Legal regime for Spanish REIT (SOCIMI)

The Spanish REIT was founded in October 2009 under the name of Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario ("SOCIMI"). Its legal regime was set out in the Law 11/2009 of 26 October, which was subsequently amended by Law 16/2012 of 27 December to relax the legal requirements for their incorporation, remove the regulatory barriers and enhance the tax treatment applicable from 2009.

SOCIMI, what are they?

SOCIMI 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"). Since the amendment made in 2012 SOCIMI are subject to zero taxation under Corporate Income Tax, thus putting them on equal footing with the already existing regimes for REIT abroad.

Basic requirements of SOCIMI

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

• The minimum share capital for SOCIMI is five million euro. The share capital can be subscribed using non-monetary contributions (i.e. by contributing properties to the SOCIMI), meaning that it is not necessary make a monetary disbursement.
• A minimum of only one 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 licenses. It is not necessary for the property to be located in Spain.
• Mandatory trading on regulated markets (such as the four Spanish Stock Exchanges) 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.
• 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 lease 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 the earnings derived from the lease of properties;
  • 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. Failing that, said benefit must be distributed in its entirety together with the rest of the benefits; and
  • 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 (one-year availability for lease will be computable for this purpose). Regarding the interpretation of this requirement, the Tax Authorities consider that, in those cases where we find complex property (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.

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

• SOCIMI must not comply with all these requirements if the listed company is not the SOCIMI itself but its parent company; and
• 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 said special tax regime takes place (provided within the relevant deadline).

Zero taxation of SOCIMIs: the big attraction

As a main feature of the regime, SOCIMI will be subject to CIT at a zero per cent rate, which make them very 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 the 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 (24 per cent in 2015); 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 (20 per cent in 2015), 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 European Union, may maximize the efficiency of their investments in Spanish real estate for leases down to zero per cent on the Spanish CIT, and also to zero per cent 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 and, since the rule of taxation is zero excepted 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 ten per cent, 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 per cent on the amount of dividends paid to the shareholders who meet the referred requirements (participation equal to or greater than five per cent of the share capital and taxation below ten per cent).

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 European Union) where the dividends collected by the relevant investor are entitled to a participation exemption regime. Note that most investment in Spanish real estate by non-resident investors has been done through Luxembourg or Dutch entities. Therefore a review of the structures currently in place may be needed in order to determine whether the SOCIMI's tax regime (as amended in 2012) provides additional efficiencies and how to adapt the existing investing structures to be able to apply the new 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 holding period requirement of three years is met.

More flexible listing: the opportunity for the Spanish MAB (Alternative Market)

SOCIMI can opt for trading on regulated markets, generally subject to tighter regulatory demands, or on multi-lateral trading systems (such as the MAB), subject to more flexible regulation and less regulatory requirements, located not only in Spain but also in any other European Union or European Economic Area jurisdiction.

Creation of a specific MAB segment for SOCIMI

From 2012 the MAB is a market suitable for SOCIMI so that they can comply with the listing requirement in that market.

The MAB has created an "ad hoc" segment for them, alongside its other three segments (SICAVs, Venture Capital Companies and Growth Companies) and subject to a specific regulation contained in the Circular of the MAB 2/2013 of 15 February (the "Circular 2/2013").

Circular 2/2013 enables both Spanish SOCIMI and foreign companies whose corporate purpose and investment regime are comparable to those established for SOCIMI to join this segment of the MAB.

This segment of MAB was released in late 2013 with two SOCIMI, Promorent and Entrecampos, having participated Ashurst in the legal advice on the listing process of Promorent.

What agents are necessary for the admission of a SOCIMI on the MAB?
Admission on the MAB requires the SOCIMI to designate a registered advisor to liaise with the supervisory authorities both at the time of inclusion and later on once it is listed. Its main task is to assess the suitability of SOCIMI interested in joining the MAB segment and to advise them in regard to the regime applicable to the trading of their securities, as well as in preparing and submitting financial and corporate information required for operating in that segment.

In order to boost the liquidity and trading of shares in SOCIMI the MAB requires SOCIMI or their core shareholders to sign a liquidity agreement with a liquidity provider, which may be an investment services company or a credit institution. The main purposes of this agreement are to boost liquidity in transactions affecting SOCIMI's shares, to achieve adequate trading frequency and to reduce price fluctuations not caused by the overall market trend.

The MAB, in the Circular 2/2013, requires that, at the time of admission, SOCIMI submit a valuation report of the company prepared by an independent expert in accordance with international valuation standards (copy of this report shall be attached to the relevant document for admission to trading). Said valuation shall not be necessary if, in the six months prior to the application for admission, SOCIMI have conducted a share placement or financial operation to determine the initial listing price of their shares.

Free float
In order to ensure the adequate operation of this segment and to facilitate share liquidity, the MAB requires a minimum free float at the time of their inclusion on the MAB. Circular 2/2013 requires SOCIMI to have shareholders with shareholdings of less than 5 per cent of share capital, and that these minority shareholders must hold a number of shares representing the lesser of the following two amounts:

• an estimated market value of two million euros, or
• 25 per cent of the shares issued by the company.

Notwithstanding the foregoing, SOCIMI that cannot comply with this free float requirement at their time of admission (which is quite likely considering the situation of the real estate market) will not be prevented from listing their shares on the MAB, since Circular 2/2013 allows SOCIMI or their core shareholders, instead of distributing the shares among minority shareholders by conducting an offer for sale or subscription of shares, to place at the disposal of the liquidity provider all or part of the shares necessary to reach the free float threshold.

What documents are necessary and how long does it take to include a SOCIMI on the MAB?
To be listed on the MAB, SOCIMIs must present an application for admission to trading, along with a prospectus called "information document for inclusion on the MAB", which must contain information regarding the real estate assets and their management, as well as financial and corporate information. For illustration purposes, the aforesaid "information document for inclusion on the MAB" shall include a description of the real estate assets, their depreciation periods, situation and condition of the same, as well as the policy for investment and replacement of said assets and the potential cost of the same being put into use due to a change in lessee.

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

The procedure for admission to trading on the MAB takes between two and four months. In any event, it all depends on various factors, such as whether or not it is necessary to restructure the company or its group beforehand, the type of financial information to be included in the "information document for inclusion on the MAB" or the conducting of a public offering for the sale or subscription of shares. However, unlike other segments of the MAB or our Spanish Stock Exchanges, in this SOCIMI segment, issuers or their shareholders will not be obliged to conduct an offering, whether public or private, for the sale or subscription of shares prior to their inclusion on the MAB in order to comply with the minimum free float requirement, since the Circular 2/2013 allows SOCIMI or their core shareholders to place at the disposal of the liquidity provider all or part of the shares necessary to reach the free float threshold.

Once the SOCIMI's shares have been listed on the MAB, Circular 2/2013 prohibits their core shareholders and key executives from selling shares or performing transactions equivalent to selling shares during the first year following their listing on the MAB, except those placed at the disposal of the liquidity provider.

What disclosure and transparency requirements will SOCIMIS listed on the MAB have to fulfil?
Once their shares have been listed on the MAB, SOCIMI must provide the MAB with information on a regular basis. In its regulations, the MAB has sought to strike a balance between two principles: the principle of sufficient information, as investors must have available a reasonable amount of information to enable them to make trading decisions, and the principle of simplicity, inherent to the MAB, which, as a multilateral trading system, is subject to more flexible requirements than those required for trading on a regulated market.

On a quarterly basis SOCIMI must send the MAB, for its dissemination, a financial report including all the key financial data relating to the first six months of each year, and annually, as soon as possible and no later than four months after the accounting close of each financial year, the audited annual financial statements.

SOCIMI, as issuers, must disclose to the MAB, for its dissemination, all relevant information that may affect those of their shares which have been admitted to trading on the MAB.

SOCIMI shall report the acquisition or sale of a significant shareholding which reaches, exceeds or falls below five per cent and successive multiples of share capital. This obligation shall only be applicable to the extent that SOCIMI are aware of the sale or purchase transaction in question in which shareholders reach, exceed or reduce their stake from the aforesaid disclosure thresholds. In its Circular 2/2013, the MAB also requires SOCIMI, on a half-yearly basis, to report to it the number of shareholders and a list of those with shareholdings equal to or higher than five per cent of share capital.

Other information which SOCIMI must disclose to the MAB, for dissemination, shall be information relating to transactions performed by their directors and executives, and, to the extent SOCIMI are aware of them, the signing, extension or termination of shareholders' agreements affecting the transfer of shares or shareholders' voting rights.

Finally, it should be highlighted that SOCIMI must have a website including all the public information relating to the process of inclusion of their shares on the MAB as well as any further information that they submit to the MAB from time to time.

The present note has been produced by the group of experts in SOCIMI of Ashurst, which is led by three specialists in real estate law, tax law and capital markets. This team, which has advised on the incorporation of several SOCIMI, has accumulated so far a solid experience in this area and continues to provide support to clients on their projects regarding this new vehicles.

"In relation to legal advice, Ashurst, the British law firm, is the number one followed by other Spanish firms…"

(Antón, A., Más de 20 grandes fortunas planean convertir su patrimonio en socimi, published on Expansión, March 3, 2014)