The OECD recently released a draft discussion paper to introduce a framework for a consistent taxation treatment of REITs.
In the model tax treaty a REIT is defined as "a widely held company, trust or contractual or fiduciary arrangements which derive their income primarily from long term investments in immovable property (real estate), distribute most of that income annually, and do not pay tax on income related to immovable property that is so distributed." The table below highlights the main issues in the discussion paper.
OECD draft REIT MODEL tax treaty
Treaty benefits to be provided to REITs that are treated as flow through entities.
Countries that do not provide flow through taxation for REITs are encouraged to do so.
Distributions to foreign investors.
Distributions to small investors (investors with less than 10% investment in the REIT) treated in the same way as a portfolio equity investment (e.g. a 15% final withholding tax). Distribution to large investors (investors with 10% or more investment in the REIT) commensurate with the tax levied on a return from a direct investment in immovable property. Capital gains and distributions from rental income derived by the REIT treated the same as a direct investment.
Distributions may also be taxed in the investor's country of residence. Country of residence should provide corresponding relief from double taxation.
Distributions to foreign pension/super funds.
No specific rules.
Disposal by foreign investors.
Still debate regarding whether:
Disposal of investment in a REIT by investors are subject to Capital Gains tax only if the foreign unit holder owns 10% or more of the REIT; or
Disposal of investment in a REIT by investors are subject to Capital Gains.
Moore Stephens believes that the suggestions put forward by the OECD areuseful because they look to improve the consistency of taxation treatment of REITs all over the world. The different treatment of small and large investors does create an additional layer of complexity. However, it does provide a more favourable and simpler system for retail investors.
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