Polish REITs vol 2, i.e. what will companies investing in real estate lease bring to the real estate market? | Legal Alert
Recently, after almost a year since the last draft, the Ministry of Finance has presented the bill on companies investing in real estate lease (”Bill”), that is going to be the Polish counterpart for REITs (Real Estate Investment Trust), popular in other countries.
Let us remind that the last draft of the Ministry of Finance (of June 30, 2017) assumed implementation to the Polish legal order of so called real estate lease companies being publicly held companies investing in real estate lease and sale. It should be mentioned that the draft did not limit a type of real estates to be leased, allowing companies to invest in, inter alia, offices, warehouses or retail space to be leased.
What is F.I.N.N.?
According to the new Bill presented by the Ministry of Finance, REIT counterparts are going to be companies investing in real estate lease (F.I.N.N.’s), being public limited companies whose main scope of activity is lease of residential real estates in the territory of the Republic of Poland. Already at this stage it can be compared with the last year draft and deducted that the bill authors decided to limit activity of Polish REITs just to investments in residential real estate lease. Nevertheless, F.I.N.N.’s will be also entitled to invest in halls of residence and retirement homes.
Let us mention that in the countries with a settled legal construction of REITs (implemented several decades of a dozen or so years ago) these entities are entitled to invest in variety of real estates to be leased, including office buildings, retail spaces, warehouses, apartments, infrastructural investments and event fiber-optic cables, billboards, cell towers, prisons or gas pipelines, as a regulating factor that matters is market and REIT success depends on profitability of a product it offers (i.e in this case
a dividend payout ratio and its regularity).
Definition of residential real estates to be leased?
However, the Bill authors assume FINNs should invest only in real estates to be leased they define as follows:
- a residential building or its share, or a flat constituting a separate real estate together with land or its share, or right of perpetual usufruct or a share in such a right, that is related to such
a building or flat, while the Bill defines a residential building as a building, in which at least
a half of its total usable area is used for residential purposes;
- a building or premises constituting a separate real estate (analogically as above together with a land share) used to run an institution providing full-time care for disabled, chronically ill or elderly persons;
- a building or premises constituting a separate real estate (analogically as above together with a land share) used for residential purposes related to needs of pupils, teachers, trainees, students or graduate students, in particular running boarding houses and halls of residence.
Importantly, FINNs can invest in the aforesaid residential real estates directly or via subsidiaries. Let us notice that according to the Bill, real estates with unclear legal status or being subject to proceedings to secure claims or enforcement proceedings, purchased by FINNs, will not be considered in assessment of real estate possessing criteria by these entities.
Conditions to be assigned the F.I.N.N.status
According to the Bill, in order to be assigned a F.I.N.N. status a joint stock company should meet various criteria, inter alia:
- registered office and board management located at the territory of the Republic of Poland;
- FINN board management consisting of at least three members meeting specific conditions (inter alia, related to education, lack of criminal history or experience in real estate management);
- share capital of at least 50 mln PLN;
- company shares must be allowed for trade in official listing markets;
- ban on emission of preference shares;
- introduction to a company status of company investment rules for a company and its subsidiaries, in particular specification of a type of a real estate the company will be investing in and selection criteria for such real estates and their pricing;
- having income from lease of at least 5 residential real estates located in the territory of Poland (while this condition will be met, if subsidiaries possess real estates);
- at least 80% of the balance sheet asset value should be residential real estates;
- at least 90% of income should be income from lease of residential real estates or from residential real estates sale for consideration, that had been leased by the company for at least a year prior to its sale;
- a balance sheet value of return liabilities (including credit- or loan-related ones or those resulting from emission of bonds and other titles of debt) shall not exceed 50% of a balance sheet asset value;
- profit shall be divided among shareholders in compliance with the Bill.
Particular attention should be paid to the last condition for a company to be assigned the FINN status. In compliance with the Bill division of profit among FINN partners shall be performed on the basis of financial data included in an annual financial report or in the amount of at least 90% of a total value of income obtained in a trading year from real estate lease or sale.
Beside FINNs, the Bill implements the registry of companies investing in real estate lease, run by the KNF-Polish Financial Supervision Authority. It will be necessary to be entered to the registry of such companies in order to be assigned the FINN status.
Let us mention that when comparing to previous bills, the authors of the Bill defined the threshold of minimum share capital for a Polish REIT to be on the relatively high level of 50 mln PLN. When adding the obligation to have income from lease of at least 5 residential real estates, it should be concluded that the FINN idea defined in the Bill is designed mostly for large entities with
a structurized real estate portfolio.
The Bill specifies various requirements to be met by subsidiaries via which FINNs could be able to invest in residential real estates. A subsidiary could be a joint stock company, a limited liability company and a limited joint stock partnership meeting various requirements specified in the Bill (as
a rule, analogical to those specified for FINNs, considering characteristics of a given subsidiary).
Various tax preferences were specified in order to encourage entrepreneurs running residential investment projects to build FINN-type structures, as well as private and institutional investors to invest in shares of FINN companies. These preferences shall be as follows:
- income tax release (both PIT and CIT) for income obtained from dividends and other income from share in a FINN-type companies for FINN investors (shareholders)
- application of the preferred CIT tax rate of 8.5% from FINN income obtained from lease, sale of residential real estates and dividends and other income from share in profit of FINN subsidiaries
- release from CIT tax payment by FINN-type companies from income obtained from residential real estate lease and sale – until spending their equivalent on dividend payment within specified time on behalf of investors (shareholders)
- in FINN subsidiaries CIT tax release from income obtained from residential real estate lease and sale shall be introduced for FINN subsidiaries provided that a dividend is paid out on behalf of a FINN within specified time,
whereas in order to avoid doubts whether an applied tax structure is a form of support assigned for entrepreneurs from public assets, depreciations of leased real estates shall not be considered in tax costs, when specifying a tax base from income obtained from residential real estate lease. As a result, a real effective tax rate for FINN companies shall be 17.74% instead of 8.5% of obtained income (according to calculations of the Ministry of Finance).
Loss of F.I.N.N. status – consequences
Negative consequences for FINN companies and their subsidiaries were also anticipated in case of non-compliance of asset-related conditions or diversification of an investment portfolio. In such
a situation a FINN company shall be obliged to correct its declaration for tax years, during which it was gaining profit from release and to pay due tax with late payment interests. Similar rules shall be applied in case of deleting a FINN company from the registry of companies investing in real estate lease. Payment of due tax and late payment interests shall also refer to FINN subsidiaries, if they do not distribute profits to FINN within specified time.
Loss of the right to be granted tax release and an obligation to tax income of FINNs or its subsidiaries shall also apply upon declaration of bankruptcy or liquidation of such companies. Then a company loses the release right starting from a day such circumstances occurred. As a result, income of such
a company, obtained for last 5 tax years and not spent on purposes entitling to make use of release, shall be summed up with income obtained for a last tax year and be subject to taxation on general basis. Payment of tax for this income (without late payment interests) should be then made no later than on the 20th day of the month following the month the aforesaid circumstances occurred.
Currently, the Bill is under public consultations and it is assumed that it shall come into force as an act on January 1, 2019. If you are interested in the bill on companies investing in real estate lease, feel free to contact us.
Patrycja Goździowska – Partner, Tax advisor
Maciej Duch – Partner, Attorney at law
Agnieszka Pajurek – Senior Associate, Tax advisor
Paweł Śliwka – Junior Associate