The Spanish Reits: A Valuable Instrument for Spanish and International Investors to Take Advantage of the Recovery of the Spanish Real Estate Market

1. The Socimi Regime

SOCIMIs (Sociedad Anónima Cotizada de Inversión en el Mercado Inmobiliario) are Spanish collective real estate investment vehicles that enjoy a privileged tax regime, provided that certain legislative requirements are met. The law governing SOCIMIs (the “SOCIMI Law”) was passed in 2009 but created a more restrictive and unattractive legal and tax regime that failed to satisfy investors’ expectations.

The Spanish regime departed too far from the standard European model when implemented in 2009 (19% Corporate Income Tax rate and the requirement of a minimum of €15m in share capital) and combined with the significant economic downturn’s impact on real estate transaction activity, no SOCIMIs were actually incorporated before 2014.

From 2008 to 2013, the Spanish commercial real estate market contracted in terms of volume to the point that deal activity consisted of a limited number of relatively small-scale transactions each year and there was no longer a fully functioning investment market.

This negative trend has reverted since 2014, with that year marking the inflection point for the Spanish real estate market’s turnaround. Since the end of 2013, the improvement in macroeconomic indicators has boosted confidence in Spain, resulting in greater interest and investment flows from international investors, which judged it a good moment to enter the Spanish market by taking advantage of the bottom of the cycle.

The SOCIMI Law was amended in December 2012 to make the regime more attractive. The reforms successfully converted the SOCIMI into a flexible and attractive instrument to invest in Spanish real estate assets.

The new SOCIMI regime provides for a 0% Corporate Income Tax rate and removes the asset diversification and leverage limitations, allowing SOCIMIs to trade on Spain’s alternative investment market (Mercado Alternativo Bursátil). Combined with the recovery and improvement of the real estate sector, investment through SOCIMIs has been boosted significantly. Listed SOCIMIs have accounted for almost 33% of the total investment volume in Spain and close to 75% of domestic investment (Source: Savills Market Report – Spain Investment, February 2015). SOCIMIs also accounted for over 20% of the total investment volume in the first quarter of 2015, maintaining the high levels of investment seen in 2014.

The SOCIMI structure has become one of the preferred routes for international investors seeking to benefit from the Spanish real estate market’s recovery. Foreign investors have their eyes on “blind pool listings” and others look for tailored structures, including the conversion of former standard real estate companies into SOCIMIs. For foreign REITs interested in Spanish real estate, the use non-listed SOCIMIs may also be an option, benefiting from 0% taxation under certain circumstances.

Naturally, local investors such as Spanish family offices or certain family-run business can also benefit from this advantageous regime solving specific issues (limitations on the deductibility of interest expenses, benefiting from a more favorable divestment regime, etc), including a reduction of its tax invoice. It is therefore worth revisiting their structures.

2. Requirements of the Socimi Regime

A) Corporate form and listing

The SOCIMI must take the form of a joint stock corporation (Sociedad Anónima) with a single class of registered share capital (minimum of EUR 5 million fully subscribed). The SOCIMI’s shares must be in registered form and nominative, being this requirement met if the shares are represented in nominative book entry form. This trading requirement must be met within 24 months of the election to become a SOCIMI.

In addition, the SOCIMI must be listed on a regulated market (for example, one of the four Spanish Stock Exchanges) or multi-lateral trading systems (such as the Spanish Mercado Alternativo Bursátil or MAB) either in Spain, in the European Union, in the European Economic Area or in any jurisdiction with which there is an effective exchange of tax information agreement with Spain.

As a general rule, the minimum free float for listing on the Spanish Stock Exchanges is 25%. In the case of MAB listing, shares representing either (i) 25% of the total share capital of the SOCIMI, or (ii) an aggregate estimated market value of €2 million, are distributed among investors holding individually less than 5% of the total share capital of the SOCIMI. Such calculation will include the shares made available to the liquidity provider to carry out its liquidity duties. No minimum number of shareholders is required by the MAB regulations and, in practice, their shares are not widely distributed among shareholders. However, as a listed entity, an actual free float requirement must be appropriately met.

B) Purpose and activities

The SOCIMI must have the following as its main corporate purposes:

  1. Acquisition, development and refurbishment of urban properties to be leased;
  2. The holding of shares of other SOCIMIs, collective real estate investment funds or foreign listed REITs that meet similar requirements to those applicable to SOCIMIs;
  3. The holding of shares in non-listed Spanish or foreign companies whose corporate purpose is the acquisition, development and refurbishment of urban properties to be leased, provided that they have the same compulsory dividend distribution obligation as that which applies to SOCIMIs and the same investment requirements and wholly owned by SOCIMIs or foreign REITs (“Sub-Socimi“).

The SOCIMI can only invest in one tier Sub-Socimis (i.e. only one level of Sub-Socimis is available); Sub-Socimis cannot hold shares in other companies. Any foreign subsidiaries must be tax resident in a jurisdiction which effectively exchanges tax information with Spain.

SOCIMIs are allowed to carry out other ancillary activities that do not fall under the scope of their main corporate purpose. However, such ancillary activities must not exceed 20% of the assets or 20% of the revenues of the SOCIMI in each tax year.

C) Investment and income requirements: 80%-20% rules

At least 80% of the SOCIMI’s assets must be invested in:

  1. Urban properties for lease;
  2. Land for development into urban properties for lease (if the development activities start within the 3 years following the acquisition);
  3. Shares in SOCIMIs, foreign REITs, Sub-Socimis or real estate collective investment funds.

There are no asset diversification requirements: the SOCIMI is entitled to hold one single asset. These qualifying assets must be held for a minimum three year-period from its acquisition date (or from the first day of the financial year when the company became a SOCIMI if the asset was held by the company before becoming a SOCIMI).

This 80% threshold should be calculated on a consolidated basis, taking into account the SOCIMI and its qualifying subsidiaries and the gross value of the assets (without taking into account depreciation or impairments).

At least 80% of the SOCIMI’s net income, excluding income arising from the sale of qualifying assets after the minimum three-year holding period has expired, must derive from:

  1. Leasing of qualifying real estate to non-related parties; or
  2. dividends from SOCIMIs, Sub-Socimis, foreign REITs, or real estate collective investment funds.

The Spanish tax authorities consider that the annual income should be measured on a net basis, taking into consideration direct income expenses and a pro rata portion of general expenses. These concepts should be calculated in accordance with Spanish GAAP.

All income obtained by the SOCIMI (including 20% income deriving from other non-qualified assets) is taxed a 0% Corporate Income Tax Rate provided the 80%-20% rules on assets and income are met.

Capital gains derived from the sale of qualifying assets are in principle excluded from the 80%/20% net income test. Conversely, the sale of qualifying assets before the end of the three year period implies that (i) such capital gain would compute as non-qualifying revenue; and (ii) such gain (and the rental income generated by the asset, if any) would be taxed at the standard Corporate Income Tax rate (28% for 2015 and 25% for 2016 onwards).

D) Dividend distribution

The SOCIMI is required to adopt resolutions for the distribution of dividends within the six months following the closing of the fiscal year of: (i) at least 50% of the profits derived from the transfer of real estate properties and shares in qualifying subsidiaries and real estate collective investment funds ( provided that the remaining profits must be reinvested in other real estate properties or participations within a maximum period of three years from the date of the transfer or, if not, 100% of the profits must be distributed as dividends once such period has elapsed); (ii) 100% of the profits derived from dividends paid by Sub-Socimis, foreign REITs and real estate collective investment funds; and (iii) at least 80% of all other profits obtained (e.g., profits derived from ancillary activities). If the relevant dividend distribution resolution was not adopted in a timely manner, a SOCIMI would lose its SOCIMI status in respect of the year to which the dividends relate.

In our view, the investment model for the SOCIMI should ensure that the dividend distribution requirement is met. However, in circumstances where SOCIMI’s leasing business does not generate enough cash to service debt and pay compulsory dividends in cash, the Spanish tax authorities have previously accepted that this requirement is met if the dividends are declared, but the resulting credit against the SOCIMI, net of withholding taxes, is immediately capitalised by the shareholders.

3. SOCIMI Tax Regime

A) Opting into the SOCIMI regime

The decision to apply the SOCIMI regime has to be agreed by the shareholders in a general meeting and communicated to the Spanish tax authorities before the last three months of the fiscal year (i.e. before 1 October if the fiscal year coincides with the calendar year). The tax regime is applicable from the beginning of the fiscal year in which the communication is duly filed with the Spanish tax authorities.

It is possible to opt for the SOCIMI regime even if its requirements are not met, subject to the SOCIMI meeting the requirements in the two years after the date on which the option was made. However, certain requirements of the SOCIMI regime are essential and must be met on the date on which the option is elected: (a) the dividend distribution policy; (b) main corporate purpose; and
(c) the registered nature of the shares.

The SOCIMI will lose the benefits of the tax regime if certain circumstances take place or if certain failures are not cured the following year. In such a case, certain taxation may be triggered and the entity will not be eligible for the SOCIMI regime for three years.

B) Corporate Income Tax

Generally, all income received by a SOCIMI or a Sub-Socimi (including capital gains) is taxed under CIT at a 0% rate. Nevertheless, rental income and capital gains stemming from qualifying assets being sold prior to the end of the minimum holding period (three years) would be subject to the standard CIT rate (28% in 2015 and 25% for 2016 onwards).

The SOCIMI will not be entitled to tax losses carried forward and tax credits, although if the company had any of such tax assets in its balance sheet before its application for the SOCIMI tax regime, those assets could be used if the SOCIMI obtains income or gains subject to the general CIT rate.

Nevertheless, the SOCIMI will be subject to a special 19% levy on the amount of the gross dividend paid to shareholders which do not qualify for the SOCIMI regime and which own 5% or more in the capital of the SOCIMI and are exempt from any tax on the dividends or not subject to tax at, at least, a 10% rate on dividends received from the SOCIMI. The Spanish Tax Authorities have issued certain rulings stating that the 10% test to be carried out in order to identify substantial shareholders shall be focused on the tax liability arising from the dividend income considered individually, taking into account (a) exemptions and tax credits affecting the dividends received by the shareholder, and (b) those expenses incurred by the shareholder which are directly linked to the dividend income (e.g., fees paid in relation to the management of the shareholding in the relevant SOCIMI distributing the dividends, or financial expenses (interest) deriving from the financing obtained to fund the acquisition of the shares of the relevant SOCIMI). In addition, the Spanish Tax Authorities have confirmed that the withholding tax levied on a dividend payment (including any Non-Resident tax liability) should also be taken into consideration by the shareholder for assessing this 10% threshold. Hence, if these dividends are subject to withholding tax in Spain at a rate equal to, or higher than, 10%, said 19% levy should not be triggered. Otherwise, a careful review will need to be carried out of the substantial taxation of the shareholders’ dividend.

C) Taxation of non- resident Shareholders

Dividends distributed to non-resident Shareholders not acting through a permanent establishment in Spain are subject to Non-Resident Income Tax (“NRIT”), at the standard withholding tax rate at 20% (19% for 2016 onwards). No exemptions are allowed on dividends distributed by a SOCIMI.

This standard rate can be reduced upon the application of a convention for the avoidance of double taxation (“DTC”), or eliminated as per the application of the EU Parent-Subsidiary Directive as the SOCIMI may qualify for its application according to the Spanish Tax Authorities criterion (the application of the EU Parent-Subsidiary withholding tax exemption requires the fulfillment of certain requirements and includes an anti-abuse provision when the majority of the voting rights of the parent company are held directly or indirectly by individuals or entities who are not resident in a EU Member State or in a European Economic Area).

Capital gains derived from the transfer or sale of the shares are deemed income arising in Spain, and, therefore, are taxable in Spain at a general tax rate of 20% in 2015 (19% in 2016 onwards), unless the relevant DTC prohibits Spain from taxing such capital gains.

Nevertheless, capital gains obtained by non-Spanish Shareholders holding a percentage lower than 5% in a listed SOCIMI will be exempt from taxation in Spain provides the shareholder is tax resident in a country which has entered into a DTC with Spain which provides for exchange clause information (most of the DTC entered into by Spain). This exemption is not applicable to capital gains obtained by a non-Spanish shareholder acting through a country or territory that is defined as a tax haven by Spanish regulations

Diego Montoya Esteban

Diego Montoya Esteban

Senior Associate at Uría Menéndez

Email: [email protected]
Tel: +34 91 586 05 82

Diego advises on corporate tax law, tax aspects of real estate investments, indirect and local taxation, and regularly advises on corporate restructuring transactions. He has extensive experience in advising on inbound and outbound investments, tax audits and all types of appeals before the tax tribunals and courts, including the Supreme Court.


About Diego Montoya Esteban

Email: [email protected]
Tel: +34 91 586 05 82
Diego advises on corporate tax law, tax aspects of real estate investments, indirect and local taxation, and regularly advises on corporate restructuring transactions. He has extensive experience in advising on inbound and outbound investments, tax audits and all types of appeals before the tax tribunals and courts, including the Supreme Court.