The Spanish acronym SOCIMI can sound intimidating if you lack awareness of the country’s financial law. At Del Canto Chambers, we have ample experience with these Sociedades Anónimas Cotizadas de Inversión Inmobiliaria; both with British and Spanish clients. In fact, they mostly correspond with what in English are known as REITs (Real Estate Investment Trusts); and exist across Europe under other acronyms. While REITs were invented in the 1960s in the United States, they have only been established in Spain since 2009.
Are Spanish REITs (SOCIMIs) Common Investment Vehicles for Foreigners?
In fact, the regime under which they were established in 2009 was not deemed very attractive for foreign investors. Most REIT models across the world avoid taxing the fund itself, and apply duties on the gains regularly shared with investors. However, Spanish law applied a 19% tax on the SOCIMI’s income. While it is not clear if this was the key obstacle, the fact was that four years after their introduction there were no SOCIMIs floating on Spain’s stock exchange.
In 2013, their regime was reformed, meaning that it closely resembled other successful REIT vehicles. It could not have come at a better time, as it helped banks and other financial bodies get rid of toxic assets emerging from the financial crisis. In 2016, there was a further amendment that ameliorated tax impositions and limited requirements and bureaucracy for the establishment of SOCIMIs.
In conclusion, following various reforms, Spanish SOCIMIs have become very attractive investment vehicles. It is unfortunate that their somewhat slow start, partly due to the uncertainties surrounding the deep real estate crisis in Spain, has discouraged foreign investors from entering the market. In fact, with the right advice, British individuals or corporations, and other expats in Spain, can really benefit from this particular financial instrument. Of course, its changing character means that it is best to enter the market with professional advice. Since Del Canto Chambers has followed closely and aided clients through gradual regulatory changes, we are perfectly positioned to help you out explore whether Spanish REITs are good for you.
What Are the Particularities of the Current Spanish SOCIMI Regime?
First, it should be clear that SOCIMIs have to either have a stake in financial entities which undertake urban real estate investment; or directly be involved in the sector. Four fifths of its investments must be in land suitable for development or existing leasable real estate in urban areas; this rule also applies to its earnings. There is an established minimum period of three years for SOCIMIs, and its shares must be publicly listed under minimum capital rules of EUR 5 million (this includes non-liquid assets). Capital is managed by external experts, such as those employed at Del Canto Chambers, that supervise expansion and other movements.
There is certain flexibility on fulfilling all of these terms. Spanish tax authorities allow listing to take some more time without undermining the SOCIMI’s special tax regime. Plus, if the society listed is the parent company, the SOCIMI can be exempt from certain requirements. They can also be listed on Spain’s Mercado Alternativo Bursátil, the country’s alternative investment market. In recent years, they have accounted for large shares of domestic and foreign investment. The latter are particularly attracted by a dynamic real estate market, as many large property firms have evolved into this kind of local REITs.
Like most other REIT systems across the world, SOCIMIs are meant to encourage dividend distribution every year. All of the profits emerging from investments in other financial bodies must be shared. At least half of those emerging from asset transfer and at least four-fifths of those emerging from earnings must also be distributed. Finally, extra activities outside the real estate sector can only amount to 20% of assets or net revenues for the SOCIMI.
How are Non-Residents, Individuals and Corporations, Treated Differently in Spanish SOCIMIs?
In order to set up a SOCIMI, prospective shareholders must establish their will to do so at a general meeting. It is often advisable to have a professional arrange and coordinate the meeting, such as the specialist lawyers we have at Del Canto Chambers, to guarantee compliance and avoid delays to the process. The decision is then communicated to Spanish tax authorities, and the latter apply the new tax regime from the start of the fiscal year when the SOCIMI is officially registered. The reason why legal experts are important is chiefly because SOCIMIs can lose these tax benefits if they commit irregularities; the particular financial society could even be prevented from becoming a SOCIMI for the three subsequent years.
Non-residents who participate in SOCIMIs have to apply the usual Non-Resident Income TAX, with a standard rate of 19%. However, there are ways of lowering it. Non-Spanish shareholders who hold less than 5% ownership and belong to a country that has entered a Double Taxation agreement with Spain (such as the UK) can actually avoid taxation on their SOCIMI capital gains. In fact, related exceptions are also of interest to corporations. A Spanish branch of a foreign REIT; or, in other words, a foreign REIT with Spanish investments; could effectively operate at 0% taxation if they follow the 5% rule.
What Are the Key Advantages for SOCIMI Investors Working with Del Canto Chambers?
In sum, there are many reasons why you should consult with Del Canto Chambers before investing in Spanish real state. SOCIMIs, provided you follow the rules, hold very interesting advantages. First, they are free from paying the standard Corporation Tax rate (remember that up to 20% of their financial activity can be different from real state). Second, they have an almost full discount on both stamp duty and tax on selling property.
This is how Del Canto Chambers can help you
Assessing whether you really need a SOCIMI or you can perhaps rely on another investment vehicle
Assist you, from start to finish, establishing your SOCIMI or joining an existing operation
Want to Know More about Spanish SOCIMIs?
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