The Royal Decree of 9 November 2016 relating to the Specialised Real Estate Investment Fund* ("FIIS" – "Fonds d’Investissement Immobiliers Spécialisés" ("FIIS")/"Gespecialiseerd Vastgoedbeleggingsfonds" ("GVBF") aims to offer a fiscally transparent investment vehicle focused on real estate to Belgian and foreign "qualified investors", in addition to the existing BE-REIT and Sicafi regimes, to enable such investors to invest in Belgian and foreign real estate through a Belgian structure with an appropriate tax regime.
General
With the Act of 12 May 2014 and the Royal Decree of 12 July 2014 relating to Regulated Real Estate Companies (together the "BE-REIT Regulation"), the regulated framework for BE-REITs saw the light of day. The BE-REIT Regulation enables investors to invest in BE-REITs – Belgian listed, operational real estate companies which limit their risk profile by respecting a maximum debt ratio and a diversification obligation, and which offer a predictable return by complying with a legally defined minimum pay-out ratio. In addition, the BE-REIT Regulation offered existing Belgian real estate funds (Sicafis) an alternative status – of no longer being considered as "undertakings for collective investments" (under the Sicafi Royal Decree) and thus no longer being classed as "alternative investment funds" (under the European AIFM rules and the corresponding Belgian Act of 19 April 2014 transposing the AIFM Directive into Belgian law, the "AIFM Act").
After two years, it can be concluded that this new regulatory framework is successful. All existing Sicafis have been converted to BE-REITs, and the sector – in the meantime expanded to 17 players (Xior Student Housing being the most recently created) – is performing well in the current market conditions, supported by the quality label of the status.
Institutional investors have indicated that it is not always expedient to accommodate their real estate investments under the regime of a BE-REIT or a Sicafi. Both regimes contain a number of protection mechanisms in favour of the (shareholders of the) BE-REIT or Sicafi. The indefinite period of the structure, the fact that it is listed, the mandatory free float, the diversification obligation, the maximum debt ratio and the prudential supervision by the Financial Services and Markets Authority ("FSMA") are sometimes difficult to reconcile with the needs of institutional investors. Certain institutional investors therefore opted to set up a structure in one of Belgium's neighbouring countries, which already had suitable, less stringently regulated vehicles for real estate investment funds.
In order to address these concerns and to bring foreign institutional investors (wishing to invest in Belgian and foreign real estate) to Belgium, the Belgian legislator has now created the new regime of the FIIS, by way of the Programme Act of 3 August 2016 and the Royal Decree of 9 November 2016 in relation to specialised real estate investment funds (the "FIIS Royal Decree"), published in the Belgian Official Gazette on 18 November 2016.
Characteristics of the FIIS
The FIIS is an institutional alternative investment fund for collective investments (institutional AIF), with a fixed number of participation rights, a distribution obligation of 80% of its result, and with collective investment in real estate as its sole goal. It concerns a non-listed "passive" fund, which, in this respect, represents the opposite of the active, commercially operational BE-REIT.
Due to the institutional nature of the FIIS, its participation rights are solely available to "qualified investors" in accordance with the AIFM Act. This category of investors includes, on the one hand, "naturally" qualified investors (these are "professional clients", as enumerated in the AIFM Act, and "eligible counterparties" in accordance with the MiFID Royal Decree) and, on the other hand, qualified investors by "designation" (these are the legal entities which have been registered as such in a register held by the FSMA). An FIIS can be incorporated by one sole qualified investor.
The obligation of an FIIS, as of the end of the second book year following its registration on the list of FIISs, to have a real estate portfolio with a total worth of at least EUR 10 million reflects the purpose of the legislator of actually reserving this regime for "big" institutional investors.
The FIIS is a closed-end fund (there is no right to exit through a repurchase as is possible in an investment company with variable share capital (sicav)). Coupled with the prohibition against listing on a stock exchange, this could lead to a lack of liquidity of the investment in an FIIS. For this reason, an FIIS can only be incorporated for a fixed period of ten years. It is, however, possible to extend this period by consecutive periods of a maximum of five years each, by way of an extraordinary general meeting at which at least half of the registered capital is represented and with unanimity of the voting rights present or represented.
The goal of an FIIS is to exclusively invest in real estate in a collective manner. Thus, an FIIS, unlike a BE-REIT, is a mere "passive" entity which may not develop operational activities (e.g. the provision of services to third parties). Like a BE-REIT, an FIIS may not (except on an occasional basis) perform real estate development activities, except for its own portfolio.
The meaning of "real estate" is enumerated in the FIIS Royal Decree in an ad hoc definition which is, for the most part, based on the existing definitions provided in the BE-REIT and Sicafi regimes. An important point of difference is that real estate located in Belgium should be directly held by an FIIS (unlike foreign real estate, which can be held both directly and indirectly). The only exception to this rule is that the FIIS may hold Belgian real estate indirectly through a subsidiary in which it directly or indirectly holds all the shares, provided it brings the situation "into conformity" (and books the relevant Belgian real estate directly onto its balance sheet) within a period of 24 months.
To maximise the flexibility of the FIIS, no diversification obligations and no maximum debt ratios were provided for. The assets of an FIIS may therefore, in principle, consist of a single property, with a freely determinable loan-to-value.
Favourable tax regime
An FIIS is subject to the same favourable tax regime as a BE-REIT and a Sicafi. An FIIS thus enjoys (to simplify the explanation) a "fiscally transparent regime" whereby income tax is only paid on (i) received abnormal or gratuitous benefits, and (ii) certain disallowed expenses (article 185bis §1 of the Belgian Income Tax Code). Like the management of a BE-REIT and a Sicafi, the management of an FIIS, which qualifies as an AIF, is exempt from VAT. Finally, an FIIS is also subject to the "subscription tax" of 0.01%.
In return for this favourable tax regime, an FIIS will, like a BE-REIT or a Sicafi, when recognised as such, owe an exit tax of 16.995% (including supplementary crisis contribution) on the unrealised gains and exempted reserves. This exit tax is also payable for a restructuring in which an FIIS is involved, e.g. the absorption of an ordinary real estate company by an FIIS. Henceforth, the exit tax also applies to the contribution of real estate by a real estate company to an FIIS, provided that the contribution is compensated solely through the issuance of new shares.
It is a characteristic of the fiscally transparent regime which an FIIS will enjoy that the taxation – coupled with the distribution obligation – is mainly located at the level of the shareholders. In principle, dividends paid by an FIIS are subject to a (for retail investors, liberating) withholding tax of 27% (30% with effect from 1 January 2017). Dividends paid by an FIIS to a Belgian company are taxable at the standard corporate tax rate (33.99% including supplementary crisis contribution), and, in principle, no dividend received deduction is possible.
To allow an FIIS to successfully fulfil its mission as an international real estate investment platform, first and foremost, a specific exemption from withholding tax for non-resident savers has been provided for. These investors enjoy an exemption from withholding tax for the portion of the dividend paid by an FIIS which it derives from foreign earnings, i.e. either dividends of foreign origin or income from foreign real estate.
In addition, corporate shareholders can still enjoy a dividend received deduction to the extent that the dividends received from an FIIS stem from already taxed income such as taxed income from foreign real estate or dividends received from normally taxed subsidiaries.
Supervision and recognition
To be recognised as an FIIS, a company must register on a list held by the Belgian Ministry of Finance. The Ministry of Finance does not possess any discretionary power in this respect and will only be able to reject a registration if the submitted file is incomplete. The status of FIIS is only obtained at the date of receipt of the confirmation letter from the Ministry of Finance.
Considering the institutional nature of an FIIS, no prudential supervision is exercised by the FSMA. However, this does not mean that it cannot exercise any form of control over FIISs. Pursuant to the "perimeter control" entrusted to it under the AIFM Act, the FSMA will still be able to take action if it would appear that an FIIS did not comply with the requirements with respect to the qualified investors. For supervision of any custodian and the manager of the FIIS, the FSMA (or any competent foreign authority) will come into the picture.
Accounting obligations
At the accounting level too, the FIIS exhibits many similarities to the BE-REIT and the Sicafi. For example, an FIIS, like a BE-REIT, has to (i) respect a payment obligation of 80% of the net current income and the realised gains on real estate, (ii) prepare its financial statements in accordance with IFRS, and (iii) have the fair value of its property portfolio determined by an independent expert at least annually (and in connection with any other material real estate transaction or corporate restructuring, unless recent figures are available and the valuation expert confirms that no new valuation is necessary). Moreover, with a view to applying the aforementioned exemption from withholding tax and a dividend received deduction, an FIIS must explain the origin of the collected and re-distributed income in its annual report.
Origin: the AIFM Act
The AIFM Act of 2014 transposes the AIFM Directive, as a result of which the provisions relating to the managers of alternative undertakings for collective investment ("AIFs") were transposed into Belgian law (Part II of the AIFM Act). On the other hand, the AIFM Act also contains a Section III in which the previously existing rules regarding Belgian AIFs were consolidated, and thus includes rules that are not the subject of the AIFM Directive.
The status of FIIS forms an application of Book II of Part III of the AIFM Act, whose provisions apply to AIF's under Belgian law that do not offer their participation rights to the public and opt for institutional regimes.
The FIIS regime is optional and only applies to AIFs which have opted for the status of FIIS and which are organised in accordance with the FIIS Royal Decree.
While the real estate fund itself is only subject to the non-harmonised provisions of Part III of the AIFM Act, the manager of an FIIS will also have to take the harmonised provisions of Part II into account, as, unless an exception can be invoked, these are binding.
Exceptions concern (to simplify the explanation) the holding exception, one-shareholder structures and group internal structures.
For "small" managers of AIF's, the impact of the harmonised provisions of Part II of the AIFM Act is limited to a "light" regime, consisting (essentially) of a number of notifications. A (manager of an) FIIS will be "sub-threshold" if the assets under management do not exceed EUR 100 million. If AIF's are unleveraged (as defined), and have no redemption rights exercisable during the first five years, the threshold is EUR 500 million.
A manager subject to Belgian law that cannot rely on an exemption and is not "sub-threshold” will have to respect the following obligations:
- obtain prior authorisation from the FSMA;
- respect the requirements imposed on it in respect of its own equity capital;
- appoint at least two suitable, effective leaders;
- have sufficient human and technical resources at its disposal;
- have solid accounting and administrative procedures;
- develop control and security regulations in the field of electronic data processing and organise internal control procedures;
- introduce a functional and hierarchical separation between risk management functions and tasks of the executive departments;
- use specific safeguards against conflicts of interest;
- implement and (at least) annually review risk management systems (whereby the FSMA monitors the adequacy of the manager's credit assessment processes);
- manage a liquidity management system;
- establish procedures for proper and independent valuation of the assets (at least once a year);
- appoint a depositary which is, among other things, responsible for the safekeeping of assets and which must ensure that the sale, issue, repurchase, redemption and cancellation of participation rights in the FIIS occur in accordance with applicable law;
- prepare an annual report of the FIIS which is made available to the FSMA; and
- prove that the debt ratio applied by it is fair and that it will comply with this limit at all times.