Ch. Kapourani - Real Estate Investment Companies (REICs) – Establishment Requirements and Incentives

Christina Kapourani, LL.M. (mult.), PgCert, PhD candidate

Summary: Real Estate Investment Companies (REICs) are legal entities with a specific investment purpose: acquiring and managing real estate, as well as related rights and participations. REICs are typically listed on the stock exchange and benefit from favorable tax treatment to encourage their formation and, consequently, to promote entrepreneurship, particularly for large real estate portfolios. In Greek law, the regulatory framework governing these special-purpose public limited companies is defined by Law 2778/1999, in conjunction with Law 4548/2018 on public limited companies, as well as specific tax regimes. Below, we will briefly outline the requirements for the establishment of a REIC, the incentives, and the risks involved.

I. Conditions for the establishment and operation of REICs:

To establish a REIC, in addition to the classic requirements of corporate law (corporate contract, statutory provisions, publication in the General Commercial Registry, etc.), additional conditions are needed, with further differentiations such as the shareholders' obligation to contribute increased share capital. Specifically, for the establishment of a REIC, the following is required:

- A minimum share capital of €25,000,000, fully contributed at the company's establishment or upon conversion from a conventional public limited company or another corporate form (Article 21(2) of Law 2778/1999). The share capital can also consist of contributions of money market instruments, securities, and real estate.

- A license from the Hellenic Capital Market Commission for both the establishment and transformation from an existing corporate form. For the license to be granted, the organization, technical and financial means, as well as the experience and reliability of the shareholders and directors, especially in the field of real estate investments, are evaluated (Article 21(3) of the law).

- Submission of a detailed business plan to the Hellenic Capital Market Commission, detailing the use of the real estate in which the company’s assets will be invested, including a specific analysis of the strategy to achieve its growth objectives (also referred to in E. 43 HCMC).

- The company's purpose must exclusively involve investing in and managing real estate. Specifically, according to Article 22 of Law 2778/1999, a REIC is mainly entitled to invest in:

- Real estate, at least 80% of its assets.

- Real estate serving its operational needs, not exceeding 10% of its assets.

- Shares and stakes in companies, acquiring at least 80% of them, provided that these companies exclusively aim at exploiting real estate and have invested all their fixed capital in real estate.

- Mandatory listing of its shares on the Stock Exchange within two (2) years of the company’s establishment (Article 23 of Law 2778/1999). The deadline for listing can be extended by another three years (2+3) in cases of force majeure and upon request to the Hellenic Capital Market Commission. Failure to list on the Stock Exchange as above leads to the revocation of the operating license and liquidation of the company.

II. Favorable Tax Regime:

From the combination of Articles 23(4) and 31(1, 3) of Law 2778/1999, it follows that:

- REICs are subject to a special tax on all their investments, excluding cash reserves.

- The tax rate is fixed at 10% of the European Central Bank's reference interest rate plus one (1) percentage point.

- The payment of this special tax exhausts the tax liability (income or capital) up to and including the shareholder level. Thus, dividends and the sale of REIC shares are tax-free.

- However, the exemption does not cover the income tax on capital gains arising from the contribution of real estate. Transfers of real estate by the investment company are also subject to real estate transfer tax at the prevailing rate.

- In case of revocation of the REIC's operating license, the tax benefits provided for it, as well as any other favorable tax arrangements established by other laws, are revoked.

III. Additional Corporate Law and Accounting Requirements:

The operation of a REIC differs from that of a conventional public limited company due to its significant business and development activities, subject to the supervision of the Hellenic Capital Market Commission regarding its financial progress. Thus, as specifically provided by law (Article 21(5) of Law 2778/1999), a REIC must:

- Obtain a license from the Hellenic Capital Market Commission for any amendment to its articles of association and for any increase in its share capital.

- Prepare its financial statements based on the International Financial Reporting Standards (IFRS) from its establishment.

- Publish an investment and available funds statement every calendar semester, with a separate reference to the categories of investments.

- Conduct a special valuation of its investments at the end of each fiscal year.

IV. Risks:

REICs offer business advantages as they attract institutional investors in large real estate portfolios and facilitate the quick liquidation of assets through stock exchange trading. They provide organized real estate services and ease transactions, mainly due to the above-mentioned tax benefits. However, the establishment and operation of a REIC should be the result of mature investment, economic, and accounting assessment to decide whether the venture is beneficial on a case-by-case basis. This is because the aforementioned special investment tax initially satisfies the tax obligation of these companies, but it no longer has a fixed rate, as initially provided (0.3% of investments). Today, the tax rate is linked to a variable index, namely the ECB interest rate. The rise in interest rates increases the tax base, consequently burdening these companies. In short, the benefit or disadvantage of establishing a REIC for each investor should be evaluated individually with specific economic data.

To understand the tax rate, the following example is based on the published financial data of an operating REIC in Greece:

Example: The average value of properties and available funds of an operating REIC amounts to €2,467,826,850.01. The tax amount based on the rate for REICs is €35,783,489 (10% * 4.65 ECB + 1.00 = 1.45). If the entity operated as a regular public limited company and not a REIC, the income tax amount on pre-tax earnings of €122,000,000 would be multiplied by the corporate tax rate (22%), resulting in €26,840,000. Therefore, it is evident that rising interest rates imply an additional tax burden for REICs, effectively undermining their tax advantage, and creating the need for a legislative resolution.