SOCIMIs are public limited companies (sociedad anónima) whose corporate purpose is the holding of either (i) leased urban assets (by means of acquisition or development) or (ii) a stake in the share capital of other SOCIMI or foreign entities of analogous or similar activity (the vehicles known as Real Estate Investment Trusts or "REIT").
Key points
- In general, SOCIMIs are entitled to apply a special tax regime, which provides for specific tax benefits in Spain, such as a total relief in Corporate Income Tax ("CIT") and abatements in indirect taxes.
- In order to apply the special tax regime and therefore benefit from the tax advantages, SOCIMIs must satisfy certain requirements. These include, amongst others, an obligation to be listed on a regulated market or a multi-lateral trading system with a minimum free float of minority shareholders representing either 25% of the SOCIMI's share capital or EUR 2m of fair market value and the fulfilment of a strict policy of dividend distribution.
- Although the SOCIMI regime was first created in 2009, the regime was substantially modified in 2012 and since then SOCIMIs have become an important vehicle to attract foreign investors lured by the benefits of their special tax regime.
- In general terms, the SOCIMI special tax regime allows foreign investors which acquire a relevant stake in the SOCIMI (minimum 5% participation) to obtain an effective taxation of 10% of its profits.
Principal tax benefits of the SOCIMI special tax regime
As a main feature of the regime, SOCIMIs are subject to CIT at a zero per cent rate, which make them attractive for any kind of investor, whether resident or non-resident in Spain and place them at the same level as other well-organised REIT 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 double taxation, although these investors may still take advantage of the SOCIMI's regime;
- Spanish individuals will include the dividend in their taxable base subject to flat rates up to a maximum of 23 per cent; and
- Non-residents without a permanent establishment in Spain who receive dividends from a SOCIMI will be subject to a withholding tax of 19 per cent, unless an exemption (under the parent-subsidiary directive or otherwise) or reduced treaty rate is applicable.
In this regard, non-resident investors, in particular residents within the European Union, may use SOCIMIs to structure their investments in Spanish real estate and that any investment returns are taxed at a rate of zero per cent Spanish CIT, and also to reduce the tax rate on dividends paid by the SOCIMI to zero per cent on Spanish withholding taxes under the parent-subsidiary directive.
However, since the zero per cent of CIT is withdrawn if dividends are distributed to a shareholder holding five per cent or more of the share capital of the SOCIMI, and such dividends, in the hands of such shareholder, are either exempt or subject to a tax rate under 10 per cent. In that case, the Spanish rules apply a special levy to the SOCIMI such that it is required to pay tax at a rate of 19 per cent on the amount of dividends paid to the shareholders who meet the above requirements (participation equal to or greater than 5 per cent of the share capital and taxation below 10 per cent).
This special levy will typically be triggered in the case of non-resident investors who are resident in either a tax haven territory or in a jurisdiction (even within the European Union) where the dividends collected by the relevant investor are entitled to a participation exemption regime.
Last but not least, SOCIMI are entitled to a 95 per cent 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 assets are leased for a minimum period of three years.
Basic requirements of SOCIMI special tax regime
The main requirements to apply for SOCIMI special tax regime are the following:
- SOCIMI's share capital must amount to, at least, five million euro.
- Mandatory trading on regulated markets or multi-lateral trading systems (such as the Mercado Alternativo Bursátil or MAB) either in Spain or another jurisdiction within the European Union or the European Economic Area with the minimum free float requirements described above.
- At least 80 per cent of the assets must be leasable urban properties, lands for development of leasable urban properties or shares of other SOCIMI or REIT.
- At least 80 per cent of the earnings (excluding any income arising from the sale of qualifying assets) must come from rental income or dividends distributed by any subsidiary SOCIMI.
- A mandatory distribution of dividends in a given proportion depending on the origin of the profits obtained:
- 80 per cent of overall earnings, including rental income;
- 50 per cent of the capital gains obtained from the transfer of assets (properties and shares) eligible for the application of the special tax regime (properties used for lease and shares in entities whose corporate object is the foregoing activities). The remaining 50 per cent will be reinvested in eligible assets within three years of the transfer.
- 100 per cent of the profits coming from entities in which SOCIMI hold a stake.
- Property assets must be leased for a minimum three-year term (can be vacant for one year if being offered on the leasing market).
Not all of the above requirements must be satisfied at the time of opting for the applicable regime. In this regard, some of the requirements, and in particular the one related to the listing, may be met within the two years following the election of the SOCIMI regime, without prejudice to the application of SOCIMI's special tax regime from the fiscal year in which the communication to the competent tax authorities for the election of the special tax regime takes place (provided within the relevant deadline).
In addition, an entity that meets all of the relevant requirements to apply the SOCIMI special tax regime but its shares are not traded on a regulated market or a multi-lateral trading system, is also entitled to apply the SOCIMI special tax regime, provided that it is fully participated by a listed SOCIMI.
Finally, it must be noted that certain requirements may be breached in a fiscal year without losing the benefits of the special tax regime, provided that this situation is rectified in the following fiscal year.
With thanks to Juan De LA Lastra for his contribution.
