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Philippines Issues REIT Revenue Regulations

Monday, August 1, 2011

The Bureau of Internal Revenue (BIR) has issued its much-delayed revenue regulation governing the tax incentives to be granted to real estate investment trusts (REITs) in the Philippines.

The Finance Secretary, Cesar V. Purisima, had said, earlier this month, that he had signed off on the REITS regulations, which had been delayed by his stipulation that the government would not be able to consider their approval unless it was agreed to increase the minimum percentage listing on the stock exchange.

When the law to introduce REITs was enacted in 2009, investors were able to take shares in a REIT, established as a company with a minimum share capital of PHP300m (USD7.1m), which would have, at all times after listing, a public float of at least 33% of its outstanding shares. However, it has now been agreed that, to continue to receive tax incentives, a REIT will be required to maintain a 40% minimum public float on the stock exchange for the first two years from its initial listing, rising to at least 67% by the end of the third year.

It has been confirmed that the new vehicles will be subject to a 30% company income tax rate on their net taxable income, but only after the distribution of a minimum 90% dividend to their shareholders, subject to a stipulation that, for its first two tax years, each REIT will have to place in escrow the corporate income tax that would have been payable on the amounts declared and paid as dividends, in case the minimum 67% listing threshold is not attained thereafter.

The funds will be released from escrow only after a REIT has shown proof that it has attained the 67% listing threshold by the end of its third tax year, or the money will be forfeited to the BIR.

In addition, for example, all property transferred to the REIT will be subject to a favourable documentary stamp tax (DST) of 0.75%, while transfers of shares in property companies will pay a DST of only 0.375%. However, income tax, capital gains tax, and value added tax (VAT), will be payable on the transfer of properties to a REIT.

It has been reported that several companies have made plans previously to float REITs on the Philippines Stock Exchange, but, now that the published tax benefits are less favourable than had been expected, particularly on the minimum float and payment of VAT, it will remain to be seen how many plans actually reach fruition.