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Philippines Tax Talk: Understanding the REIT Act
In a bid to boost the stock market, the Real Estate Investment Trust (REIT) Act was recently passed into law, marking the fourth legislative attempt to bolster economic growth and development in Philippine markets. The Real Estate Investment Trust (REIT) Act of 2009 (Republic Act No. 9856) promises to promote economic development in capital markets, democratize the distribution of wealth by increasing Filipino participation in the Philippine real estate market, enable the financing of infrastructure and other projects through the management of capital markets, and provide protection to the investing public.
But let's get back to basics: What is REIT? And how can it help improve our economy?
A Real Estate Investment Trust (REIT) is a corporate institution that invests in real estate, while reducing and (in some cases) eliminating corporate income taxes. In exchange, REITs are required to distribute 90% of their annual income to shareholders. The REIT structure provides a framework for real estate investments in the same way as mutual funds provide investments in stocks. Like any corporation, REITs can either be publicly or privately held, and are classified as either equities, mortgages or hybrids.
The Real Estate Investment Trust (REIT) Act of 2009 proposes several incentives for establishing these corporations in the country, including tax exemptions on revenues and shareholder dividends. REITs will also benefit from the documentary stamp tax exemption recently issued on its original shares of stock.
According to Philippine Stock Exchange (PSE) president and chief executive officer Francis Lim, "The REIT law promotes transparency for tax reporting purposes. Moreover, the new business opportunities that will be created should translate to a broader tax base for the government. An independent study conducted by a team from the University of Asia and the Pacific concluded that the government will not only recover every peso of tax incentive but stands to gain between P0.15 and P0.35 more over a 15-year period. This conclusion was made on the basis of the March 28, 2009 version of the bill, which granted far more liberal tax incentives than the enrolled version."
Michael McCullough of Manila brokerage firm , KMC MAG Group, adds, "The REIT is a promising new investment option allowing many small investors to take part in large scale real estate developments through simply purchasing stocks in the REIT. The entire commercial real estate industry is excited as REITs will encourage more real estate development, which will be beneficial to the local economy."
In order to qualify for tax exemptions under the REIT Act, companies must first meet the following requirements:
- Company must be listed in the Philippine Stock Exchange (PSE) and distribute dividends of at least 90% of its net income;
- Company must invest only in real estate or real estate assets;
- Company must invest at least 70% of its total assets;
- Company must not undertake in property development activities nor invest in unlisted property development companies;
- Company must invest at least 35% of its total assets in real estate;
- Not more than 5% of its investments in listed or unlisted debt securities and listed shares of or issued by property and non-property corporations (local or foreign) and other locally-registered REIT should be invested in any one issuer's securities or any one manager's funds;
- When investing in real estate as a joint owner, the REIT should acquire shares or interests in an unlisted special purpose vehicle (SPV) constituted to hold down the real estate and the REIT should have freedom to dispose of such investment;
- Company's total borrowings and deferred payments should not exceed 35% of its deposited property;
- A full disclosure on the identity of the parties and the transaction should be made to the PSE if it acquires assets from or sells assets to interested parties or invests in securities of or issued by interested parties;
- Company must conduct a full valuation of a REIT at least once a year;
- Company must comply with the applicable minimum public ownership requirement of the Philippine SEC;
- In addition, to qualify for the exemption of taxes imposed on the transfer or sale of assets, REIT must retain or hold the assets sold or transferred for a period of five years from the date of sale or transfer to the REIT.
REITs must have a minimum paid-up capital of Php 300 million, with 1,000 public shareholders, having at least 50 shares each. Although the act seems promising, it is important that the incentives and exemptions given to investors must be offered with caution, as it may impact other industries, and even government funds.
Manila lawyer , Amanda Carpo of Kittelson & Carpo Consulting stated that: "The REIT law will allow Philippine real estate market to be truly global and it holds a lot of promise for the industry. Hopefully, the law will be implemented as written and the different government agencies will not try to inject their policies into the implementing rules and regulations. Those concerns should have been aired and dealt with in the deliberations. We must trust our lawmakers and not second guess the wisdom of the law."
Contact Kittelson & Carpo Consulting