The Belgian "Specialised Real Estate Investment Fund"

Belgium recently introduced a new type of real investment vehicle, the Specialised Real Estate Investment Fund (“SREIF”) which benefits from both a flexible regulatory framework and an attractive tax treatment.

SREIFs in short

A SREIF is an alternative investment fund with a fixed number of participation rights for collective investments reserved for eligible (institutional and professional) investors. It is aimed at investing exclusively in certain real estate assets, including but not limited to:

• Belgian real estate assets held directly by the SREIF (exceptionally, the SREIF may indirectly hold Belgian real estate provided that: (i) such Belgian real estate is held through a 100 per cent directly or indirectly owned subsidiary; and (ii) a subsequent restructuring process occurs within 24 months following which the SREIF will directly hold such assets)
• foreign real estate assets held directly or indirectly by the SREIF
• shares in foreign real estate companies holding real estate abroad
• shares in regulated institutional or public real estate companies

The main characteristics are set out below.

Easy to set up

SREIFs are only available to professional and institutional investors, so the procedure to set up a SREIF is fairly straightforward and does not require any regulatory approval or licence other than having it registered in the SREIF list maintained by the Belgian Ministry of Finance. The latter will merely verify whether the formal requirements are met and will not verify the investment policy, the valuation of the assets or the creditworthiness.

It is expected that the whole procedure will take no more than 30 business days from the date on which the complete file is submitted.

Belgian or foreign investors can also restructure an existing real estate portfolio by way of contribution, merger or demerger with a newly set up SREIF.

A SREIF must be incorporated as a closed-end investment company and may take the form of:

• a limited liability company;
• a partnership limited by shares; or
• a limited partnership.

Attractive regulatory framework

A SREIF offers more regulatory flexibility compared with the regulatory burden impeding existing Belgian real estate investment trusts (REITs):

• it can be created by a single investor
• there is no risk diversification requirement (which means that a SREIF may invest in a single asset or in a single class of real estate assets)
• it may invest in Belgium and also abroad
• there is no maximum debt leverage
• no listing on a stock exchange is required
• IFRS accounting standards apply: asset values can reflect market value which may avoid cash traps

Eligible investors

Eligible investors include certain professional and institutional investors. Given that only eligible investors may invest, the information documentation to be prepared by a SREIF can be relatively short and straightforward.

If certain financial instruments issued by a SREIF are held by investors who are not eligible investors, the SREIF will not lose its institutional character as long as it can demonstrate that it has taken appropriate measures to guarantee that the financial instruments are held by eligible investors and provided that it does not promote or contribute to these financial instruments being held by non-eligible investors.

A SREIF is deemed to have taken such appropriate measures if certain conditions are met, e.g. explicitly stating in the information document and in its articles of association that only eligible investors are entitled to hold financial instruments issued by the SREIF.

Attractive tax treatment

An attractive tax regime applies:

• Corporate Income Tax: SREIFs will only be taxed on a limited notional corporate tax base consisting of (i) received “abnormal or benevolent advantages” and (ii) certain disallowed expenses. As such, this excludes rental income, capital gains on real estate assets, dividends or interest received in relation to Belgian and non-Belgian real estate.
• Withholding Tax: Income distributed by the SREIF to foreign shareholder(s) will be exempt from Belgian withholding tax provided that the income stems from
  foreign source income, i.e. non-Belgian dividends or non- Belgian real estate income.
• Double Tax Treaties: A SREIF may in principle benefit from any double tax treaty to which Belgium is a party.
• VAT: Management fees for services provided to a SREIF are exempt from Belgian VAT.
• Annual tax on collective investment institutions: An annual “subscription tax” applies to SREIFs at a rate of 0.0925 per cent, calculated on the basis of the total net amounts invested in Belgium (as such geographical scope is defined in the relevant legislation).
• No stock exchange tax: No such tax is due on disposals or acquisitions of participations in a SREIF.
• Other: A tax of 16.995 per cent is triggered when a company is registered as a SREIF (calculated by reference to the sum of all latent capital gains and tax-free reserves of the SREIF at the time of registration) instead of the standard 33.99 per cent rate. The same tax applies in the event of contributions of a branch of activity/universality to a SREIF, (de)mergers and any other similar transaction to which a SREIF is a party. Contributions in kind of real estate assets in exchange for new shares in the SREIF will also be subject to such tax rate.

Term

A SREIF must be incorporated for a maximum term of ten years in order to compensate for the risk of a lack of liquidity of its investments given that it is a closed-end fund and for it not being listed. As an exception to this general rule, the SREIF’s articles of association may provide that its term be extended for successive periods, each of which is for a maximum of five years only, provided that certain conditions are met, including obtaining the unanimous approval at a shareholders’ meeting of the SREIF.

Restraints

Certain restrictions do apply to SREIFs:

• a SREIF cannot act as a real estate developer/promoter
• at least 80 per cent of a SREIF’s net result must be distributed annually to its shareholder(s)
• the minimum total value of the assets held by a SREIF must amount to at least EUR 10 million at the end of the second financial year following its registration as a SREIF
• a SREIF’s annual report must include a breakdown of its net results in order to determine the source (i.e. foreign or Belgian) of the allocated dividend
• the investment policy must be disclosed to investors
• a SREIF may only acquire or dispose of hedging products if such acquisition or disposal is not speculative and provided that this is in line with the SREIF’s global policy of hedging financial risks
• investors may not request the redemption of their shares and may only exit the fund: (i) upon expiry of the SREIF’s term (initially ten years – extension possible, see above); (ii) upon transferring their shares to other professional and/or institutional investors; and (iii) if the shareholders decide on early liquidation

Impact of AIMFD 

To the extent that a SREIF qualifies as an alternative investment fund within the meaning of the AIMF law, i.e. the law of 19 April 2014 implementing the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) in Belgian law, the SREIF manager will in principle be subject to the AIMF law unless it qualifies for an exemption.

In such case, the SREIF’s manager will have to comply with the AIFM law requirements (e.g. obtaining a licence, liquidity requirements, etc.) although a lighter version of the AIFM law requirements may apply to so-called “small” managers of alternative investment funds (i.e. the assets of the funds under its management remain below EUR 100 million or such assets amount to less than EUR 500 million provided that certain additional conditions are met).

One advantage of the AIFM law being applicable is that the manager of the SREIF will have a so-called European passport and thus will have the opportunity to market the shares of the SREIF across the EU.

Limited regulatory monitoring

Only limited regulatory monitoring applies: the Belgian Financial Services and Markets Authority (FSMA) will merely monitor whether a SREIF only targets institutional and/or professional investors and whether its manager complies with the AIMF law requirements (to the extent that it is relevant).