REITs Real Estate Investment Trusts and Tax

A Comparison of Tax Frameworks across REITs in Leading Financial Centres

Chetcuti Cauchi | Published on 18 Jun 2019 | Updated on 04 Sep 2019

REITs  Real Estate Investment Trusts and Tax

Since the introduction of Real Estate Investment Trusts (REITs) in the USA in the 1960s, 38 REIT frameworks have been implemented worldwide with a market cap of around $1.7 trillion.  

Although the name implies that they are trusts, REITs may be and usually are companies.  They are also referred to as real estate investment vehicles based on funds as they present the prospect for individuals to invest in real estate which is income-generating in the same way that people invest in stocks and bonds through funds. 

Opportunities and Investments of REITs 

REITs present the opportunity to individuals in the property markets who have a lower investment threshold, as it provides them with the ability to gain returns from property investments which usually would be above their grade as individual investors. REITs also allow individuals to invest in property without mortgage borrowings usually needed when investing in property.  Individuals may also invest in a share of a large property portfolio than would be possible if investing individually. 

Investing in REITs is more liquid an investment than investing directly in property because, as opposed to buying and selling property itself, investors purchase or sell shares. This means that investors can dispose of just part of the investment if necessary, which is not possible when investing in a property directly. 

To secure a steady flow of income, REITs usually need to allocate the majority of the rental income from property.  Investors have the benefit of gaining expertise from professional property asset managers who can assist with choosing and managing assets. 

Tax Frameworks for REITs 

Each country has its own legal and tax framework for REITs, so a REIT may take on a different form in different jurisdictions, such as companies, funds or trusts etc. There are also similarities between frameworks, and each tax regime contains elements of:  

  • rental profits and capital gains are tax exempt if derived from property rental business at the level of a REIT which is tied to the distribution requirement at the level of the REIT;  
    and
  • distributions made to shareholders are taxed – removing double layer of taxation at company and shareholder level.

Most countries typically maintain the ability to charge tax on distributions allocated to non-resident shareholders usually in the form of withholding tax on dividend payments. 

Below is a summary of the treatment of tax in REITs regimes in different jurisdictions:


The United States and the  Real Estate Investment Funds

In the US, dividends paid to shareholders are permitted as tax deductions against chargeable income.  This decreases profits subject to tax, and applies corporate tax on remaining chargeable income, if any, in order to encourage the REIT to distribute the majority of its profits. 

In addition, an excise tax of 4% is applicable if the REIT does not distribute a minimum of 85% of its ordinary income and 95% of its net capital gain within the tax year. Depending on how they are set up, additional non-income taxes may apply to REITs. 
Withholding taxes are applicable on distributions of REITs. This varies depending on if a shareholder is domestic and is therefore not usually subject to withholding tax, or foreign. 

With domestic investors, distributions from REITs are taxable at varying rates subject to whether they are capital gain distributions or not. 

Ireland 

Corporate tax on income and capital gains generated from property rental is not applicable to REITs, but is subject to tax on all other income or gains. 20% Withholding tax is applied to dividend distributions out of rental income and gains. Whilst Irish resident investors are charged tax on dividends with credit for dividend withholding tax levied at the level of the REIT, non-residents are charged withholding tax on dividends which may be decreased in terms of double tax treaties. 

IF a REIT is a publicly listed company, non-residents are not charged Irish capital gains tax on disposal of shares in a REIT. 
 

United Kingdom 

Whilst any other income and gains generated from a REIT are charged corporation tax, a REIT is not charged tax for rental income earned or capital gains generated on disposal of rental business assets.  Dividend distributions from rental income and gains are typically subject to withholding tax at the rate of 20%. This is so except for when payments are made to UK companies, UK pension funds or UK charities, as the rate of taxation may decrease in terms of double tax treaties for non-resident investors.  Distributions generated from other profits which are taxed normally are treated as regular dividends and not charged withholding tax. 

Distributions to investors from rental income and capital gains generated upon the disposal of rental property are taxed at the maximum tax rate of 45% with credit for the 20% withholding tax incurred upon distribution. However, distributions from other income are charged tax as ordinary dividend receipts. 

Normal corporate tax is charged on distributions made to investors for rental income or gains generated upon disposal of rental property of the REIT.  

Capital gains tax is charged on gains generated by individuals upon the disposal of shares in REITs. Gains generated by investors are charged normal corporation tax.  

Non-resident investors are charged withholding tax at the rate of 20% on distributions of rental income and capital gains generated from the disposal of rental property.  Distributions from income are not charged withholding tax.  Capital gains generated from the disposal of shares by non-resident investors in UK REITs are not part of UK tax.  

Hong Kong 

Any REITs authorised by the Securities and Futures Commission is not charged Hong Kong profits tax.  Yet, when a REIT holds real estate in Hong Kong directly, Hong Kong property tax is applicable on rental income. 

If Hong Kong real estate is held by the REIT is a special purpose vehicle, it is charged profits tax on profits generated from real estate. Income derived from property outside Hong Kong is typically not charged tax in Hong Kong. 

No withholding tax is charged on distributions made from Hong Kong REITs. In Hong Kong, distributions from REITs are not subject to tax. Capital gains generated from the disposal of units in a REIT are not charged Hong Kong profits tax.

For a full comparison of REITs frameworks around the world, visit here! 


Request More Information
Please send me legal and other updates

Key Contacts

Dr Maria Chetcuti Cauchi

Senior Partner, Property & Projects

+356 22056875

Dr Silvana Zammit

Partner

+356 22056423

Related Practice Groups