Real Estate Investment Trusts in the European Union – Emergence of a standard of direct taxation

Wolfgang Speckhahn

Dr Wolfgang Speckhahn, LLM MRICS, is based in Munich and responsible for the business development and strategy of DeA Capital Real Estate operational activities in the D/A/CH regions as well as Investment and Products, including distribution. He has many years of professional experience in international real estate markets, serving as a senior manager in various operational and management functions in the real estate and finance industry. Dr Speckhahn is a lawyer admitted to the Bar in Munich and a licensed Tax Law Specialist. Furthermore, he is a Member of the Royal Institution of Chartered Surveyors (MRICS) and of the Regulatory & Taxation Committee of EPRA.

The European REITs market, as well as the EU Member States’ (MS) real estate and capital markets more broadly, have significantly developed over the last few decades. There are 13 REIT regimes in the EU. When comparing individual country REIT regimes in the EU, we notice many similarities in their look and function. Albeit they present differences in detail, their general framework is to a large extent identical, and they are slowly becoming harmonised. As their conditions and requirements are already similar, if not equivalent, there is a ‘common understanding building around the harmonisation of REIT regimes, leading the way to a mutually recognised REIT regime within the EU.
Despite this positive common understanding for a joint legal framework, there is also a common ‘negative’ understanding regarding direct taxation in cross-border situations.[1] Even legally, equally foreign REITs are treated differently under MSs` tax regimes. Several MSs are protecting their domestic markets in disallowing foreign REITs to benefit from their domestic REIT regimes, thus, creating an economic disadvantage in a cross-border situation.[2]
However, according to the European Court of Justice (ECJ), MSs must recognise a ‘product’ duly established in their home state as if it was operating in the territory of a host state without imposing any additional requirements, irrespective of its compliance with any conditions set for the domestic REIT.[3] Still, almost all MSs do not recognise the foreign REIT regime, even though it is legally established in another MS.
Hence, the foreign REIT is treated as a foreign corporate generating directly, or through a domestic subsidiary, income from real property. This leads to unequal treatment of REITs, depending on their nationality, thus discriminating the foreign REIT while excluding it from the tax treatment compared to a domestic REIT. Such a different treatment on the grounds of nationality is violating EU law, i.e., the freedom of movement (Art. 49 EU Treaty).
According to the ECJ, although direct taxation falls within the sole competence of the MSs, they must nonetheless exercise that competence consistently within EU law[4]. The Treaty’s principles and its freedoms enshrined having nearly unlimited priority, this means there should not even be a need for tax regulations to be harmonised.[5]
Therefore, applying the  ECJ ruling to the case of a REIT that is validly established in one MS means that it must be recognised as having a legal personality and be legally acknowledged as a company legally established, without the need to meet neither further requirements nor additional conditions, as set out by the ECJ in its case ‘Stauffer’[6]. Should a mutually recognised model for a REIT exist, there must be no differences being made regarding in which MS the REIT was established, since once legally established in one MS the REIT must be recognised as such by all other MSs.
Since a so-called EuroREIT is an EU-wide concept (like the Societas Europaea (SE)), there should be no difference in treatment according to whether a MS provides for a local REIT regime. Thus, a REIT established in a MS shall benefit from a tax transparent treatment at its level for income derived in a home state, in the same way a REIT established under the host state would.
Therefore, investments made cross-border by a ‘foreign’ REIT must not be taxed at its REIT level.
At the same time, there are concepts available to safeguard Member States’ concerns about their loss of sovereignty and tax base. Those concepts may not be achievable through harmonised direct tax regimes but rather by providing for the apportionment of profits. Like the Home State Taxation method (HST), the concept of ‘mutual recognition’ is fundamental to home state taxation.[7]
Together with the mechanisms already existing for the automatic exchange of information[8], the proposed treatment for REITs across the EU provides for a concept using the undisputed benefits of the HST, eliminating the criticism concerning only home state taxation.
However, the proposal above is not about allocating an amount equalling a withholding tax that would have been levied in the host state on income derived from a foreign REIT. Rather, the concept is based upon a true flow-through model where the foreign REIT finally distributes dividends to its shareholders, whether they be residents in the home state of the REIT or resident in another MS.
Thus, tax would be levied in the country of residence of each of the shareholders on the amount distributed, applying the individual tax rate of the shareholder. Any tax revenue due to the tax authorities in the country of residence of the shareholder would then be split among the tax authorities of the MS where the REIT originated its income. The split of the tax revenue would be made using the model of formulated apportionment[9], based upon separate accounts provided by the REIT to the tax authorities. Not only would this identify qualifying income from non-qualifying activity income, but it would also proportionally separate the origin of the income.
This proposal may fulfil many dreams of EU businesses. In general, allowing companies to consolidate their EU activities under a single corporate tax base means that EU companies would no longer have to establish transfer prices for many internal transfers within the EU. They would be able to offset losses incurred by an affiliate in one MS against profits earned in another MS, and the tax consequences of cross-border reorganisations within the consolidated group would be simplified. In essence, providing for consolidated base taxation with formulary apportionment would allow companies doing business in several MSs to contend with one company tax system and to treat their operations as EU operations. Thus, achieving a common consolidated tax base in the EU outweighs the disadvantages associated with using a formula to distribute that income to the MSs.[10]
According to the Council Directive 2016/881/EU[11], multinational groups (MNE) located in the EU or with operations in the EU with total consolidated revenue equal to or higher than EUR 750 million must file a country-by-country report to the competent authority of the MS. The latter shall, by automatic exchange, communicate the report to any other MSs in which one or more constituent entities (i.e., companies) of the MNE Group are either resident for tax purposes or are subject to tax with respect to the business carried out through a permanent establishment there.
Clearly, MSs have set the first footprint into finding a joint solution. However, it took until June 2021 for the Council to reach a provisional political agreement with the European Parliament’s negotiating team for a political endorsement.[12] Before coming into force, the European Parliament needs to approve the Council’s position, and then the directive will be deemed to have been adopted by the MSs, who will implement it into their national laws.

[1] See above.
[2] By way of applying withholding tax and rules for the ordinary treatment of non-resident corporates.
[3] See Case C-120/78, 1979, ’Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein’, ECR I-01459, ‘Cassis de Dijon’.
[4] See most recent, i.e., Case C-284/09, ‘Commission v Germany’, (2011), ECR I-09879, para 44.
[5] See most prominent, i.e., Case ‘Avoir Fiscal’, para 107.
[6] See Case ‘Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften’, C-386/04, (2006), ECR I-08203.
[7] Weiner, J.M., ‘Formulary apportionment and the future of company taxation in the European Union’, CESifo Forum, 1, 10-20, p. 13.
[8] See i.e. Directive on the automatic exchange of Information (AEOID): Council Directive 2014/107/EU of December 9, 2014, amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation
[9] See above.
[10] Weiner, J.M., ‘EU commission, member states commit to EU-Wide company taxation, formulary apportionment’, Tax Notes International, 26(5); Cornelisse, R., Weber, D., Wijs, R. & Blokland, G., Proposal for a uniform EU REIT regime - part 2’, European Taxation, February, 68-75.
[11] Council Directive (EU) 2016/881 of May 25, 2016, amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation, ELI: http://data.europa.eu/eli/dir/2016/881/oj.
[12] Council of the EU Press release June 1, 2021, https://www.consilium.europa.eu/en/press/press-releases/2021/06/01/public-country-by-country-reporting-by-big-multinationals-eu-co-legislators-reach-political-agreement/.