REIT as a problem-solving tool in family businesses: tax advantages and legal regime
One of the common grounds for disputes within the family businesses, especially when it comes to the second or third generation, is the distinction between partners who participate in the management or activity of the company, and partners who do not.
It is normal that, either because of capacity or quantity, not everyone can obtain direct remuneration from the family business. This is usually regulated in the family protocol, which sets out the merit criteria that will allow a family member to enter the management of the business.
Those who are left out will mainly receive dividends for their status as a partner. This circumstance tends to lead to some being more interested than others in receiving dividends, and it is advisable that this is also set out in the family protocol, as it has caused many disputes.
In family groups, especially those with a certain amount of experience, it is common for one of the companies in the group to be the owner of the properties in which the operating companies carry out their leasing activities.
The special tax regime for REITs is an option to be taken into account when it comes to facilitating corporate peace of mind and, at the same time, obtaining very favourable taxation.
What are REITs?
A Real Estate Investment Trust (REIT) is a company that typically generates income by producing and owning real estate assets. Some REITs are publicly traded, while others are not. By investing in REITs, investors are indirectly investing in the real estate assets owned by the company. As with a company’s ordinary shares, an investor in a REIT usually obtains voting rights. In Spain they are known as SOCIMI.
Thus, if we separate the property leasing company from the business group (maintaining the same shareholding), and convert it into a REIT, the shareholders will receive a dividend from the lease every year in an advantageous situation.
Characteristics and tax advantages of REITs in Spain
REITs have a special tax regime with a 0% corporate income tax rate (in addition to other advantages such as a 95% rebate on the Property Transfer Tax quota on the acquisition of real estate). However, they are obliged to distribute as dividends 80% of the profits from the rental activity, 50% of the profits derived from the sale of properties, and 100% of the dividends obtained from other REITs.
This means that the shareholders who receive the dividend from the REIT, although they will have to pay personal Income Tax as a return on capital, will receive the full profit, without any tax cost (the general Corporate Income Tax rate is 25%) as would be the case if they received it from a family holding company or an operating company. This results in a higher net profit.
It should be pointed out that it is necessary for the REIT not to be part of the business group for it to function optimally, since, on the one hand, the Law does not allow the leasing of real estate to other companies in the same business group and, on the other, the dividend given to a parent company would not be eligible for the exemption of Article 21 of the LIS. However, outside it, its return is very advantageous.
The REIT can satisfy the cash flow needs of partners who do not participate in management at a very advantageous taxation. It avoids the problems involved in the distribution of dividends from a family operating company to the holding company and subsequently to the individual shareholders, and at the same time facilitates the intergenerational transmission of the business assets generated over the years.
Requirements for REITs
It is true that REITs have certain requirements that are not always easy to meet, since their minimum share capital is 5 million euros, they must take the form of a public limited company and their shares must be admitted to trading on a regulated market; but it is no less true that, over the years, this difficulty has eased. For example, the appearance last year of the BME Scaleup, where there is no longer a minimum amount of floating capital, has solved many of the problems related to the incorporation of new non-family shareholders.
In any case, an individual analysis of each group’s situation is always necessary, as separating the leasing company from the rest of the group will require a restructuring whose feasibility and impact must be carefully considered, as well as being a complex legal vehicle that requires individualised advice.
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