REIT in the Philippines
By: Aissa V. Encarnacion
The signing into law of Republic Act No. 9856 entitled An Act Providing the Legal Framework for Real Estate Investment Trust and for other Purposes (the “REIT Law”) and the subsequent enacment of the Implementing Rules and Regulations by the Securities and Exchange Commission (SEC IRR) stirred excitement and optimism in the capital market. Many real estate companies geared up and prepared to create their own REITs.
REIT is a stock corporation established in accordance with Philippine law principally for the purpose of owning income-generating real estate assets. The REIT must be a publicly listed company with at least 1,000 public shareholders owning at least 50 shares of any class of shares who in the aggregate own at least 1/3 of the outstanding capital stock of the REIT. It must have a minimum paid up capital of P300 million. At least 75% of the deposited property of the REIT must be invested in, or consist of, income-generating real estate. This means that the REIT must hold real property that generates a regular stream of income such as rentals, toll fees, user's fees and the like. The REIT may invest in local or foreign assets, subject to the terms of its articles of incorporation. The shares of stock of a REIT must be registered with the Securities and Exchange Commission (SEC) and listed in the Philippine Stock Exchange (the “Exchange”). In order to be able to hold land in the Philippines, the REIT must comply with nationality requirements, and must therefore be at least 60% Filipino.
The more attractive features of the REIT are the dividend policy and the tax incentives. As in other REITs, the REIT Law provides that a REIT must distribute annually at least 90% of its distributable income as dividends to its shareholders. The law also requires that the percentage of dividends received by the public shareholders must not be less than such percentage of their aggregate ownership in the REIT. Tax incentives include reduction in taxes arising from the transfer of assets and in income taxation which may be availed of by the REIT provided that certain conditions are met. Among those conditions is that the REIT remains listed in the stock exchange. The transfer of real property to the REIT is subject to only 50% of the applicable documentary stamp tax (DST) and other fees assessed to effect the transfer. Income tax, on the other hand, will be computed based on the net taxable income, which as defined in the REIT Law, enjoys as a deduction the dividends distributed from out of the distributable income for the taxable year. Moreover, income payments to a REIT is subject to a lower creditable withholding tax of one (1%) percent. Value-added tax and dividend tax of 10% are still imposable. However, the sale, transfer or exchange of securities in the real estate-related assets shall not be subject to tax.
There are investment safeguards provided in the law. The REIT may invest not more than 15% of investible funds in any issuer's securities or anyone managed fund, except with respect to government securities where the limit is 25%. The total borrowings and deferred payments of the REIT should not exceed 35% of its deposited property provided that the total borrowings and deferred payments of the REIT that has a publicly disclosed investment grade credit rating by a duly accredited or internationally recognized rating agency may exceed 35% but not more than 70%. To provide for further safeguards, the REIT Law requires the appointment of a Fund Manager and a REIT Property Manager, both of whom shall be independent from the REIT and its sponsor/promoter. To maintain the quality of management of the REIT, the officers and directors of the REIT, whether elected or appointed, shall also be subjected to the Fit and Proper Rule. Contracts with related parties are required to comply with minimum requirements, which includes the requirement that the contract must be approved by the majority of the entire board, and the unanimous vote of all the independent directors.
Many believe the REIT Law will push the country forward and bring it up to par with its neighboring Asian countries. So has the country turned the corner? Not quite. The implementing rules and regulations issued by the Philippine Bureau of Internal Revenue (BIR) culled from SEC Memorandum Circular No. 2 (Series of 2011) chilled all optimism and practically stymied the implementation of the REIT Law in the country. In SEC Memorandum Circular No. 2, a public company must have 1,000 shareholders owning at least 40% of the outstanding capital stock of the REIT in the initial year, and must increase its minimum public ownership to 67% within three (3) years from listing in the Exchange. While the law requires a REIT to be a public company, the law merely defines a public corporation as having 1,000 shareholders with at least 50 shares each owning in the aggregate at least 1/3 of the outstanding capital stock of the REIT.
Moreover, Revenue Regulation No. 13-2011 of the BIR provides that the REIT must put in escrow, for the first two years, the income tax on the dividend and the dividend deduction prior to obtaining the 67% minimum public ownership. The Revenue Regulation went further by providing that in order for the REIT to enjoy the dividend deductions provided in the law, it must maintain its public ownership at 67%. The REIT Law is completely devoid of any mention of the public ownership at 67% as a condition for the availment of the tax incentives, much less as the end goal of the law. Expanding public participation is ideal, but is it realistic?
While many are poised to set up REITS and have set aside significant capital for this purpose, the issue on public ownership remains to be the stumbling block to its full implementation. Recent pronouncements of the new government of President Duterte seemed promising as the Department of Finance and even the SEC have voiced their willingness to review these regulations, bringing hope that the REIT Law will be finally implemented under the new government. Until then, the government must determine the optimal level for fiscal management without compromising its democratization objectives. Drawing a delicate balance between the two should be the primordial goal of its economic policy.