The Finnish Act on Real Estate Investment Funds has been in force since 1998 (1173/1997). Due to tax and regulatory reasons, no real estate investment funds as defined by this Act have so far been established. Collective real estate investing has traditionally been carried out through listed real estate investment companies (private and institutional investors), or alternatively through closedended funds (limited partnerships) open to institutional investors where fiscal transparency is combined with less regulatory constraints.

The Finnish legislation introducing specific tax benefits to certain real estate funds ("REIT") is an attempt to make residential real estate investing more attractive. The European Commission has approved the Finnish REIT legislation in May 2010 and the Finnish Parliament is currently processing amendments required by the Commission. The legislation should be applicable from fiscal year 2010 onwards (Bill 113/2010).

In the Finnish scheme, a Finnish resident limited liability company acting as the REIT is exempt from corporate income tax, providing that the following conditions inter alia are met:

  • At least 80 % of the REITs assets are comprised of real estates that are primarily in residential use;
  • The activities of the REIT are limited to renting out the properties and constructing properties for its own use, and to activities closely related to the preceding;
  • The amount of the REITs debt financing does not exceed 80 % of the balance sheet;
  • Each shareholder's stake in the REIT is less than 10 %;
  • The REIT distributes at least 90 % of its profits to its shareholders;
  • The shares of the REIT are quoted on a public market or multilateral trading facility in the EEA.

The Finnish scheme includes a tax cost for companiescurrently carrying out real estate investment activities that wish to enter into the REIT system, as well as restrictions on tax exempt disposal of the REITs assets. Also, the REIT needs to comply with the regulatory environment set forth in the Act on Real Estate Investment Funds. Although the new legislation extends fiscal transparency to limited liability companies, the competitiveness of REITs against closed-ended funds remains to be seen.

It should also be noted that the exemption from corporate income tax does not preclude exemption from dividend withholding tax for non-resident investors, who are comparable to Finnish tax exempt entities (e.g. certain investment funds or non-profit organisations resident in the EEA).

All non-UCITS funds may face a tougher regulatory environment in the future, depending on the developments of the Directive on Alternative Investment Fund Managers, currently under consideration in the EU. At this stage, a feasibility study on the application of the new REIT regulations may however be justified, especially for non-resident investors.

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