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Hong Kong's Securities and Futures Commission (SFC) has begun a one-month consultation, until February 26, 2014, on proposals to amend the Code on Real Estate Investment Trusts (REIT Code) to introduce flexibility in their investment scope.
Since the first REIT was listed in 2005, the Hong Kong REIT market has seen steady and stable growth in both breadth and depth. The size of the REIT market has grown close to five times since 2005 in terms of market capitalization, and the trading volume of the REIT market also saw sustained increase in average daily turnover since 2009.
Hong Kongs REIT portfolios have also widened to offer investors a diverse choice from retail properties to commercial and hotel properties, and properties in Mainland China. The Hong Kong REIT market further saw a major milestone by listing the world's first RMB denominated REIT in 2011.
However, taking into account the comments received following meetings by the SFC during the past year with various industry participants, and developments in comparable overseas jurisdictions, the SFC now considers that it is an appropriate time to amend the REIT Code.
In essence, the proposals seek to introduce flexibility for REITs to invest in properties under development or engage in property development activities; and invest in financial instruments, including listed securities, unlisted debt securities, government and other public securities, and local or overseas property funds, subject to at least 75 percent of the gross asset value (GAV) of a REIT being invested in real estate that generates recurrent rental income at all times.
The above proposals are also subject to relevant restrictions to ensure transparency of its activities. Details of these restrictions, including maximum thresholds on investments (such as a maximum threshold on property development investments of up to 10 percent of a REIT's GAV), disclosure and reporting requirements, are set out in the consultation paper.
It is said that, in considering the proposed amendments to the REIT Code, the SFC has been mindful of the need to strike a proper balance between facilitating market development and competitiveness on the one hand, and ensuring the protection of investors' interests and market integrity on the other.
"These proposals have taken into account both the protection of investors' interests and the long-term development of the Hong Kong REIT market, which is key to Hong Kong's continued development as an international premier asset management center," said Ashley Alder, the SFC's Chief Executive Officer.
The Commission has also noted the recent research report released by the Financial Services Development Council (FSDC) pertaining to the development of the Hong Kong REIT market. While the FSDC is supportive of the SFC's proposal to allow REIT managers greater flexibility to invest in properties under development, the FSDC has also made other suggestions.
One of the FSDC's proposals relates to the removal of profits tax on REITs. The SFC comments that, while such removal could be expected to be beneficial to Hong Kong REITs, it should be noted that currently, unlike other jurisdictions, no tax is levied at individual unitholder level on dividends or capital gains in Hong Kong.
"Therefore, a removal of profits tax could result in Hong Kong REITs becoming completely tax-free," the SFC confirmed. "Whether this would resonate well within Hong Kong's overall tax structure is of course a matter of government tax policy."A comprehensive report in our Intelligence Report series dealing with the issues raised by international property investment, and the possible taxation implications raised by such purchases, with an account of the likely (and some less obvious) potential countries for your consideration, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report15.asp
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