27 February 2020 by and Special Budget Speech Alert

Refining the taxation of real estate investment trusts (REITS)

Prior to the commencement of specific legislation regarding real estate investment trusts (REITs) on 1 April 2013, two forms of listed property investment entities existed in South Africa, namely, property loan stock companies (PLS) and property unit trusts (PUT), i.e. collective investment schemes in property. These entities were subject to different regulatory controls and tax treatment.

A unified tax regime was adopted with effect from 1 April 2013 and REITs were introduced. In terms of the Act, a REIT is defined as a resident company, the shares of which are listed on an exchange as defined in section 1 of the Financial Markets Act 19 of 2012 (Financial Markets Act) and are listed as shares in a REIT as defined in the listing requirements of an exchange approved in consultation with the Minister.

In the Budget, the Minister has made various proposals aimed at refining the taxation of REITs. These proposals include clarifying the definition of REITs; clarifying the meaning of a share in the definition of REITs and amending the anti-avoidance provisions regarding taxation of foreign dividends received by REITs.

The Budget proposes that the definition of REIT in the Act, which currently refers to the approval of listing requirements by the appropriate authority under the Financial Markets Act in consultation with the Minister, be updated to be in line with the Financial Sector Regulation Act 9 of 2017 (i.e. twin peaks). It further proposes that the consultation requirements regarding the listing criteria in an approved exchange be reviewed.

In regards to the definition of a share, National Treasury has identified that some REITs wish to issue and list preference shares. However, it was never envisaged that holders of preference shares should benefit from the REIT tax dispensation given that preference shares are mainly used for financing and not to provide full equity exposure to investors. In order to prevent the issue and listing of preference shares by REITs, it has been proposed that the legislation should be amended to exclude preference shares and non-equity shares from the shares that must be listed on the exchange to qualify as a REIT.

Lastly, according to government there is a mismatch that occurs in respect of foreign dividends received by REITs. This mismatch occurs where a REIT holds shares in a non-resident property company thereby qualifying for the section 10B participation exemption in respect of the foreign dividend received from that non-resident company. In addition to the dividends tax participation exemption, the REIT also obtains a full deduction when it distributes profits from those foreign dividends thereby escaping taxation altogether. In order to address this mismatch, it has been proposed that the legislation be amended so that the full dividend is subject to tax if the recipient is a REIT.

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