The new SOCIMIs: are things looking up on the real estate market?
In his recent statements to the financial press, Miguel Ferre, the Secretary of State for Finance, took an optimistic view of the role that SOCIMIs (Sociedades Cotizadas de Inversión en el Mercado Inmobiliario or Listed Corporations for Investment in the Real Estate Market) are set to play in reactivating the real estate market, currently all but dead in the water. The optimism shown by the Secretary of State is well founded, at least from a technical standpoint, if we take into account the tax treatment given to these vehicles and their shareholders, especially their nonresident shareholders.
SOCIMIs are the new Spanish “REIT”, a listed vehicle for investment in urban real estate of any kind (residential properties, business premises, offices, hotels, etc.) that are rented out, which is taxed at 0% for corporate income tax purposes and is obligated to distribute to its shareholders at least 80% of its ordinary income and 50% of any capital gains realized on sales of its properties. Thus, juridical double taxation is avoided, as the SOCIMI’s income is taxed in the hands of the shareholder in the form of dividends (or when the shareholder sells his or her shares in the SOCIMI). If the dividends are not taxed in the hands of the shareholder at a rate of at least 10%, the SOCIMI will be liable for a special 19% tax on the income distributed to such shareholders.
This tax regime means that, whereas the property income obtained by a Spanish-resident individual can be taxed at 52% for personal income tax purposes, if the investment is made through a SOCIMI the tax rate can be slashed by nearly half (27% for personal income tax purposes). The attraction is even greater for nonresident shareholders (whether individuals or legal entities) who invest in a SOCIMI, since the income received by the SOCIMI can be tax free in Spain if the shareholders own a holding in the SOCIMI of less than 5% or if, where the holding is greater, they can evidence that they are taxed at a rate of at least 10%, whether in Spain via withholding tax or in their countries of residence. Yes, you read that correctly: in these cases Spain would be waiving its right to tax income generated by real estate located in Spain, representing a very brave step on the part of the Spanish tax authorities with the clear aim of attracting foreign investment to Spain’s beleaguered real estate sector.
But it doesn’t stop there: those foreign REITs (generally with a strong capacity to invest) that invest in real estate in Spain can do so through their own (unlisted) SOCIMI and they will also benefit from the attractive tax regime described above, with the possibility of not having to pay any tax in Spain on income/gains obtained in the country.
Lastly, the possibility that SOCIMIs have to be listed on the MAB (Mercado Alternativo Bursátil or Alternative Stock Market) sparked considerable interest at family-owned real estate groups that believed that they were seeing the opportunity to have their own SOCIMI and benefit from this tax regime, provided that they had some “minority shareholders.” However, according to the latest news coming out of the MAB, it appears that the intention is to take things on a case-by-case basis but, in any event, to require an actual “listing,” with certain minimum levels of “free float” in terms of percentages and of number of shareholders. At the end of the day, part of the original philosophy of the REIT is that traditionally illiquid real estate investments are made more liquid through their listing on organized markets.
It is still too soon to assess the success of these new SOCIMIs, which took their first steps this past January 1, but an analysis of their tax regime leads us to share the Secretary of State’s optimism.
