Legal regime for Spanish REITs (SOCIMIs) and some practicalities

Spanish SOCIMIs — public limited companies whose main activity is the lease of urban assets — have become one of the most tax-efficient and flexible real estate investment vehicles in Europe.

Since the 2012 amendment to their regulatory framework, SOCIMIs benefit from a zero percent Corporate Income Tax rate, aligning their tax treatment with that of other REITs regimes internationally. In addition, SOCIMIs can satisfy their mandatory trading requirements by listing on a MTF, with several platforms in Spain specifically tailored to accommodate these entities.

This report provides an overview of the principal legal and tax provisions applicable to SOCIMIs and outlines key practical considerations for investors and stakeholders.

What is a SOCIMI?

A SOCIMI is a Spanish sociedad anónima whose main corporate purpose is to hold either: (i) leased urban assets (through acquisition or development) or (ii) equity interests in other SOCIMIs, Spanish real estate collective investment undertakings (Spanish RE IICs), or foreign entities engaged in analogous or similar activities to that of a SOCIMI (the vehicles known as Real Estate Investment Trusts or REITs).

The most important regulations governing SOCIMIs are set out in Law 11/2009 of 26 October. This law has been amended several times since its enactment, most recently in 2021.

Incorporating a SOCIMI

Legal requirements

The basic requirements to apply for SOCIMIs' special tax regime are the following:

1. Minimum share capital - EUR 5 million

In-kind contributions of property are expressly permitted. This means that a monetary disbursement is not necessary.

Only a single property is required to incorporate a SOCIMI; thus, they can be created in real estate projects where the existence of a company per project (and one asset per company) is essential for the purposes of liability, management, risks and licensing purposes. The property may be located outside Spain.

The share capital must comprise one class of shares only affording identical rights to all shareholders.

2. Listing obligation

SOCIMIs' shares must be admitted to trading on a regulated market or a multilateral trading facility (MTF).

In principle, any country's regulated market (eg, the Spanish Bolsas de Valores) is suitable to fulfil this requirement. However, if the country in question is not a member of the European Union (EU) or the European Economic Area (EEA), it must be a territory with which there is an effective and uninterrupted exchange of tax information throughout the tax period.

In the case of MTFs, only Spanish facilities and those of the EU or the EEA are permitted.

3. 80% asset and income ratios

• Investment ratio:
  
  At least 80% of the value of a SOCIMI's assets must be invested in leasable urban properties or land intended for the development of such properties (provided development begins within three years), as well as in shares or participations in:

(i) other listed SOCIMIs;
(ii) non-listed SOCIMIs (i.e. PropCos);
(iii) Spanish RE IICs; and
(iv) foreign REITs.

• Income ratio:
  
  Likewise, at least 80% of the earnings (excluding any income arising from the sale of qualifying assets) must come from leases or dividends resulting from equity interests assigned to the fulfilment of the SOCIMI main corporate purpose.
  
  The ratios should be determined following the Generally Accepted Accounting Principles used in Spain (Spanish GAAP). If there is a group consisting of multiple SOCIMIs, the above ratios must be calculated on a consolidated basis.

4. Mandatory dividend distribution

Both listed and non listed SOCIMIs must distribute their accounting profit once all other relevant corporate obligations have been met. For these purposes, the legal reserve of a SOCIMI cannot exceed a 20% of the amount of share capital, and the bylaws of a SOCIMI cannot foresee any other reserves that cannot be distributed.

The distribution rules according to the origin of the profit are as follows:

• Distribution of 80% of overall earnings, including the earnings derived from property leases.
• Distribution of 50% of the capital gains obtained from the transfer of assets (properties and equity interests) that are eligible for the application of the special tax regime (i.e. properties used for leases and equity interests in entities engaged in analogous or similar activities to that of a SOCIMI, once the minimum three year holding period has been accomplished). The remaining 50% should be reinvested in eligible assets within three years of the transfer. Failing that, said benefit must be distributed in its entirety together with the rest of the benefits.
• Finally, 100% of the dividends coming from entities in which the SOCIMI holds an equity interest must be distributed.

The shareholders meeting of a SOCIMI must take the decision of the profit distribution within the six months following to the end of each fiscal year, and the distribution must be effectively paid within the month following to such decision.

5. Minimum lease period

Property assets must be leased for a minimum three-year term (one-year availability for lease will be computable for this purpose).

Regarding the interpretation of this requirement, the Spanish Tax Authorities consider that, in those cases where there are complex properties (such as a shopping centre in which the horizontal division has not been declared) it is not necessary that the term for lease is fulfilled for all the premises individually, but the overall degree of compliance will be analysed, without prejudice to any premise not having been leased.

No debt restrictions will apply.

Criteria of the Spanish Tax Authorities

Two last considerations are relevant to the above requirements, as confirmed by the Spanish Tax Authorities (Dirección General de Tributos):

• SOCIMIs must not comply with all these requirements if the listed company is not the SOCIMI itself but its parent company.
• Not all of the above requirements must be satisfied at the time of opting for the applicable regime. 

Some of the requirements, particularly those related to the listing, may be met within the two years following the election of the SOCIMI regime, without prejudice to the application of the SOCIMI special tax regime from the fiscal year in which the communication to the competent Tax Authorities for the election of said special tax regime takes place (provided within the relevant deadline).

Zero Taxation: the main attraction

As a main feature of the regime, SOCIMIs will be subject to CIT at a 0% rate, which makes them very attractive for any kind of investor, whether resident or non-resident in Spain, and places them at the same level as other successful REITs created in Western countries.

Just as a general introduction to taxation for the investors, we may face three different scenarios:

• Spanish CIT taxpayers (or non-residents with a permanent establishment in Spain) will include the dividend in their CIT base without entitlement to the exemption to avoid the double taxation, although these investors may still take advantage of the SOCIMI regime.
• Spanish individuals will include the dividend in their savings income taxable base.
• Non-residents without a permanent establishment in Spain who receive dividends from a SOCIMI will be subject to a withholding tax of 19%, unless an exemption (parent-subsidiary) or reduced treaty rate is applicable.

In this regard, investors non-residing in Spain (e.g. funds investing in shopping centres, hotel buildings or any other property to be leased), in particular residents within the EU, may maximize the efficiency of their investments in Spanish real estate for leases down to 0% on the Spanish CIT, and also to 0% on Spanish withholding taxes under the parent-subsidiary directive, then receive return on the investment without tax leakage.

However, all that glitters is not gold since the rule of zero taxation is excepted if dividends are distributed to a shareholder holding 5% or more of the share capital of the SOCIMI, and such dividends, in the hands of such shareholder, are either exempt or subject to an effective tax rate under 10%, in which case the application of a special levy to the SOCIMI has been foreseen because the latter is required to pay tax at a rate of 19% on the amount of dividends paid to the shareholders who meet the referred requirements (participation equal to or greater than 5% of the share capital and an effective taxation below 10%).

This special levy will typically be triggered in case of non-resident investors who are resident in either a tax haven territory or in a jurisdiction (even within the EU) where the dividends collected by the relevant investor are entitled to a participation exemption regime. Note that most investments in Spanish real estate by non-resident investors used to be channelled through entities resident in an EU Member State. Many of these structures were reviewed since 2012 as a result of the new SOCIMI regulation.

In addition, since 2021, the amount of the yearly profits not distributed in excess of the 80% that has to be compulsory distributed will be subject to a special levy of 15%. This levy does not apply to the amount of the profits generated upon the transfer of qualifying assets that can be reinvested in the three-year period following the transfer of the qualifying asset. Finally, If the full amount of the yearly profits is distributed, this special levy (15%) will not apply.

Last but not least, SOCIMIs are entitled to a 95% reduction on the Transfer Tax triggered on the acquisition of real estate assets if they are residential properties to be leased or land for the promotion of residential properties to be leased, to the extent that the holding period requirement of three years is met.

MTFs are eligible markets for SOCIMIs

MTFs versus regulated markets

SOCIMIs can choose to trade on regulated markets, which generally have tighter regulatory demands, or on MTFs, which have more flexible regulations and fewer requirements. Eligible MTFs can be located in Spain or any other EU or EEA country.

Usually, companies listed on Spanish MTFs must have a market capitalisation of no more than one billion euros. However, this limitation does not apply to a SOCIMI if less than 25% of its share capital is distributed to the public (not including treasury stock, shares held by shareholders owning 3% or more of the share capital, or shares held by the members of the board of directors).

Currently, there are two MTFs in Spain where SOCIMIs can be admitted to trading: BME MTF Equity and the Portfolio Stock Exchange.

The selection of a MTF depends on several factors, including the issuer’s intention to migrate to a regulated market, the distribution of its shareholding, the target investor profile, cost-benefit considerations, and the extent of disclosure, governance, and market-making obligations the issuer is willing to assume.

The main features of Spanish MTFs are summarized below to assist in further analysis once the issuer’s objectives, timeline, and corporate characteristics have been established.

BME MTF Equity

Key considerations about this market

Since 2012, BME MTF Equity (formerly known as Mercado Alternativo Bursátil or MAB) has been an eligible market for SOCIMIs to meet the listing requirement.
BME MTF Equity is an MTF managed by BME Holding, the main operator of securities markets and financial systems in Spain and is subject to the supervision of the Spanish Stock Exchange Commission (Comisión Nacional del Mercado de Valores, CNMV). Its main regulations are set out in its Rulebook.

BME MTF Equity has two segments in which SOCIMIs may be admitted for trading (BME Growth and BME Scaleup).

BME Growth

BME Growth is configured as a market for SMEs in expansion. The Market will verify annually that at least 50% of the listed companies are SMEs, defined as companies with an average market capitalisation of less than EUR 200 million based on the year-end share prices of the previous three years.

In order to be admitted to trading, minority shareholders of the SOCIMI (those with stakes of less than 5%) must either hold shares with an estimated market value of at least EUR 2 million or represent at least 25% of the share capital. If a single minority shareholder holds shares worth more than EUR 1 million, the excess will not be taken into account when calculating the distribution requirement.

To assess whether the distribution is sufficient, BME Growth also requires the presence of at least 20 minority shareholders who are independent of the reference shareholder/s, each holding a stake of at least EUR 10,000 or more (except for mass distributions to more than 500 shareholders).

BME Growth requires a SOCIMI applying for listing to appoint a registered advisor from the market's special register and enter into an agreement with a liquidity provider. Among the documents to be provided for admission, the SOCIMI must also file a valuation report prepared by an independent expert in accordance with international valuation standards. This report will be used to determine the initial reference price. However, the valuation will not be necessary if the SOCIMI has conducted a relevant share placement or financial transaction during the six months prior to the application for admission.

The financial information provided to the market must be prepared in accordance with International Financial Reporting Standards (IFRS) or national accounting standards, unless the issuing company was incorporated outside the EEA, in which case it may choose to apply Generally Accepted Accounting Principles used in the United States (US GAAP).

Currently, the process for admission to trading on BME Growth takes approximately four months. The specific duration depends on factors such as the need for prior corporate restructuring, completion of a public offering for the sale or subscription of shares, and the type of information to be included in the information document.
If the SOCIMI has been in business for less than two years, its main shareholders, directors and key executives must agree not to sell shares or carry out transactions equivalent to the sale of shares within one year of the SOCIMI's listing. This agreement does not apply to shares that are the subject of a sale offer, regardless of whether the offer is considered to be public.

Reporting obligations once the SOCIMI is trading in the segment include audited half-year and annual financial statements, as well as an annual valuation of real estate assets.

BME Scaleup

BME Scaleup is aimed at SMEs in the early stages of development, as well as other companies seeking to raise finance through the securities market.

There are no free float or distribution requirements for an initial listing on this segment.

Admission to trading on BME Scaleup does not require a liquidity agreement. However, SOCIMIs must appoint a registered advisor and file a valuation report under the same conditions as on the BME Growth segment.

The duration of the listing process is similar to that of BME Growth, although less documentation is required. Furthermore, no one-year lock-up applies, even for issuers that have been incorporated for less than two years.

Reporting obligations are closely aligned with those in the BME Growth segment, although half-year financial statements do not need to be audited.

Portfolio Stock Exchange

In June 2022, the CNMV authorised a new Madrid-based MTF: Portfolio Stock Exchange. This new market is announced as the first to integrate all trading, post-trading and custody services on a single, fully digital platform. This cuts out many intermediaries and reduces costs for issuers. The main regulations are set out in the Rulebook (an English version of which is included as an annex).

The market is open to admitting SOCIMI shares for trading and this MTF meets the trading requirement of Law 11/2009 for qualifying for the special tax regime.

There are no free float or distribution requirements for listing on the Portfolio Stock Exchange.

While a registered advisor or liquidity provider is not required, all issuers must have the regulatory support from a law firm or a specialised entity throughout the listing period.

The documents required for listing and ongoing compliance are less stringent than those required for BME MTF Equity. For instance, no valuation of real estate assets is required at any time, and half-year financial statements are optional.

The listing process takes less time, since the processing time is set at one week. However, in practice, this period is usually extended. There is no mandatory lock-up period.

How can we help?

At Ashurst Spain, our team specialises in providing expert advice on real estate, tax and capital markets law. We have guided the firsts SOCIMIs through their initial listings on the former MAB, and we continue to support them with acquisitions, sales, restructurings and compliance matters on the BME Growth and BME Scaleup platforms. We are also accredited by the Portfolio Stock Exchange to advise on the admission process, helping our clients to meet regulatory requirements and achieve their goals.