REIT Tax Benefits Expected By Philippine Property Market

by Mary Swire, Tax-News.com, Hong Kong

02 October 2009

A bill providing a real estate investment trust (REIT) regulatory framework has been approved by the Philippine Senate, and can be expected to pass into law.

The new bill will allow for companies to obtain capital by listing their income-producing property assets on the stock market within a REIT. Investors would take shares in the REIT which would have a minimum share capital of PHP300m (USD6.3m) and, at all times after listing, have at least 1,000 shareholders with at least 30% in total of its outstanding shares.

A REIT will only be able to invest, directly or indirectly, in income-producing property, at least 75% of which must be invested in, or consist of, property located in the Philippines. The total borrowings and deferred payments of a REIT shall not exceed 35% of its deposited property, unless it has an investment-grade rating, in which case it may borrow not more than 70% of its deposited property. It will be required to distribute annually at least 90% of its income to its shareholders.

To encourage the establishment of REITs, the law provides tax incentives to the REIT and its shareholders. The 30% company income tax rate will be based on the REIT's net taxable income, but only after deducting the 90% dividend distribution to its shareholders. Under current regulations, the 30% tax rate would normally be imposed on the net taxable income before dividend distribution.

Transfers of property to the REIT shall be subject to only 50% of the applicable documentary stamp tax, registration and annotation fees. Sale of shares of the REIT through the stock exchange shall be exempt from the documentary stamp tax. The REIT shall also be exempt from the initial public offering tax when it offers its shares to the public through a local stock exchange.

In addition, dividends paid by the REIT to a domestic company, resident foreign corporation or an overseas Filipino investor (OFW) shall be exempt from the 10% dividend tax. In case of OFWs, the exemption shall be good for a period of seven years from the effectiveness of the tax regulations implementing the law.

A REIT shall be subject to VAT on sales arising from any disposal of property, and on its gross receipts from the rental of property, but it will not be considered as a dealer in securities and shall not be subject to VAT on the sale, exchange, or transfer of securities forming part of its property-related assets.

Senator Edgardo J. Angara, who has promoted the passage of the bill, said that establishing REITs in the country would provide liquidity to the real estate market, unlock capital and provide a much-needed boost to the Philippine economy.

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