On 14 October 2016, the Polish government published a long-awaited draft of a new law on real estate investment trusts (REITs) (Polish: spółki rynku wynajmu nieruchomości). The draft has now been referred to public consultation and the government expects the new law to enter into force on 1 January 2017. However, this deadline may be rather optimistic given the fact that after the public consultation is completed, the draft law must then be formally accepted by the Polish parliament and signed by the President.
The new REIT regime introduces certain solutions to the Polish market that are already known in other EU jurisdictions, such as income tax exemption, dividend requirement, and leverage limit. The main idea behind the new law is to raise interest among Polish retail investors and create conditions for domestic capital to invest in the real estate market. The new REIT regime is also aimed at improving capitalization and trading volume on the Warsaw Stock Exchange (WSE).
Special tax treatment
As in other EU jurisdictions, the main characteristic of a REIT is that it can transfer cash through its organizational chain without taxation, which means that tax only applies when an investor withdraws cash from the REIT. To achieve this effect, the new REIT law amends the Act on Corporate Income Tax and introduces a special income tax exemption for REITs. This exemption applies to: (i) the profits generated from the lease of real property or sale of real property, (ii) the sale of shares in another REIT or a special purpose vehicle holding real properties in which a REIT or its SPV holds at least 95% of the share capital (REIT SPV), (iii) the dividends received from REIT SPVs , and (iv) the profits gained by REIT SPVs from the lease or sale of property.
In order to benefit from this tax exemption, a REIT - and also any of its SPVs - must apply in writing to the relevant tax authorities. In such a case, the tax exemption applies as of the next calendar month after the filing of the application (which also becomes the first day of the tax year for the entity in question). From that moment, the REIT (or its SPV) have two years to meet their respective qualification conditions (see below), otherwise they will have to file a correction of their tax returns and pay the outstanding taxes together with interest.
Conditions to become a REIT
The draft regulation limits a REIT's scope of business activity to the leasing or selling of real properties and the financial activity required to manage the shares in its SPVs.
A REIT must be a company created for an indefinite period of time and must be listed on the WSE. Its share capital must be at least PLN 60 million. At least 70% of its asset value must be comprised of real properties or shares in other REITs or REIT SPVs, and consequently at least 70% of its net sale revenues must be gained from the lease of at least three real properties or the sale of real properties. It is worth mentioning that not all assets are recognized by the draft regulation as real properties. Therefore, in order to meet the above thresholds, REITs will not be able to invest their capital in undeveloped properties or in housing assets.
Another important requirement is that at least 90% of its profit must be paid out as annual dividends to its shareholders - unless the shareholders decide to allocate it for re-investment on the real estate market. Finally, a REIT's liabilities may not exceed 70% of its assets.
The thresholds related to the composition of a REIT's assets and its maximum leverage limit must be complied with at the end of each quarter of the financial year. This requirement is complementary to the WSE's local listing rules which still require companies to publish quarterly interim reports in addition to annual and semi-annual reports as required by the Transparency II Directive (which sets out common financial disclosure requirements for companies listed in EEA countries).
Similar conditions must be met by REIT SPVs, with the exception that they do not have to be listed on the WSE, there is no minimum share capital requirement, and they may be set up for a defined period of time.
The draft of the new REIT law provides for limited corporate governance rules. It only requires that the management board have at least two members, whereas regular companies have a free hand in deciding on this issue. In addition, it requires that members of a REIT's governing bodies: (i) must have higher education, (ii) must not have been convicted of an intentional tax offence, and (iii) must have a sound reputation with respect to their professional duties.
The management board of a REIT will be obliged to prevent any conflict of interest and - if any conflict arises - ensure that its shareholders' interests are protected. However, no detailed rules are set out with respect to corporate governance, and more specifically with respect to the liability and remuneration of the management team.
Of course, as a WSE-listed company, a REIT will have to comply with a number of disclosure obligations, including financial reporting and the disclosure of inside information. Additionally, REITs will have to declare their compliance with the Corporate Governance Code for WSE listed companies ("comply or explain" rule).
The draft REIT law is now publicly available and certain institutions, organizations and professionals will be able to provide their comments to it. Once this public consultation is over, the government will refer the draft REIT law to the Parliament, where it will have to be officially accepted. The progress of work on the draft REIT law can be followed on the Governmental Legislation Centre's website.