The Belgian government is about to introduce a new real estate investment company structure, the FIIS/GVBF. This new investment structure offers additional benefits that allow institutional and professional investors to hold a majority stake in the company without it having to be listed. Also, the regulatory requirements of the FIIS/GVBF are generally less stringent than the ones that apply to Belgian REITs. Finally, like the REITs, the FIIS/GVBF will also benefit from a beneficial tax regime.
On 28 June 2016, the federal government submitted a bill of the Program Law II to parliament. This bill contains the tax provisions of the much anticipated legal framework for a new type of real estate investment vehicle, the FIIS/GVBF (“Fonds d’investissement immobilier spécialisé”/“gespecialiseerd vastgoedbeleggingsfonds”). The implementing decree containing the regulatory provisions should follow in the summer. It will not be possible to constitute an FIIS/GVBF before the implementing decree is published.
The FIIS/GVBF is specifically designed for real estate investments that are made by one or more institutional and/or professional investors.
By creating the FIIS/GVBF, the Belgian legislature intends to address the needs of institutional and professional investors to have their real estate investments and related risk and return profiles customized and controlled. In this way, for the first time, institutional and/or professional investors will be able to take a controlling interest in a (dedicated and beneficially-taxed) real estate investment vehicle.
Expected attractive regulatory framework
The FIIS/GVBF offers a number of advantages compared to the already existing Belgian REITs (e.g., SIR/GVV and SICAFI/Vastgoedbevak), next to which it will coexist. Some of the main characteristics of this new vehicle can be summarized as follows:
- Institutional and professional investors can hold all the shares of the FIIS/GVBF. This vehicle is not required to have a (listed) public SIR or SICAFI as a shareholder, which is the case for institutional SIRs and SICAFIs;
- The shares of an FIIS/GVBF can be held by one single investor (in which case the requirements imposed by the AIFM Law will not apply);
- No listing is required;
- Thanks to the application of IFRS accounting standards (allowing asset values to be marked to market value), real estate investments through an FIIS/GVBF will not lead to a cash trap; instead it will be possible to distribute the FIIS/GVBF’s profits more quickly;
- There is no risk diversification requirement. The rule pursuant to which one single real estate asset cannot represent more than 20% of the company’s total asset value does not apply to the FIIS/GVBF;
- There is no limitation on the level of debt leverage, as opposed to the SIR and the SICAFI;
- The FIIS/GVBF does not have to be approved by the FSMA. It must only be registered with the Ministry of Finance (which is expected to be a rather light procedure).
The benefit of this flexible regulatory regime will come with a number of regulatory restraints, however, such as a limited duration of 10 years, renewable for consecutive 5-year periods, yet subject to a unanimous decision of the general assembly. As is the case for the SICAFI and the SIR, the FIIS/GVBF will be subject to the obligation to annually distribute at least 80% of its net income.
The FIIS/GVBF may only invest in “real estate” under the definition given to this term in the implementing decree. An FIIS/GVBF will not be allowed to act as a real estate developer. Furthermore, an indirect investment in Belgian real estate by an FIIS/GVBF through a subsidiary is allowed only if the FIIS/GVBF holds directly or indirectly 100% of the shares of the subsidiary and if the participation is held for no more than 24 months.
Beneficial tax treatment
The bill of the Program Law II describes the advantageous tax regime that applies to the FIIS/GVBF, which is identical to the one that applies to SIRs and SICAFIs. The aim of this tax regime is to make the FIIS/GVBF’s intervention in a real investment structure as tax neutral as possible. The main features of this tax regime are as follows:
- Notional corporate tax base. The FIIS/GVBF will be subject to corporate income tax, but its taxable basis will be limited to disallowed expenses and abnormal or gratuitous advantages received. Rental income, capital gains on real estate assets, and dividend and interest income will remain untaxed as a matter of principle.
- Participation exemption – dividend withholding tax exemption. Subject to certain conditions, the portion of a dividend distributed by an FIIS/GVBF stemming from (taxed) foreign source income can benefit from an exemption from dividend withholding tax and can also be eligible for Belgium’s 95% participation exemption at the level of Belgian corporate shareholders (resulting thus in an effective tax rate of only 1.7% for Belgian corporate shareholders).
- VAT exemption for management services. Management services rendered for the benefit of an FIIS/GVBF will be eligible for VAT exemption, at least to the extent that these services are specific to, and essential for, managing the FIIS/GVBF. This will allow the FIIS/GVBF to avoid a VAT cost in relation to these fees (i.e., since an FIIS/GVBF will generally not be able to recover any input VAT that is charged to it).
- No stock-exchange-transactions tax. Dispositions and acquisitions of shares issued by an FIIS/GVBF will benefit from full exemption from Belgian stock-exchange-transactions tax.
It is important, however, to note that the registration of an FIIS/GVBF with the Ministry of Finance will trigger a 16.995% “exit tax”, which is to be computed on the sum of all latent capital gains and tax-free reserves of the FIIS/GVBF at the time of registration. This tax will also be due by companies that take part in certain restructuring operations (merger or (partial) demerger) in which an FIIS/GVBF is involved. A novelty is that the exit tax will also apply if Belgian real estate assets are contributed to an FIIS/GVBF. This new rule will also apply to contributions made to SIRs and SICAFIs. Finally, the FIIS/GVBF will be subject to a so-called “annual tax on collective investment institutions”, which would be equal to 0.01% of its total net assets.