Monday 22/07/2019

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Dividends from Belgian REITs under fire

Senior Equity Analyst

Key take aways:

  • The Belgian government decided to raise the withholding tax to 27% in 2016 but quickly decided in June to reduce this same withholding tax from 27% to 15% for healthcare Real Estate Investment Trusts (REIT).
  • This rapid return to a lower tax level is driven to keep the healthcare REIT’s competitive in comparison to neighbouring countries and because of its high tax returns and societal value.  Also several municipalities were impacted by a higher rent cost because of this measure.
  • This newly reduced fiscal regime is not applicable to residential REIT’s which means there is an important financial impact according to the activities of the listed REIT’s in Belgium.

Belgium has since 1995 a REIT-like framework for companies investing in property. The REIT (Real Estate Investment Trust) has been used in the United States since decades and offers a/o tax transparency (no corporate tax on the company), simplified financial reporting & enhanced transparency (no depreciation on property which is regularly appraised by an external appraiser) and a minimum dividend payout (at least 80% of recurrent income has to be paid out as dividend to shareholders). The sector enthusiastically embraced the new system with today 17 REITs listed on the Brussels SE and representing a market value in excess of EUR 10 bn.

Reduced rate

According to a press release from the Belgian Ministry of Finance issued last June, withholding tax (WHT) on dividends paid by Belgian REITs active in ‘healthcare property’  will benefit again from the reduced rate of 15% instead of the regular 27% applicable to most dividends and interest payments originating in Belgium. As a reminder, the regular WHT rate was already raised from 25% to 27% in January 2016. Amid laborious budgetary talks, the ‘normal’ rate of 27% is now rumoured to rise to 30% as from 2017. To make things even more confusing  some political forces plead for measures ‘encouraging investments in shares’. What are the underlying forces behind these contradictory moves and what can investors expect in the coming months ?

The Belgian withholding tax is very important as it has been up to now the main way to tax income from capital next to the ‘tax on stock exchange operations’ (‘TOB’) and the newly introduced ‘speculation tax’ due on capital gains realised on shares, options and other listed instruments owned for a period shorter than 6 months. The rate is also very important as the WHT is paid in full discharge (‘libératoire’) for private investors and not as a down payment ahead of the definitive taxation as it the case in many countries. In other words, the WHT rate is the effective tax rate paid on dividends.

The only way is (unfortunately) up…

The chaotic and rapidly changing evolution of the taxation on dividends in Belgium (see table below) reflects several underlying constraints and motivations which can be summarized as follows: the ever high budgetary needs of a highly indebted Belgian state, retain the fiscal attractions of the Belgian REIT, keep taxes as simple as possible and, last but not least, help ‘social needs’.

The first item is simple; considering the ever-difficult state of Belgian public finances, lower taxation of dividends is wishful thinking and any ‘tax favour’ has to be ‘compensated’ elsewhere. This is all the more true in a context of ‘tax shift’ in Belgium i.e. shift taxation from labour to other income classes such as, you guessed, dividends.  

The second point, preserving the fiscal attractiveness of the Belgian REIT, is also important as Belgium is poised to compete with similar REIT structures in the neighbouring countries and preserve what is now a flourishing and tax-producing sector. Indeed, even if REITs do not pay corporate tax, they still generate significant income for the state coffers including withholding tax, exit tax (one-off tax when a company adopts the REIT regime) and other taxes (subscription tax, property taxes…).

Keep it simple please

Simple and efficient taxes are very important in order to minimize the cost of collecting taxes and headaches for the taxpayer. A good illustration thereof is the tax reform of 2012 rising the regular WHT rate to 21% but with an added 4% tax on investment income above EUR 20,020. In other words, the WHT was no longer purely made in full discharge and needed lots of administration in order to be implemented. Needless to say, this reform was short-lived and abandoned the next year (‘plain’ rise of the WHT rate to 25%). This also explains why the recent ‘speculation tax’ (on ‘normal’ equities, Belgian REITs are not subject to this tax) and new planned taxes on capital gains are much more complicated than simply rising the WHT rate and their fiscal efficiency uncertain.

Listed property can be social

Last but not least, taxes are routinely used by states for ‘societal’ issues such as promoting housing, meeting shortcomings in healthcare housing or whatever is deemed as a socially desirable. This is the point behind the above-mentioned ‘tax shift’ (encourage employment by taxing labour less) but also behind the long-time favourable WHT rate for REITs investing in residential property; the rationale of the State was to help REITs investing in residential property as they have to cope with low market yields, property taxes (by law cannot be passed on to the tenants) and well-protected tenants.

The latest reform of end 2015 rises the WHT (again) to 27% and abolishes the lower rate for residential REITs; as a result, dividends from residential REITs originally taxed at 0%, have witnessed a dramatically higher taxation in just 4 years. Hence, as a (partial) compensation, and in order to avoid some undesirable side effects (several municipalities paying substantially higher rents  to listed REIT Care Property Invest), the current Finance Minister announced that WHT for ‘healthcare REITs’ will fall to 15% as from January 2017. Note that this is only a partial compensation as healthcare property (nursing homes, services flats…) was previously qualified as residential property but ‘plain’ residential property such as ‘normal’ flats do not qualify as healthcare property.

REITs concerned by the announced  measure (but not yet officially published as law) would be Aedifica and Care Property Invest (CPI), both mainly invested in healthcare property, but not Home Invest Belgium (HIB) which benefitted till end 2015 of the reduced tariff as a ‘residential REIT’. CPI can contractually pass on the effects of a higher WHT to its ‘historic’ tenants and did already so in 2013 (WHT on residential REITs from 0% to 15%) In other words, the government tax hesitations will only be an administrative nuisance for Care Property but somewhat negative for CPI shareholders not subject to Belgian WHT. For Aedifica, this move is positive as the company could not pass on the effects of the higher withholding tax on its tenants. In other words, while we do not expect gross yield to be fundamentally affected, Aedifica shareholders subject to Belgian WHT will be relieved to see their net yield rise by ca. 16%. Alongside HIB, this new reform barely one year after the last one is quite negative for the image of Belgium and the stability of its tax regulations.

Higher WHT rates are unavoidable in the current Belgian fiscal and political context as this a simple & straightforward way to increase tax proceeds. New taxes on capital gains are both more complicated and less efficient but could be adopted anyway for political reasons. On a more positive tone, one cannot rule out that other forms of property enjoy (again) a lower WHT in the future such as affordable and social housing  or property devoted to public services (schools, nurseries…).

 

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