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Newsletter | Articles REITS are introduced in Germany The introduction of Real Estate Investment Trusts (REITs) in Germany has generated much controversy with it having the largest real estate market in Europe. A REIT is used to invest in property. It enjoys protection from corporate and trade tax but must distribute a significant amount of its cash flows to shareholders. In November 2006 the German government approved the draft law on German Real Estate Investment Trusts (G-REITs) and following a number of suggestions for amendment by the German Lower House, is expected to be finalised by the end of March. Residential portfolios account for a significant part of the German real estate market. With private equity funds heavily invested in flats and residential housing, portfolios had hoped to use the G-REIT vehicle as an exit. Stock Corporations According to the government draft, German REIT stock corporations (REIT AG) will generally be unregulated stock corporations. They deal with the purchase, holding and sale of title of ownership and rights of use in real estate in Germany and foreign countries. They are also responsible for managing the renting and leasing of real estate. At least 75 per cent of the total assets of the REIT AG must be real property and it should not hold more than 25 per cent of its assets as participating interests. If these requirements are not met consideration must be given to sales or mergers within the group to achieve REIT status. Shareholder Restrictions No more than 10 per cent of REIT AG shares can be held directly. This is in a bid to avoid reduced withholding tax rates for foreign investors under many double-taxation treaties. Exit Tax Regulation Exit-tax provision will be incorporated into income tax law and will be applicable only for a three-year period ending January 1, 2010. Tax privileges will happen if hidden reserves are realised for real estate assets held over more than 10 years as fixed assets of German property upon conversion into a G-REIT or upon sale to REITs, to preliminary REITs and to open-end real estate investment funds with private unit holders. Only 50 per cent of the hidden reserves will be subject to tax. Privileged taxation also applies to sale-and-leaseback structures. The new law’s exit tax provision is likely to give significant impulse to the German real estate market. The REIT AG will be completely exempt from corporate tax and trade tax. No privileges are envisaged for property tax and real estate transfer tax. Taxation at Shareholder Level REIT shareholders must pay the full amount of tax on the high distributions. An important aspect for foreign shareholders is a withholding tax of 25 per cent on the distributions, which can be reduced to 15 per cent with many double-taxation treaties.