The Tax Treatment of CIVs and REITs
Direct Held vs Indirect Held real estate
investments under Tax Treaties
Amsterdam, 2 November 2012
Stefano Simontacchi
Agenda
Definition
Direct Investment
Real Estate Company
Real Estate Investment Trust
Definition of ‘Immovable Property’
Definition
ARTICLE 6(2) OECD M.C.
The term “immovable property” shall have the meaning which it has under the law of the
Contracting State in which the property in question is situated. The term shall in any case
include property accessory to immovable property, livestock and equipment used in agriculture
and forestry, rights to which the provisions of general law respecting landed property apply,
usufruct of immovable property and rights to variable or fixed payments as consideration for
the working of, or the right to work, mineral deposits, sources and other naturel resources;
ships boats and aircraft shall not be regarded as immovable property
 Precedence to the legislation of the situs state
 Positive list
 Negative list
Relationship with article 3(2)?
3
Main issues of interpretation
Definition
 Definition of where the property is situated
 Definition of when the situs has to be determined
ARTICLE 3(2) OECD M.C.
 Immovable property physically connected to the soil
 Movable property included in the positive list
 Movable property defined immovable property by the law of the situs state
4
The Term ‘Situated’
Definition
POSSIBLE CONFLICTS
10%
REIT
 REIT units are movable properties
 REIT units are immovable properties
Determination of the situs State
State R
State S
Definition of immovable property
100%
 REIT units are immovable property
situated in State R
 REIT units are immovable property
situated in State S
5
Real Estate Direct Investments
Direct Investment
ALPHA
State R
100%
100%
State S
ALPHA
100%
P.E.
 Income from immovable property: Article 6 OECD M.C.
 Gains derived from the alienation of immovable property: Article 13(1) OECD M.C.
PRIMARY TAXATION RIGHTS TO S STATE
6
Income from Real Estate Investments
DIVIDENDS
State R
DIVIDENDS
Real Estate Company
100%
ALPHA
100%
State S
ALPHA
100%
100%
RENTAL
PAYMENT
RENTAL
PAYMENT
Article 10 OECD M.C.
PRIMARY LIMITED TAXATION RIGHTS TO S STATE
Article 6 OECD M.C.
PRIMARY TAXATION RIGHTS TO S STATE
7
Share Deal vs. Asset Deal before 2003
Real Estate Company
OECD M.C. 2000
State R
100%
100%
State S
ALPHA
100%
Article 13(1) OECD M.C.
Article 13(4) OECD M.C.
PRIMARY TAXATION RIGHTS TO S STATE
EXCLUSIVE TAXATION RIGHTS TO R STATE
8
Share Deal vs. Asset Deal after 2003
Real Estate Company
ARTICLE 13(4) OECD M.C. 2003
Gains derived by a resident of a Contracting State from the alienation of shares deriving more
than 50 per cent or their value directly or indirectly from immovable property situated in the
other Contracting State may be taxed in that other State
NEUTRALITY OF THE FORM OF THE INVESTMENT
Paragraph 4 provides that gains from the alienation of such shares and gains from the
alienation of the underlying immovable property, which are covered by paragraph 1, are
equally taxable in that State
9
Article 13(4) – Geographical Scope
Real Estate Company
100%
100%
State R
State S
ALPHA
ALPHA
100%
100%
100%
ALPHA
100%
100%
Third State
Article 13(4) OECD M.C. Article 13(4) OECD M.C.
PRIMARY TAXATION
RIGHTS TO S STATE
PRIMARY TAXATION
RIGHTS TO S STATE
Article 13(5) OECD M.C.
EXCLUSIVE TAXATION
RIGHTS TO R STATE
10
Article 13(4) – Value Test
 VALUE: 1,600
 < 50% VALUE OF ALPHA
 UNREALIZED GAIN: 1,500
State R
100%
100%
State S
ALPHA
100%
 VALUE: 2,000
 > 50% VALUE OF ALPHA
 NO UNREALIZED GAIN
Real Estate Company
 The shares object of the
alienation must derive more
than 50% of their value from
immovable property situated
in a contracting state
 No reference is made to the
existence or not of unrealized
gains connected to the
immovable property, the value
of
which triggers the
attribution of taxation rights
to the state in which these are
situated
11
Article 13(4) – Proposed Amendment
Real Estate Company
MIXED MECHANISM
 Value test as application requirement; and
 Unrealized gain test as limit to the attribution of taxation rights
PROPOSED ARTICLE 13(4) OECD M.C.
Gains derived by a resident of a Contracting State from the alienation of shares deriving more
than 50 per cent or their value directly or indirectly from immovable property situated in the
other Contracting State may be taxed in that other State to the extent of the amount of the
[net] unrealised gains relating to immovable property situated in the latter State proportionally
attributable to the shares alienated.
12
Article 13(4) – Indirect Derivation of Value
100%
State R
100%
BETA
100%
State S
ALPHA
100%
ALPHA
B SHARES
BASIS
10
VALUE
110
GAIN
100
A SHARES
BASIS
10
VALUE
110
GAIN
100
100%
BUILDING
 50% VALUE OF ALPHA
BASIS
10
VALUE
110
GAIN
100
Real Estate Company
 Article 13(4) makes
express reference to
both direct and indirect
derivation of value
 Shares indirectly derives
value from immovable
property where they
relate to the capital of a
company that in turn
owns a participation in
an
entity
owning
immovable property
 The inclusion of indirect
derivation of value is
thus consistent with the
anti-abuse origin of the
provision (Lamesa case)
 50% VALUE OF ALPHA
 50% VALUE OF BETA
13
Article 13(4) vs. Article 13(2) – Case 1
DIRECT ALIENATION
Real Estate Company
INDIRECT ALIENATION
State R
ALPHA
ALPHA
State S
P.E.
P.E.
100%
BETA
100%
100%
Article 13(1) OECD M.C.
Article 13(2) OECD M.C.
Article 13(2) OECD M.C.
Article 13(4) OECD M.C.
PRIMARY TAXATION RIGHTS TO S STATE
PRIMARY TAXATION RIGHTS TO S STATE
14
Article 13(4) vs. Article 13(2) – Case 2
DIRECT ALIENATION
Real Estate Company
INDIRECT ALIENATION
100%
100%
100%
State R
ALPHA
ALPHA
State S
P.E.
P.E.
Article 13(1) OECD M.C.
BETA
Article 13(5) OECD M.C.
Article 13(2) OECD M.C.
Article 13(2) OECD M.C.
Article 13(4) OECD M.C.
EXCLUSIVE TAXATION RIGHTS TO R STATE
PRIMARY TAXATION RIGHTS TO S STATE
15
Article 13(2) – Proposed Amendment
Real Estate Company
INCONSISTENCY
 The treaty regime of Case 2 seems inconsistent with the rationale behind the introduction
of Article 13(4)
 It would be different if Article 13(4) had defined shares of real estate companies as
immovable property (as is the case in many treaties)
PROPOSED ARTICLE 13(2) OECD M.C.
Gains from the alienation of movable property forming part of the business property of a
permanent establishment which an enterprise of a Contracting State has in the other
Contracting State, including such gains from the alienation of such a permanent establishment
(alone or with the whole enterprise), may be taxed in that other State.
Such provision is not applicable to gains from the alienation of shares deriving more than 50
per cent of their value directly or indirectly from immovable property situated either in the
Contracting State of which the person carrying on the enterprise is resident or in a third State.
16
Income from REIT
REIT
DISTRIBUTION/
ALIENATION
DISTRIBUTION/
ALIENATION
10%
REIT
10%
State R
State S
RENTAL
PAYMENT/
GAINS FROM
ALIENATION
100%
REIT
RENTAL
PAYMENT/
GAINS FROM
ALIENATION
100%
17
Regulatory Framework
REIT
MAIN SPECIFIC REQUIREMENTS/RESTRICTIONS
ENTITY FORM




Unit trust
Corporation
Partnership
Fund
INVESTOR
REQUIREMENTS
 Minimum number
of investors
 Maximum interest
owned by a single
investor
 Maximum interest
owned by a limited
number of investors
 Minimum interest
owned by investors
not
individually
exceeding
a
maximum interest
threshold
INVESTMENT
RESTRICTIONS
DISTRIBUTION
REQUIREMENTS
 REIT Activity
 Yearly obligation to
distribute a
− Income test
significant portion
− Asset test
of REIT profits
 REIT Investments
− Minimum level of
diversification
− Limitation on
investments in real
estate
− Limitation on
investments in
subsidiaries
18
Domestic Taxation
REIT
REIT TAX REGIME
FISCAL NATURE OF
THE REIT
TREATMENT OF THE
INCOME ON THE
REIT LEVEL
TREATMENT OF
INVESTOR
TAX EXEMPTION
Person Liable to Tax
Exemption or 0% rate
Liable to Tax
FLOW – THROUGH
Transparent for Tax
Purposes
None
Liable to Tax
DIVIDEND DEDUCTION
Person Liable to Tax
Regular Taxation but
Deduction of
Dividend Paid from
the Taxable Base
Liable to Tax
EXEMPTION FOR
ELIGIBLE INCOME
Person Liable to Tax
Exemption for Eligible
Income
Liable to Tax
TAXATION ON THE NET
ASSET VALUE
Person Liable to Tax
Special Tax on the Net
Asset Value
Tax Exempt
ORDINARY TAXATION
Person Liable to Tax
Regular Taxation
Tax Exempt
19