-REIT, which is subject to the REIT-specific ⁄exittax provision without enjoying the full ⁄tax privilege of a G-REIT. In order
to qualify as a Pre-REIT, a stock corporation needs to have its statutory
seat in Germany and must be registered with the ⁄Federal Central Tax
Office (“Bundeszentralamt für Steuern”) as a Pre-REIT. At the end of the
fiscal year following the year of registration, and at the end of each subsequent
fiscal year, a Pre-REIT must comply with the REIT-specific legal requirements
regarding ⁄limitation on the company’s objectives, ⁄asset structure
requirements, and ⁄income requirements. The Pre-REIT must apply to the
Federal Central Tax Office (“Bundeszentralamt für Steuern”) to be admitted
to the stock market as a G-REIT within three years after its registration. Upon
request, this application period can be extended for one additional year. In
the event that the Pre-REIT does not timely comply with the requirements for
registration as a G-REIT, the Pre-REIT will lose its exit-tax status.
Prospectus
A precondition for the listing of shares of ⁄G-REITs on the regulated market
of a German stock exchange or an organized market in another member
state of the European Union is the filing of a prospectus and its approval
by the ⁄Federal Financial Supervisory Authority (“BaFin”). The prospectus
shall give potential investors sufficient information about the G-REIT to gain
insight regarding the company’s structure, its corporate bodies, its assets
and liabilities, its financial and market situation, and any potential risks and
chances, as well as information about shareholders’ rights.
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Real estate stock corporation (“Immobilien-AG”)
An alternative investment form that allows indirect investment in real estate.
In contrast to ⁄open-end real estate funds, the real estate stock corporation
is not ⁄tax transparent and may invest in real estate without being limited
in its investments by the Code on Investments (“Investmentgesetz”). The
main difference between the real estate stock corporation and the ⁄G-REIT
is the real estate stock corporation’s lack of ⁄tax privilege and a different
⁄risk/return-profile.
Registered name
The name of a ⁄G-REIT must include either the term “REIT-Aktiengesellschaft” or “REIT-AG”. These names are protected by law; corporations other
than G-REITs may not bear this name.
Registered office
A ⁄G-REIT must have its registered office as well as its place of management in Germany. This ensures that G-REITs are German tax residents and
that they are not resident abroad for the purpose of a ⁄double taxation
treaty.
REIT
Abbreviation for “Real Estate Investment Trust”. From the investor’s perspective, a REIT constitutes an investment form for the indirect investment in real
estate and has been established in more than 20 international jurisdictions
since the 1960s. In Germany, the ⁄G-REIT was introduced in 2007 through
the ⁄REIT-Gesetz. One internationally common characteristic of REITs is
that they are treated as ⁄tax-transparent or tax exempt entities so that
profits and dividends are taxed at the investors’ level. In order to qualify
for this tax privilege on a company level, a REIT usually has to comply with
certain legal requirements, such as investments into real estate, source of
income, and minimum dividend distribution to investors.
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REIT index
The Deutsche Börse AG has introduced two indices for the REIT segment:
(i) the “RX REIT All Share Index” for all domestic and foreign REITs listed in
the General Standard or Prime Standard segment of the Deutsche Börse AG,
and (ii) the “RX REIT Index” showing the performance of the 20 largest REITs
listed in the Prime Standard segment of the Deutsche Börse AG.
REIT service corporation
A ⁄G-REIT can offer real estate-related services to third parties only by
forming a REIT service corporation, 100% of which must be held by the
G-REIT. A G-REIT’s investment in a REIT service corporation is subject to the
⁄limitation on maximum shareholding and ⁄income requirements.
REIT-Gesetz
“Gesetz über deutsche Immobilien-Aktiengesellschaften mit börsennotierten
Anteilen”, in short, “REIT-Gesetz”. This law is the major legal source for
⁄G-REITs and was enacted in June 2007, retroactive to January 1, 2007.
The legislative purpose for the introduction of the G-REIT was to promote the
attractiveness of the German capital markets internationally by introducing
an internationally compatible investment form that has proven successful in
other countries for more than 40 years. In connection with the ⁄exit-tax provision, G-REITs also serve as an investment vehicle for German companies
to mobilize their real estate and thereby increase their equity.
Residential real estate
Real estate that was built before January 1, 2007 and serves a predominantly
residential purpose (meaning that the real estate is used more than 50% permanently and privately for residential purposes). ⁄G-REITs may not invest
in residential real estate due to the G-REIT’s ⁄limitation on the company’s
objectives.
Risk/return profile
An analysis model for investments that examines the return of an investment
in comparison to its volatility. Broadly speaking, the model assumes that
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higher investment returns correlate with higher volatility or risk of financial
loss. Economic models suggest that the risk/return profile of ⁄G-REITs will
rank between the risk/return profile of direct investments in real estate or
⁄open-end real estate funds with a relatively low return combined with a
low volatility on the one side, and the risk/return-profile of ⁄real estate stock
corporations or so-called “opportunity funds” with a high return combined
with a high volatility on the other side. Therefore, the risk/return profile of
G-REITs might be unique in comparison to alternative investment forms.
Shareholder taxation
Corresponding with the ⁄tax privilege of ⁄G-REITs at the corporate level,
all dividends and profits from disposal of shares in G-REITs are fully taxed at
the shareholder level. Dividends are deemed to be profits from capital investments, not from leasing. Capital gains from disposal of a private shareholding that at no time during the previous five years equaled or exceeded 1%
are taxable only if they were held for less than one year. If the shareholder
held at least 1% of the shares in a G-REIT at any point in time during the
previous five years or if the shares were acquired as business assets, capital
gains earned by the sale of the shares are always fully taxable. Neither the
half-income method for individuals nor the 95% dividend exemption for corporations under German tax law applies. Profit distributions are subject to a
⁄withholding tax at a rate of 20%. Beginning January 1, 2009, the ⁄flat-rate
withholding tax (“Abgeltungsteuer”) will apply to G-REITs, profit distributions
and to capital gains on share disposals.
Shares
All of a ⁄G-REIT’s shares must be voting shares of the same class and may
only be issued if paid in full. Shareholders are not entitled to demand certificates. G-REITs need to issue global deeds.
Tax privilege
The main characteristic of a ⁄G-REIT is that the income taxation is shifted
from the corporate level to the shareholder level (⁄shareholder taxation). A
G-REIT is exempt from German corporate income tax, from the solidarity
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surcharge, and from the trade tax. However, the G-REIT remains subject to
other taxes, such as ⁄real estate transfer tax, ⁄land tax, and value added
tax. The tax privilege commences (retroactively) at the beginning of the
fiscal year in which the stock corporation is listed in the trade register as a
G-REIT.
Tax sanctions
Depending on the type, seriousness, and duration of any infringement of
the requirements that are set forth by the ⁄REIT-Gesetz, the tax authority
may impose sanctions against the ⁄G-REIT that can range from fines to the
G-REIT’s loss of its ⁄tax privilege.
Tax transparent
If an entity is tax transparent, its income is directly attributed to its investors
and thus solely taxed at the investors’ level instead of at the entity’s level.
Trading in real estate
Trading in real estate is not allowed for ⁄G-REITs. Sales will be deemed to
be “trading” if the revenues from such sales within the last five years account
for more than half the value of the ⁄G-REIT’s average real estate portfolio
during that time, determined pursuant to ⁄IFRS.
Withholding tax
All dividends distributed by a ⁄G-REIT to its shareholders are subject to
withholding tax at a rate of 20% plus a 5.5% solidarity surcharge. Such withholding tax is credited to the income tax liability of domestic shareholders;
withholding tax payable on behalf of foreign shareholders is a flat tax. If a
⁄double tax treaty allows only for a tax rate lower than 25%, the foreign
shareholder may, under certain circumstances, apply for a partial reimbursement of withholding tax. Beginning January 1, 2009, the withholding tax on
profit distributions will be a ⁄flat-rate withholding tax.
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INTERNATIONAL REITS
A-REIT (Australia)
Introduced in 1985. As of August 1, 2008 approximately 65 A-REITs were
listed with the Australian stock exchange, with a total ⁄market capitalization
of approximately 80 billion AUD (equivalent to approximately 45 billion EUR).
Any unit trust may qualify for acknowledgement as an A-REIT. No requirements exist as to minimum capital and listing with the stock exchange.
Canadian REIT
Introduced in 1993. As of August 1, 2008 approximately 30 Canadian
REITs (“Mutual Fund Trusts”/“MFTs”) were listed with the Canadian stock
exchange, with a total ⁄market capitalization of approximately 23 billion
CAD (equivalent to approximately 15 billion EUR). Any unit trust may qualify
for acknowledgement as a Canadian REIT. Minimum capital requirements for
Canadian REITs exist. The Canadian REIT must be listed with the Canadian
stock exchange to avoid a redemption right of the unit holders.
FBI (“Fiscale Beleggingsinstelling”; The Netherlands)
Introduced in 1969. As of August 1, 2008 six FBIs were listed with the Dutch
stock exchange, with a total ⁄market capitalization of approximately 8 billion EUR. Any Dutch public company, Dutch limited liability company, openended investment fund or comparable foreign legal entity may qualify for
acknowledgement as an FBI. Certain minimum capital requirements exist
dependent on the legal form of the FBI. FBIs are not required to be listed
with the Dutch stock exchange but if it is listed, it is exempt from certain
shareholder requirements.
J-REIT (Japan)
Introduced in 2001. As of August 1, 2008 approximately 40 J-REITs were
listed with the Japanese stock exchange, with a ⁄market capitalization
of approximately 3,500 billion JPY (equivalent to approximately 23 billion
EUR). A corporation or trust may qualify for acknowledgement as a J-REIT. A
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J-REIT requires a minimum of JPY 100 million (approximately 650,000 EUR)
of share capital. Listing requirements for the J-REIT do not exist.
SIIC (“Société d’Investissements Immobiliers Cotée”; France)
Introduced in 2003. As of August 1, 2008 approximately 45 SIICs were listed
with the French stock exchange, with a ⁄market capitalization of approximately 45 billion EUR. Any corporation or other company with its capital
divided into shares taxable under French corporate tax may qualify for
acknowledgement as a SIIC. SIICs require at least 15 million EUR of share
capital. The SIIC must be listed with the French stock exchange.
UK-REIT (U.K.)
Introduced in 2007. As of August 1, 2008 approximately 20 UK-REITs were
listed with the U.K. stock exchange, with a total ⁄market capitalization of
approximately 22 billion GBP (equivalent to approximately 27 billion EUR).
Any close-ended company taxable under U.K. law may qualify as a UK-REIT.
The UK-REIT must be listed with the stock exchange and must have at least
50,000 GBP (approximately 62,000 EUR) of share capital.
US-REIT (U.S.)
Introduced in 1960. As of December 31, 2007 approximately 150 US-REITs
were listed with the U.S. stock exchange, with a total ⁄market capitalization
of approximately 300 billion USD (equivalent to approximately 210 billion
EUR). Any legal U.S. entity taxable as a domestic corporation managed by a
board of trustees or directors and with freely transferable shares may qualify
for acknowledgement as a US-REIT. Requirements for US-REITs as to minimum capital and listing with a stock exchange do not exist.
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Morgan Lewis is a leading international law firm
with more than 1,400 lawyers in 22 offices worldwide.
For further information on our German and
international real estate practice please contact
Dr. Christian Zschocke or Ulf-Gerson Kemper at:
[email protected]
For further information on our U.S. real estate
practice please contact Eric L. Stern at:
[email protected]
For all other information please contact us at:
frankfurtoffi[email protected]
Morgan, Lewis & Bockius LLP
Guiollettstraße 54
60325 Frankfurt am Main
Tel. +49.69.714.00.711
Fax: +49.69.714.00.710
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