Articoli
14/04/2016
Diritto Immobiliare

Real Estate investment trusts in Italy (SIIQs): Expanding the range of instruments available to investors

SIIQs (società di investimento immobiliare quotate), known as real estate investment trusts, are listed companies limited by shares, the corporate purpose of which is real estate investment. They are resident for tax purposes in Italy and the shares are issued and/or traded on the Italian regulated markets, as well as on EU Member States markets or those of the European Economic Area (included those belonging to the white list pursuant to article 168-bis of Presidential Decree no. 917/1986).

SIIQs were first introduced into Italian law in 2006 (Law no. 296 of 27 December 2006 (article 1, paragraphs 119 to 141)) as subsequently implemented by  Ministerial Decree no. 174 of 7 September 2007. At the end of 2015 there were only 3 SIIQs in Italy[1],notwithstanding the fact that the SIIQ scheme has been strongly encouraged through the grant of preferential tax treatment[2], over and above the tax applicable to the most common real estate investment funds.
Given the limited uptake in the use of SIIQs, Italy adopted Law Decree no. 133 of 12 September 2014, the so-called “Decreto Sblocca Italia”, and Law no. 164 of 11 November 2014. The structure of SIIQs has been heavily modified in order to increase their attractiveness for prospective investors, on one hand, and to offer an efficient and alternative – rectius complementary – structure in addition to traditional real estate investment funds.

Requisites
Article 20 of the Sblocca Italia Decree, amends the criteria that a company seeking to come within the SIIQ special regime needs to meet. In particular:

Ownership structure and control
The ownership limit has been amended. A single shareholder is now allowed to hold – directly or indirectly – no more than 60% (previously 50%) of the voting rights in the ordinary shareholders’ meeting as well as the rights to dividends. According to the Law Decree, in the event of a breach of this limit, as a result of extraordinary m&a or capital markets transactions, the SIIQ special tax regime shall be temporarily suspended until the requirement is restored.

Free float condition
At least, 25% of the shares (previously 35%) must be held by shareholders which – upon the exercise of the option to become a SIIQ – hold no more than 2% of voting rights in the ordinary shareholders’ meeting as well as the rights to dividends. Pursuant to the new provisions, this requirement applies to companies, which are already listed on the stock exchange.

Furthermore, a 3-year period (instead of the previous 2-year period) following the exercise of the option to enter the SIIQ scheme is granted to the SIIQ in order to fulfil the above conditions. Indeed, the special tax regime, consisting of an exemption to the main property taxes IRES and IRAP applies only after the fulfilment of the ownerships conditions;
Once a company has successfully become a SIIQ, it has to fulfil particular obligations in terms of targets and the structure of investments. In particular, the properties leasing activity has to be carried out by the company in compliance with certain asset and profit tests, jointly referred to as “predominance condition”:

  1. Asset test
    In order to fulfil the “predominance condition”, at least 80% of the overall assets have to be composed of leased premises, of shareholdings in other SIIQ (or SIINQ) or in “qualified” real estate investment funds[3];
  2. Profit test
    In addition, at least 80% of the overall income has to be generated by revenues relating to lease agreements or resulting from dividends arising out of (i) the rental activities carried out by SIIQs, SIINQs, “qualified” real estate investment funds or of (ii) gains on disposals of leased premises;  In the event of a persisting breach of the “predominance condition” during a period of 3 years (previously 2 years), the special tax regime ceases to apply;

As a result, SIIQs are now allowed to build up investment portfolios through the participation in “qualified” real estate investment funds, which are likely to remain under the management of the SGR (i.e. Asset Management Company). In this respect, the SGR system represents, in turn, the  need for products suitable for SIIQ investors.

Pay-out ratio
The Sblocca Italia Decree, in order to ensure greater competitiveness,, requires the distribution of 70% [instead of the previous 85%] of the net profit on an annual basis. In addition, the company has to distribute 50% of the net capital gains realised on the disposal of the leased premises, of the shareholdings in other SIIQs and SIINQs[4] and of participations in “qualified” real estate investment funds. The reduction of the pay-out ratio is intended as an attempt to grant SIIQs additional liquidity, thus, facilitating the carrying out of core transactions. For the sake of clarity, the main amendments can be summarized as follows:

Object of

the amendment

Previous

Regulation

Current regulation
Maximum percentage of voting rights and rights to dividends a single shareholder is allowed to hold 51% 60% within the 2° tax period following to the exercise of the SIIQ option. In the event of breach of this limit, as a result of extraordinary m&a or capital markets transactions, the special tax regime is suspended until the requirements are restored.
Minimum percentage of participation with no more than 2% of voting rights or rights to dividends 35% 25%. This requirement does not apply to companies already listed.
The properties leasing activity must be carried out in a predominant way Within 2 years of the option of the SIIQ regime Within 3 years of the exercise of the SIIQ option. Shareholdings in qualified real estate funds are included in the predominance condition set forth above.
Mandatory distribution of the net profit on an annual basis 85% 70% of the net profit. Further obligation to distribute 50% of the net capital gains realised, within 2 years following the completion, with the exemption from IRES add IRAP.

Real estate investment funds in liquidation and SIIQs

In line with the provisions of Law Decree no. 91 of 24 June 2014 (i.e. Decreto Competitività), converted by Law no. 116 of 11 August 2014 concerning the extension of the duration period granted to listed real estate investment fund, the new regulation resulting from the Sblocca Italia Decree encourages complementarity between SIIQ and real estate funds with particular reference to the funds’ winding-up process. In this respect, the conversion of the quotaholders’ assets into SIIQs shareholdings can occur through 2 different procedures namely A) contribution and B) assignment:

Contribution

The Sblocca Italia Decree promotes the idea whereby a real estate investment fund in liquidation, rather than winding up its real estate assets, grants the assets to a SIIQ, thus providing the investors with SIIQ’s shares, in exchange for quotas of the fund.

In this respect, it should be pointed out that:

  • in exchange of the transfer from the fund of “a number of mainly leased properties[1]”, the SIIQ may transfer equities to the fund’s quotaholders – in tax neutrality regime – and such equity assignment in favour of the fund’s quotaholders does not produce any income or revenues with reference to the relevant income tax;
  • although the transaction is exempt from VAT, the same does not affect the pro-rata deducibility calculation;
  • the contribution of a set of mainly leased real properties described above is subject to the payment of stamp duty, of the ordinary tax and of the cadastral duty at a fixed amount of Euros 200;
  • Furthermore, provided that the fund assigns the SIIQ’s shareholdings within 30 days, the discipline concerning the mandatory tender offer (e. OPA obbligatoria) as established in the article 106 of TUF does not apply to the case at issue.

In is understood that the contribution procedure described above may be carried out only provided that such transfer of the SIIQ’s shares in favour of the fund quotaholders does not affect the control criteria and free float condition required of SIIQs. The Sblocca Italia Decree provides that the minimum free float requirement equal to 25% does not apply to a company that is already listed. Therefore, a real estate company listed on the stock exchange may adopt the SIIQ structure even through a transfer of real property to real estate funds in liquidation without regard to the minimum free float requirement.

Assignment
Even with reference to a direct assignment of a number of mainly leased properties from a real estate fund being wound up to a SIIQ, the Sblocca Italia Decree provides that the transaction shall not be subject to VAT and shall subject to the payment of the stamp duty, of the ordinary tax and of the cadastral duty at a fixed amount of Euros 200. [The direct assignment of the properties in favour of the SIIQ assumes, as a matter of fact, the same SIIQs being a fund’s quotaholders, meaning that the SIIQ acquired and holds 100% of the fund’s value. Otherwise, it shall be necessary to settle in cash with all the residual quotaholders other than the SIIQ.]

As a general remark, with reference to both the contribution and assignment of the winding up real estate fund’s assets to a SIIQ, the following should be noted:

  • Should, for example, the shareholders of the asset management company (SGR) intend to acquire equity participations in the SIIQ, the regulation concerning the transactions with related parties shall apply;
  • the contribution or the assignment shall be the result of a decision made by the asset management company (SGR) in the exclusive interest of the quotaholders. Such aspect appears to be of the essence, since the lack of a clear decision-making process, exposes the investors to the “risk” to obtain SIIQ’s shareholding instead of the money resulting from the liquidation process concerning the fund’s real properties. Indeed, there is a significant difference between company shares and money: only the first, in fact, respond to dynamics pertaining to the company as well as to the relevant market, as a whole. In addition to the above, it should be noted that a decision entailing the contribution or the assignment, as described above, instead of the liquidation of the assets may be considered as an amendment to the fund regulation which requires the quotaholders meeting’s approval or, Banca d’Italia approval, in case no relevant provisions are included in the fund regulation;
  • furthermore, with reference to the SIIQ’s management, the asset management company (SGR) may be lawfully entrusted with operational tasks concerning the administration of the properties.

SIIQs and CIUs (Collective Investment Undertakings)

Given the above, the Italian legislator clarified – in Article 20 lett. b) of Sblocca Italia Decree – that the SIIQs are not a CIUs (Collective Investment Undertaking) and, therefore, they are not subject to the strict supervision of Banca d’Italia. Following the adoption of the well known EU Directive “AIFM” concerning the Alternative Investment Fund (FIA) managers, the national legislator felt the need to expressly point out the distinction between such FIAs[2] and the SIIQs. Indeed, even if the latter share with the first some of features (i.e. raising of capital, plurality of investors, investment aimed at providing a return to investors) there are differences:

  • first of all, the absence of a strict and predetermined investment policy. Unlike real estate investment funds, SIIQs are not subject to the obligation to define ex ante an investment/divestment policy, meaning that the entrepreneurial project may be completely overhauled over time;
  • since SIIQs are investment companies listed on the stock exchange, they are subject to the supervision of both Banca d’Italia and Consob and, above all, they are able to exert a higher appeal among foreign investors, who are definitely attracted by the transparency guaranteed by such kind of investment instruments;
  • the prevailing industrial/commercial purposes. In particular, SIIQs are characterised by, and developed around, a stable and long-term industrial/commercial policy. Nevertheless, such policy is subject to amendments, thus, making the SIIQ able to easily adapt to changing condition of the real estate market, to reflect the change of strategy imposed by the management due to controlling shareholders’ influence.

In conclusion, the range of the real estate investment instruments available has been extended and improved and the Italian real estate sector finally appears to be ready to attract, support and satisfy the needs of foreign investors for core investment and stable returns.

 

[1] Pursuant to the provisions of Circolare no.22/E issued by the Fiscal Authority (i.e. Agenzia dell’Entrate), on 19 June 2006, the requirement concerning the “plurality of real properties” is fulfilled when the transaction involves two or more real estate properties, from a cadastral standpoint, whilst as regards the “mainly leased” condition is considered to be met when the value of the leased premises is not lower than 50% of the overall value of the premises transferred or assigned to the SIIQ.

 

[2] Meaning both fund-shaped entities and corporate entities, like SICAF.

 

[1] Beni Stabili Siiq, IGD Siiq and AEDES Siiq (from November 2015)

[2] Essentially, the exemption of the business income resulting from the “non taxable activity” from IRES (imposta sul reddito delle società) and IRAP (imposta regionale sulle attività produttive).

[3] A “qualified” real investment fund is one that invests at least 80% of its overall assets in real estate leased properties, in participations in real estate companies or in similar investment funds or in equity in other SIIQ and SIINQ. 
[The revenues distributed by qualified real estate investment funds to SIIQs are not subject to the ordinary withholding tax applicable on the distribution of  dividends. This is an exception to article 7 of Law Decree no. 351 of 25 September 2001, which provides that revenues resulting from participation in investment funds are not taxed, unless such participation concerns commercial undertakings.]

[4] Not Listed Real Estate Investment Companies which: i) carry out the properties leasing activity in a predominant way, ii) are owned by one or more SIIQs to the extent of, at least, 95% of voting rights in the ordinary shareholders’ meeting as well as of rights to dividends and meet the requirements provided for the Group tax regime (so called “consolidato nazionale”), iii) opted for the SIIQ regime jointly with the parent SIIQ.

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