As the world – and markets – react to the news of a potential COVID-19 vaccine, governments can begin to plan their ‘exit strategies’ to get their economies back on track and tackle the debt burden they have taken on to support their fragile economies. There is no doubt that the pandemic will need to be paid for, and that money will come from higher and alternate forms of taxation. As a response to this, governments are currently looking for ways to increase investment, increase economic activity and ultimately increase taxation.
A solution to some of these problems comes in the guise of REIT regimes. In contrast to the often-mistaken view that REITs do not pay tax, recent research commissioned by EPRA and undertaken by PwC shows that REIT regimes are significant tax contributors in the jurisdictions they operate in within Europe. For every EUR 100 in turnover, REITs pay an average of EUR 32.8 in tax. And the Total Tax Contribution (TTC) and other payments to governments of all 98 REITs among EPRA’s membership in Europe have been estimated to be EUR 4.1 billion. It comprises EUR 1.7 billion in taxes borne, a cost to the REIT, EUR 2.3 billion in taxes collected on behalf of tax authorities and EUR 0.1 billion in other payments to governments.
Another avenue for tax revenue
All governments need tax income and to boost investment; REITs offer a reliable and steady source of tax combined with continued investment.
The study commissioned by EPRA was a first-of-its-kind total tax contribution analysis at European scale that looked to understand in more detail the tax structure of REITs and whether the reluctance for some jurisdictions to implement REIT regimes was well-founded. What we discovered was that REITs are very clearly misunderstood by non-tax professionals who assume their lack of corporate taxation means they are free from paying tax – quite the opposite is true.
While tax arrangements do exist for REIT regimes, these are in place to ensure investors are not put in a position where they are forced to pay tax twice: corporate taxation at the company level and then again at the shareholders’ level. Instead, the profit allocation structure of REITs is such that they are legally required to distribute on average 90% of its taxable income to their shareholders in the form of dividends.
The benefit of this tax structure, also due to the dividend distribution obligation, means that investors receive a historically stable dividend that is not eroded through taxation but directly related to the income from their investment. The stability of such investment is reinforced by the underlying long-term asset class, real estate, which is an excellent investment for investors, such as pension funds, who are looking for a long-term, stable and recurrent income.
Democratising an investment opportunity
What these REIT regimes have been able to do is democratise investment in real estate and allow your ‘everyday’ investor to participate in the value creation of real estate investment. No longer the purview of the extremely wealthy and large institutions, REITs have levelled the investment opportunity and increased investment in the real estate sector.
The pandemic has changed the investment landscape, and the real estate sector is just one area that pensions funds, insurance companies and individual investors will look to generate long-term, sustainable returns. Not only do REITs democratise access to real estate investment, but they also do so across every sector of real estate. Our study found that they were invested in varying real estate sectors – including offices, retail, healthcare and residential – providing investors with the ability to not only invest in real estate on the whole but invest in diversified asset allocations.
National governments and the role of the European Commission
REIT regimes and their implementation are the prerogatives of national governments, but EPRA believes that the European Commission can play an important role in exploring ways in which to encourage Member States to engage in mutual recognition of REIT regimes. This will increase the opportunity for investors to allocate assets outside of their jurisdiction and distribute assets across multiple markets. The European Commission also has the ability to promote REIT regime best practices to increase investment and stimulate economic growth as well as to help property investors to scale-up their investments into green renovations and support objectives of the European Green Deal.
Following our study, EPRA remains committed to encouraging further Member States to implement REIT regimes as a way to increase investment in the real estate sector and use this industry as a vanguard in the economic recovery from the pandemic while at the same time rising to the challenge of creating a more sustainable future. While there have been concerns raised about the tax implications of REIT regimes, we believe this report will go some way towards convincing Member States that REITs are significant tax contributors and an effective way for countries to increase investment in an industry which is essential for the economic recovery from the pandemic.
