Atty. Gregorio B. Austral, CPA
The REIT Act: A Lawful Means of Foreign Investments in Real Estate
We all know that ownership of lands in the Philippines is reserved for Filipinos only or for domestic corporations whose Filipino equity is at least 60% of its capital. In the case of nationalized industries such as those involved in land ownership, the Anti-Dummy Law applies. It is therefore a legal impossibility for foreigners to own land in the Philippines. This is clearly provided under Section 7, Article XII of the 1987 Constitution which states: “Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations or associations qualified to acquire or hold lands of public domain.” In a long line of cases, the Supreme Court has declared as illegal any scheme or arrangement that allows a foreigner to exercise ownership rights over private lands. This policy discourages foreign investors to invest their money on business ventures involving ownership of lands.
The Real Estate Investment Trust (REIT) Act is one law that provides opportunities for citizens of other countries to invest their money in real estate businesses. The Act provides for the regulatory and tax incentives frameworks for: (a) real estate companies to raise cash publicly listing their income generating assets such as malls or office building; and (b) investment scheme that assists in funding and development of infrastructure projects, and also promote investors’ interests. According to Dean Cesar Villanueva, from the capital market point of view, the REIT is intended to attract foreign investors and fund managers to make investments into the real-estate market of the country through the shares of stocks of the REIT.
Despite the inclusion of the word trust in its title, the REIT Act does not allow the setting of a business trust to pursue the objectives it sets. The Act mandates that it would be a corporation that would be employed as the pool of investors’ funds to purchase and manage real estate assets. To be entitled to tax incentives and benefits, a REIT must comply with the following terms and conditions, thus: (a) register with the Securities and Exchange Commission as a stock corporation with minimum paid-up capital of P300 million, from not less than 1,000 public shareholders, having a minimum of 50 shares each; (b) submit a REIT Plan which would provide to investors clear information on the source of dividends; (c) duly listed with the Philippine Stock Exchange (PSE); (d) at least 75% of its assets must be in income-generating real estate assets such as offices, apartment buildings, hotels, shopping centers, hospital warehouses, and highways; (e) annually distribute to shareholders at least 90% of net income, which must be derived from not less than 70% of total assets; and (f) total borrowings and deferred payments should not exceed 35% of deposited property.
The REIT grants the following tax benefits for employing the REIT: (a) 30% of the corporate income tax on the REIT net taxable income after deducting the compulsory 90% dividends distribution to its shareholders; (b) exemption from the Minimum Corporate Income Tax (MCIT); (c) transfers of property and accompanying security arrangements to the REIT would be subject only to 50% of the applicable documentary stamp tax; (d) subject to lower creditable withholding tax of 1%; and (e) exemption from the initial public offering tax when listing its shares.
With the foregoing incentives, the REIT may be considered a good alternative to real estate investments in the Philippines. However, it is suggested that the revisited after years implementation since some requirements appear to be difficult to comply. (Based on the Chapter on Real Estate Investment Trust (REIT) Act, Commercial Law Review, by Cesar L. Villanueva and Gabriel S. Villanueva, 2015 Edition, pp. 932-934).