On October 14, 2016, the Ministry of Finance announced a draft act introducing Real Estate Investment Trusts (REITs) benefitting from a CIT exemption into the Polish legal order. REITs have been operating in many countries around the world for several years, e.g. in the USA, France, Spain and Germany. However, the Polish legal system has until now not contained any regulations on these type of institutions.
Under the assumptions of the draft, a corporate income tax exemption is the main characteristic of the special status of REITs, aiming to eliminate double taxation of income and revenues related to real estate lease. To obtain the given tax preferences a company will have to fulfill numerous requirements concerning the structure of assets and revenues, as well as the level of liabilities.
A Polish REIT - Draft Assumptions
A Polish REIT can be a public company with its registered office or management in Poland, which meets the following conditions:
- its share capital is not lower than PLN 60,000,000;
- it was established for an indefinite period;
- its shares have been admitted to trading on a regulated market in Poland;
- its scope of activity includes lease of real estate or its parts, free of charge disposal of real estate or its parts and financial activity involving share management in other companies (subsidiaries);
- revenues from lease of real estate or its parts are obtained from the lease of at least three pieces of real estate or its parts;
- at least 70% of the balance sheet value of assets comprise real estate, shares of subsidiaries and other companies of the REIT market;
- at least 70% of net revenues from sales is generated from lease of real estate or its parts or from sale of real estate or its parts against remuneration;
- a balance sheet value of labilities does not exceed 70% of the balance sheet value of assets;
- at least 90% of the profit arising from the annual financial statements, generated from lease of real estate or its parts, from sale of shares in other REIT against remuneration, or from dividends paid by subsidiaries, is paid to shareholders in a form of a dividend in each accounting year or this profit is designated for acquisition of real estate or its parts, or shares constituting at least 95% share in the share capital of a joint stock company, a limited liability company or a limited joint stock partnership of which at least 70% of the balance sheet value comprises real estate.
Pursuant to the draft, the CIT exemption in Poland will apply to:
- income obtained from lease of real estate or its parts, as well as from the sale of real estate or its parts against remuneration, sale of shares of the REIT subsidiaries or shares in other REIT market companies; REIT revenues obtained from dividends paid by its subsidiaries;
- income of REIT subsidiaries obtained from lease of real estate or its parts, as well as from the sale of real estate or its parts against remuneration.
However, it must be noted that the REIT shareholders will not be entitled to benefit from the exemption under art. 22 section 4 of the CIT Act in respect of tax on dividends paid by these companies.
Purpose of the Draft
The draft act does not define residential buildings and flats as real estate, which arises from the fact that the greater purpose of the draft is to stimulate economic activity on the commercial real estate lease market. The assumed increased involvement of national private capital is to facilitate the development of the domestic commercial real estate lease market and to break the existing dominance of foreign investors. The authors of the draft also assume that the appearance of REIT shares on the regulated market trading will create favorable conditions for the development of the capital market in Poland, as investing in such companies is to be attractive for retail non-professional investors due to the attractive risk profile (based on high quality real estate) and dividends paid.
The Consequences of Implementation of the Act
Introduction of REITs into the Polish legal order should have a positive effect on the commercial real estate market. It is projected that owing to REITs, the share of domestic capital on the Polish real estate market, which is currently being dominated by foreign investors (more than 90% of commercial real estate in Poland is controlled by foreign capital, and Polish capital almost does not participate in the domestic real estate market) will considerably increase. Also, the Polish capital market willis to benefit from the introduction of REITs into the Polish legal order, mainly due to the connection of tax preferences with a requirement concerning the admission of REIT shares to the trading on the regulated market in Poland.
The draft act is still in the early phases of the legislation process and is likely to be modified. The further works on the draft is worth following, with the Act due to come into force on January 1, 2017.