The Act of 12 May 2014 relating to Regulated Real Estate Companies ("gereglementeerde vastgoedvennootschappen"/"sociétés immobilières réglementées") ("B-REITs") aims to offer the status of "regulated real estate company" to real estate companies that wish to operate as an REIT and that meet the legal characteristics of the B-REIT. This regulation is also inspired by the rules applicable to foreign REITs.
General
Since 1995, "public" investments in real estate have been fitted into the framework of the legislation relating to collective investment undertakings ("UCIs"), and specifically the regime applicable to listed real estate investment companies ("vastgoedbevak"/"sicafi") (Act of 3 August 2012 relating to collective investment undertakings and Royal Decree of 7 December 2010 relating to real estate investment companies).
Due to their current UCI status, real estate investment companies would, as of the date of entry into force of the act transposing the AIFM Directive (the "AIFMD Act"), according to the provisions of the AIFMD Act, be considered as "alternative investment funds" and would have to comply with the additional legal framework applicable to such entities. However, it seems that, particularly for real estate investment companies, the additional framework of "alternative investment fund" does not provide any added value, and that this legal framework does not coincide with the economic reality. In the countries surrounding Belgium, real estate companies are usually not organised as an "investment fund" and will therefore not necessarily be subject to the AIFMD legislation. They have REIT regimes with specific characteristics and a tax transparency similar to investment funds, and include the "société immobilière réglementée" ("SIIC") in France, and the "Real Estate Investment Trust" ("REIT") in the United Kingdom and Germany. With the "regulated real estate company", the Act of 12 May 2014 relating to Regulated Real Estate Companies (the "B-REIT Act" or the "Act") aims to introduce a separate REIT status in Belgium, besides the status of "real estate investment company" ("vastgoedbevak"/"sicafi") (a regulatory framework that will remain in place). The introduction of B-REIT status offers existing real estate investment companies (provided that certain conditions are met) the possibility to switch to a status that is more aligned to the economic reality, with a legal framework that is aligned to the activities of these operational and commercial real estate companies. After approval of the draft act in Parliament on 24 April 2014, the B-REIT ACT was ratified and promulgated on 12 May 2014. The Act has not yet been published.
The B-REIT Act needs to be read in parallel with the act relating to the transposition of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (the AIFM Directive).
Characteristics of the B-REIT and differences from the existing legal framework for real estate investment companies
The definition of a B-REIT in the Act is based on its activity, which consists of placing real estate, directly or through a company in which it participates, at the disposal of its users, and, as the case may be and within certain limits, the possession of other types of "real estate" (shares in public real estate investment companies, rights of participation in certain foreign UCIs, shares issued by other REITs and real estate certificates). In this context, the B REIT is allowed to exercise all activities related to the construction, rebuilding, renovation, development (for its own portfolio), acquisition, alienation, management and exploitation of real estate.
Its commercial activity distinguishes the B-REIT from an entity with an investment activity, which entails raising capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors in order to generate a "pooled return" (in other words, the characteristics that are typical of an "alternative investment fund"). The B REIT does not have an investment policy embedded in its articles of association, but develops a strategy in which its activities can reach out over the entire value chain of the real estate sector. Its activity will therefore be wider than the mere acquisition of real estate for the purpose of collecting the rent and/or alienating such real estate.
This kind of strategy is generally aimed at possessing the real estate in the long term. In no case can the B REIT engage in "real estate trading".
As a general principle, the B-REIT Act provides that the activities should be exercised by the B REIT itself, without charging a third party (other than an affiliated company) with the responsibility relating thereto. This implies that the public B-REIT has operational teams at its disposal which form a significant part of its workforce. Obviously, this does not mean that the B REIT is not allowed to call upon external suppliers, such as architects, contractors or attorneys, and it does not hinder the outsourcing of the execution of tasks; however, "property management" [sic] cannot be delegated at all. The responsibility for, and the coordination of, the business activity should at all times remain with the public B-REIT. The Act also stipulates that the B-REIT should maintain direct relations with its customers and suppliers – which, for most (if not all) real estate investment companies, is nothing more than a statutory ratification of the economic reality.
In view of their importance for the real economy and public savings, B-REITs will be supervised by the Belgian supervisory authority, the FSMA (Financial Services and Markets Authority). As is currently the case for real estate investment companies, specific rules relating to the maximum debt ratio (which remains limited to 65%), risk diversification and pay-out ratio will apply, as such rules exist for REITs in the surrounding Member States.
Certain differences compared to the current regime for real estate investment companies are the following:
- "Real estate services": subsidiaries of public B-REITs which are "real estate companies" (in other words, not institutional B-REITs) are allowed to provide real estate services to third parties, provided that strict conditions apply (including a limitation on the result that is generated by such real estate services and on the volume of the managed assets).
- The Act does not require the B-REIT to act "in the exclusive interest of its shareholders" (the "company's interest" is key).
- The Act does not provide that the B-REIT is represented by two directors in case of "acts of disposal on real estate".
- No requirement exists to (formally) appoint "a person charged with the financial services" ("persoon belast met de financiële dienst"/"personne chargée du service financier").
- The directors, actual leaders and persons in charge of the independent control functions can only be physical persons (although a transitional regime has been provided for).
Registration procedure – transitional regime for real estate investment companies – right to exit
A company seeking to adopt the status of a public B-REIT will have to apply for a permit from the FSMA. The company will have to prepare a recognition file to that effect, the content of which will be determined by Royal Decree.
The Act contains certain specific provisions applicable to public real estate investment companies seeking to adopt B-REIT status, in terms of both procedure and timing.
The content of the recognition file that has to be submitted to the FSMA with a view to obtaining a permit will be determined by Royal Decree, but it is expected to include at least a draft of the modified articles of association as well as justification that the company meets (or will meet) the criteria of article 4 of the Act (i.e. the B-REIT criteria). In this context, the company will also have to pay attention to the provisions related to the exit right (see below).
The approval of the modification of the corporate purpose (and, thus, the approval of the transition to B-REIT status) by the general meeting of shareholders requires an attendance quorum of 50% of the shares (or, if this quorum is not reached at the first general meeting, the convocation of a second general meeting) and a majority of 80% of the votes.
If the general meeting approves the proposed modification of the articles of association, each shareholder opposed to this proposal can exercise a right to exit, at a price equal to the higher of (i) the closing price of the share on the day preceding the day of publication of the convocation of the (as the case may be, first) extraordinary general meeting, and (ii) the average closing price of the share over 30 calendar days preceding the date of the extraordinary general meeting that approves the modification of the articles of association (as the case may be, the second EGM). The public real estate investment company can decide to make the adoption of the new status subject to the condition that the number of shares for which the exit right is exercised does not exceed a certain percentage of the company's capital (a condition that can subsequently be waived).
The exit possibility is subject to a number of very severe restrictions:
- the exit right has to be exercised at the EGM approving the modification of the articles of association and immediately after such approval;
- the exit right is limited to EUR 100,000 per shareholder;
- only the shares used to cast a negative vote can be the subject of the right to exit;
- the exit right can only be exercised in respect of shares which were uninterruptedly held by the shareholder as of the thirtieth day preceding the (first) EGM and until the end of the (as the case may be, second) EGM approving the modification of the articles of association.
With a view to implementing (where applicable) the exit right, the company will have to undertake a share buyback (under the conditions of article 620ff. of the Companies Code) or have a third party purchase such shares. A share buyback cannot be realised if it would imply a breach of article 620 of the Companies Code.
The B-REIT Act provides that the publication of communications or documents relating to the exit right do not as such constitute a public offer within the meaning of the Prospectus Act, nor a public takeover bid within the meaning of the Public Takeover Bids Act, provided that, if the 30% threshold is exceeded, (in principle) an obligation will arise to launch a takeover bid.
Based on an amendment to the draft act in respect of article 509 of the draft AIFMD Act, filed on 28 March 2014, a legal inconsistency has been avoided for real estate investment companies which would only be able to adopt B-REIT status after 22 July 2014 (the final deadline to apply for a permit as an alternative investment fund under the AIFMD Act). Real estate investment companies that apply for a permit as a B-REIT (and that are obliged to apply for such a permit within four months after the B-REIT Act has entered into force) will remain subject to the UCI Act and the Royal Decree on real estate investment companies until the day that the B-REIT permit has been granted. Real estate investment companies that do not wish to opt for B-REIT status will also remain subject to the UCI Act and the Royal Decree on real estate investment companies until the end of the fourth month following the entry into force of the B-REIT Act. However, as of the end of the fourth month following the entry into force of the B-REIT Law, such companies are obliged to apply for an AIFM permit.
The recognition of a public real estate investment company as a public B-REIT entails, simultaneously and by operation of law, the recognition as institutional B-REITs of the real estate investment companies which are controlled by that public B-REIT. The administrative body of an institutional real estate investment company which has obtained recognition as an institutional B REIT will have to take the necessary measures to bring the articles of association in line with the B-REIT Act.
Main tax aspects
The Explanatory Memorandum for the Act states that it is the legislator's intention to make B REITs subject to the same tax regime as real estate investment companies.
As is the case for real estate investment companies, B-REITs will only be taxable on the abnormal and benevolent advantages they receive and non-tax deductible expenses and costs, other than depreciation and capital losses on shares. They will also be subject to the specific tax assessment on secret commission fees, and they will not have the possibility of setting off against income tax the withholding tax which has been withheld at the source on received dividends.
The B-REIT will also be subject to the "exit tax" regime at the time of its recognition. The unrealised capital gains on real estate will then be taxed at 16.995%. Recognised real estate investment companies adopting B-REIT status will not have to pay the exit tax again. The entire system is conceived as a regime of (limited) "tax transparency", under which a company that has paid the exit tax will no longer have to pay taxes on its real estate income and capital gains on real estate. Only the investors in a B-REIT are taxed on the (compulsory) received distributions and the capital gains realised on shares.
It was initially intended that the existing regime on withholding tax as applicable to real estate investment companies would fully apply to the dividend distributions of B-REITs. However, at the very last moment, this assimilation was reversed by a Government amendment, and the text now states that the King is not (any longer) competent to exempt the revenue from shares of B-REITs (other than institutional B-REITs) from withholding tax. Thus, the existing exemptions introduced by Royal Decree will no longer apply. In practice, this mainly entails bad news for foreign investors (non-resident savers and foreign pension funds), as they would be subject to the withholding tax of 25%. Belgian investors (except private individuals and certain other investors) are able to set off the 25% withholding tax against the corporate income tax due. The Explanatory Memorandum also states that the exemption from withholding tax for non-resident savers owning shares in a real estate investment company will also be abolished.
Entry into force and transitional regime
The B-REIT Act was ratified and promulgated on 12 May 2014, and will enter into force on a date to be determined by the King. The Act has not been published yet. The Royal Decree on B REITs, which is expected together with the publication of the Act or soon thereafter, will thus determine the date on which B-REIT status enters into force.