LEGAL REGIME FOR SPANISH REITS (SOCIMI) AND SOME PRACTICALITIES

The Spanish REITs emerged 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 several times. The most relevant amendment took place in 2012, including a new tax regime applicable to these entities that has turned them into very attractive real estate investment vehicles.

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 SOCIMIs or foreign entities of analogous or similar activity (the vehicles known as Real Estate Investment Trusts or REIT). Since the amendment of their regime in 2012, SOCIMIs are subject to zero taxation under Corporate Income Tax, thus putting them on equal footing with the already existing regimes for REITs abroad.

INCORPORATING A SOCIMI

Legal requirements

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

Minimum share capital of five million euros.

The share capital can be subscribed using non-monetary contributions (i.e. by contributing properties to the SOCIMI), meaning that it is not necessary to 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 or multi-lateral trading facilities.

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

In the case of multilateral trading facilities, only Spanish facilities, those of the UE Member States or those of the European Economic Area are admitted.

80% of urban real estate assets.

At least 80% of the value of the SOCMI's assets must be invested in leasable urban properties, in land for the development of leasable urban properties (provided that the development starts within three years) as well as in shares or participations in SOCIMIs or REITs.

Likewise, at least 80% of the earnings (excluding any income arising from the sale of qualifying assets) must come from lease or dividends distributed by any subsidiary SOCIMI.

Mandatory distribution of dividends in a given proportion depending on the origin of the profits obtained.

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

• Distribution of 80% of overall earnings, including the earnings derived from the lease of properties.
• Distribution of 50% 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% 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 a stake must be distributed.

Properties must be leased for a minimum period of three years.

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. 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: THE BIG 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's 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 European Union, 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 a 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 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 European Union) 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's regulation.

In addition, since 2021, the amount of the yearly profits non 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.

Last but not least, SOCIMI 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.

MANDATORY TRADING. WHERE?

MTFs versus regulated markets

SOCIMI can opt for trading on regulated markets, generally subject to tighter regulatory demands, or on multi-lateral trading facilities (MTFs), 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.
There are currently two MTFs in Spain where SOCIMIs can be admitted to trading: BME MTF Equity and Portfolio Stock Exchange.

BME MTF Equity

a. 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 a MTF managed by the main operator of securities markets and financial systems in Spain (BME Holding) and subject to the supervision of the Spanish Stock Exchange Commission (Comisión Nacional del Mercado de Valores, CNMV).

BME MTF Equity has a segment for growing SMEs called BME Growth which, among others, was designed for SOCIMIs. This segment coexists with other two segments (BME IIC, for investment funds, and BME ECR, for venture capital companies).

BME Growth's main regulations are: (i) Circular 1/2020 on market listing rules, subsequently amended by Circular 2/2022; (ii) Circular 3/2020 on the information to be provided by listed companies; and (iii) Circular 5/2020, which includes the rules for share trading.

Both Spanish SOCIMIs with a capitalisation of less than one billion euros and foreign companies whose corporate purpose and investment regime are comparable to those established for SOCIMIs may join this segment.

Those newly incorporated SOCIMIs or similar foreign companies that have less than 70% of the market value of their assets invested in leased urban assets may be incorporated with the classification of "SOCIMI in Development". This classification will be reviewed annually.

b. What agents should be involved in the listing process?

Admission to trading in BME Growth requires the SOCIMI to designate a registered advisor among those included in the market's special register. This advisor will liaise with the supervisory authorities, both at the time of admission and later on once it is trading. Its main task is to assess the suitability of those SOCIMIs interested in joining BME Growith segment and to advise them in regard to the regime applicable to the trading of their shares, 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 SOCIMI's shares, the SOCIMI should sign an 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.

Among other documents, in order to be admitted to trading the SOCIMI must provide a valuation report prepared by an independent expert in accordance with internationally valuation standards, which will be used to determine the first reference price. This valuation will not be necessary if, during the six months prior to the application for admission, the SOCIMI has conducted a share placement or financial transaction that is relevant for determining the first reference price.

c. Free float

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

In addition, in order to assess whether the distribution is sufficient, BME Growth requires the presence of at least 20 minority shareholders who are independent of the reference shareholder(s) and who hold each a stake of ten thousand euros or more (except for mass distributions to more than 500 shareholders).

d. What documents and deadlines are involved in the process of requesting admission on BME Growth segment?

To be listed on this segment, SOCIMIs must present an application for admission to trading, along with a prospectus called "information document for inclusion on the market", 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 market" 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 market 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).

Currently, the process for admission to trading on BME Growth takes approximately four months. In any case, the specific duration depends on several factors such as the need for prior corporate restructuring, the completion of a public offering for the sale or subscription of the shares or the type of information to be included in the information document.

If the SOCIMI has been in business for less than two years, the main shareholders, directors and key executives must undertake not to sell shares or carry out transactions equivalent to sales of shares within one year of the SOCIMI's listing, except for shares which are the subject of a sale offer, whether or not the offer is considered to be a public offer.

e. What disclosure and transparency obligations are applicable in BME Growth?

Once their shares are listed on BME Growth, SOCIMIs must provide the market with information on a regular basis. BME Growth's regulation to this regard aims to strike a balance between two principles: (i) sufficiency, insofar as potential investors must have sufficient information at their disposal to enable them to make trading decisions; and (ii) simplicity, which is typical of a multilateral trading facility subject to fewer regulatory requirements than those required for trading on a regulated market.

Every six months, SOCIMIs must submit to the market, for dissemination, a financial report with the main financial figures for the relevant six-month period.

On an annual basis, as soon as possible and no later than four months after the end of each financial year, they shall make public the audited annual accounts and the result of the valuation of their real estate assets carried out by an independent expert, in accordance with internationally accepted criteria.

Furthermore, SOCIMIs, as issuers, will have to disclose to the market for dissemination, all relevant information that is likely to affect the shares that the company has admitted to trading. Among others:

• The acquisition or transfer of shares by any shareholder which causes his holding to reach, exceed or fall below 5% of the share capital and successive multiples thereof.
• The conclusion, extension or termination of shareholders' agreements affecting the transfer of shares or shareholders' voting rights.
• Corporate or financial transactions affecting the securities included in the segment and decisions taken with respect to the exercise of investors' rights, specifying the relevant dates.

Finally, SOCIMIs must have a website on which they will include all public documentation relating to the admission process as well as any further information that they submit to the market from time to time.

A new alternative: Portfolio Stock Exchange

In June 2022, the CNMV authorised a new MTF based in Madrid: Portfolio Stock Exchange. This new market is announced as the first to integrate all trading, post-trading and custody services in a single 100% digital platform, cutting out many intermediaries and achieving significant cost reductions for issuers.

The market is open for SOCIMI's shares to be admitted to trading and is eligible to meet the trading requirement of Law 11/2009 to qualify for the special tax regime.
Among other particularities, Portfolio Stock Exchange does not require a minimum number of independent minority shareholders, but it does foresee distribution requirements (the public must hold 20% of the share capital or shares worth at least three million euros). These requirements can be fulfilled over a period of five years after admission and, if after this period 50% of the threshold is reached, an additional extension can be requested.

ASHURST Spain has experts in real estate, tax and capital markets who were pioneers in accompanying some of the first SOCIMIs to join the MAB (now BME Growth) and who continue to advise these vehicles on a daily basis on all kinds of issues. It is also one of the firms authorised by Portfolio Stock Exchange to advise on admission processes to this new market.