Malta: Tax Regimes Across Leading REITs Frameworks

Last Updated: 21 June 2019
Article by Kenneth Camilleri

Real Estate Investment Trusts (REITs) have existed in the US since the 1960s and there are now 38 REIT regimes globally with a total market cap of approximately $1.7 trillion. Notwithstanding that they are referred to as trusts, REITs are usually, although not necessarily, companies. They may be described as real estate investment vehicles modelled on funds in that they provide an opportunity for investors to invest in income-generating real estate in a way which is similar to how individuals invest in stocks and bonds through funds.

REITs open up property markets to investors with a lower investment threshold, allowing them to access returns from investment grade property which would be beyond their reach as individual investors and allowing investment to be made without recourse to the mortgage borrowings typically associated with property investments.

They also allow investors to hold a share in a larger property portfolio than would be held individually, achieving diversification and reducing risk. The investment is also more liquid than direct investment in property given that investors buy and sell shares rather than the property itself. This also enables the disposal of part of the investment should this be required which would be more complicated were they to hold the property directly.

REITs are typically required to distribute most of their property rental income thus guaranteeing a regular flow of income to investors who also benefit from the expertise of professional property asset managers in the selection and management of assets.

Every jurisdiction is unique from a legal perspective and as a result REITs look different in each country and can take different legal forms such as companies, funds or trusts, however broad commonalities do exist.

Although the specifics of the tax regime applicable to REITS in different jurisdictions may vary, in principle the tax frameworks involve some element of: tax exemption on rental profits and capital gains derived from property rental business at the level of a REIT tied directly or indirectly to a distribution requirement at the level of the REIT; and taxation of distributions made to shareholders – removing double layer of taxation at company and shareholder level.

Jurisdictions usually retain the right to tax distributions made to non-resident shareholders often in the form of withholding tax on dividend payments.

A brief overview of the tax treatment in a few of the main REITs jurisdictions follows:

United States

Treatment at the level of the REIT: Broadly speaking, dividends paid to shareholders are allowed as a tax deduction against chargeable income, thus reducing the profits subject to tax, with corporate tax applying on any remaining chargeable income. This creates an incentive for the REIT to distribute as much as possible of its profits. Furthermore, an excise tax of four per cent applies to the extent that the REIT fails to distribute at least 85 per cent of its ordinary income and 95 per cent of its net capital gain within the tax year. Additional non-income taxes may apply to REITs depending on the state in which they are set up.

Withholding tax: Withholding taxes apply on distributions of REITs and vary depending on whether shareholders are domestic (not generally subject to withholding tax) or foreign.

Tax at the level of the investor: Distributions from a REIT are taxable in the hands of domestic investors at rates which vary depending on whether they are capital gain distributionsor otherwise.

Ireland

Treatment at the level of the REIT: REIT is not liable to corporate tax on income and capital gains arising from the property rental business. Subject to tax on all other income or gains in accordance with the normal rules.

Withholding tax: dividend distributions out of rental income and gains are subject to withholding tax at a rate of 20 per cent.

Tax at the level of the investor: Irish resident investors are subject to tax on the dividend with credit for dividend withholding tax levied at the level of the REIT. Non-resident investors are subject to withholding tax on dividends which may be reduced in terms of double tax treaties.

Non-residents are not subject to Irish capital gains tax on disposal of shares in a REIT given that it is a publicly listed company

United Kingdom

Treatment at the level of the REIT: Not subject to tax in respect of rental income earned or capital gains realised on disposal of rental business assets. However, any other income or gains derived by the REIT is subject to corporation tax in the usual manner.

Withholding tax: Dividend distributions out of rental income and gains are usually subject to a 20 per cent withholding tax subject to certain exceptions where payments are made to UK companies, UK pension funds and UK charities, the rate of which may be reduced in terms of double tax treaties for non-resident investors. Distributions out of other profits which are taxed normally are treated as regular dividends and not subject to a withholding tax.

Treatment at investor level: Distributions to individuals out of property rental business income, i.e. rental income and capital gains realised upon disposal of rental property, are taxable at the maximum tax rate of 45 per cent with a credit for the 20 per cent withholding tax suffered upon distribution. Distributions out of other income are subject to tax as ordinary dividend receipts.

Distributions to corporate investors out of rental income or gains derived upon disposal of rental property in the REIT are subject to corporate tax in the normal manner.

Gains realised by individuals upon the disposal of shares in REITs are subject to capital gains tax at applicable rates and such gains realised by corporate investors are subject to corporation tax in the normal manner.

As indicated above, non-resident investors are subject to the 20 per cent withholding tax on distributions of rental income and capital gains derived from the disposal of rental property. Distributions made out of other income are not subject to withholding tax.

Capital gains realised upon the disposal of shares in UK REITs by non-resident investors are outside the scope of UK tax.

Hong Kong

Treatment at the level of the REIT: A REIT authorised by the Securities and Futures Commission is exempt from Hong Kong profits tax, however when it holds real estate in Hong Kong directly, any rental income derived therefrom would be subject to Hong Kong property tax. Where Hong Kong real estate is held by the REIT via a special purpose vehicle, it would be subject to profits tax on profits derived from the real estate. Income derived from property held outside Hong Kong would usually be exempt from tax in Hong Kong.

Withholding tax: There is no withholding tax on distributions made from a REIT in Hong Kong

Treatment at the investor level: Distributions received from REITs are not subject to tax in Hong Kong.

Capital gains realised on disposal of units in a REIT are exempt from Hong Kong profits tax.

For more information on REITs around the world, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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