Singapore’s rules for real estate investment trusts (REITs) have changed. The Inland Revenue Authority of Singapore (IRAS) released a new guide to help investors understand how REITs will be taxed going forward as Singapore aims to strengthen its position as an REIT hub in Asia.

Income Tax on REITs Under the New Guidelines

Tax concessions on REITs have been extended through 31 March 2020. The current treatment for REITs allows for all trusts listed on the SGX to benefit from a myriad of tax concessions. A trustee of an REIT that distributes 90% or more of the income earned by the REIT to unit holders enjoys tax transparency.

Tax transparency will not be applied if the trust sells real estate.

Sales of real estate through an REIT will be considered capital gains. Distributions to a Singapore branch from a foreign trustee will not be subjected to withholding tax.

Listed REITs will also maintain the following concessions:

  • Non-tax residents or non-individual investors will still enjoy a concessionary income tax rate of 10%.
  • Tax exemptions for foreign-sourced income will remain. Income may include:
    • Branch profits
    • Distributions
    • Dividend income
    • Interest income

The tax exemption only applies to foreign-sourced income if the REIT is listed. Subsidiary companies of the REIT will enjoy the same benefits if they’re wholly-owned. Overseas properties are subject to the following conditions:

  • Tax exemption is granted only if the property is acquired by the trustee on or before 31 March 2020.
  • The property remains beneficially owned by the REIT’s trustee or its Singapore tax resident subsidiary company.

Real estate trusts were initially allowed to earn income from foreign properties in their portfolio without paying taxes indefinitely. The benefit, introduced a decade ago, was an incentive that was slated for an indefinite period. When the 2010 budget was introduced, the expiry date was changed to 31 March 2015.  The 2015 budget allowed for these benefits to be extended for a period of five years.

Stamp Duty Concessions Have Expired

Stamp duties on Singapore properties have been exempt since 2005. These concessions have been allowed to expire. Previously, two stamp duty concessions were available to REITs in Singapore:

  1. Remission on the transfer of an immovable property in Singapore to a REIT
  2. Remission on the transfer of 100% of issued share capital for properties outside of Singapore transferred to a Singapore-incorporated company.

The IRAS has allowed these two stamp concessions to expire. The concessions were set forth with the intention of allowing the industry to grow and expand overseas. Growth and expansion goals have been met, allowing stamp duty concessions to expire.

Trusts that have a portfolio made entirely of Singapore properties face a maximum duty of 3%. The duty corresponds to the value of the properties that the trust acquires.

Singapore has listed over 30 REITs and business trusts in the country since 2002 due to the tax-efficient structure that is in place.

Gross Distribution of an REIT to Foreign Citizens

The gross distribution of an REIT to a non-Singapore national will be taxed at a rate of 10%. The reduced tax rate does include specific requirements that must be met to benefit from the tax reduction.

  • Recipients must not have a permanent establishment in the country.
  • The recipient must not conduct other forms of activity in the country.

MAS Changes to Strengthen REITs

The Monetary Authority of Singapore (MAS) announced on 2 July 2015 numerous changes to the REIT sector with the goal of strengthening the market in response to industry feedback. The changes that were made have an impact on how much operational flexibility is given to REITs.

Two changes of note for operational flexibility include:

  1. The development limit on deposited property has had its limit increased from 10% to 25%. The change requires the added 15% to be used on a property that has been: held by the trust for at least 3 years and the REIT will continue to own for an additional 3 years following redevelopment of the property. Redevelopment in this case refers to “building works,” in accordance with the Building Control Act.
  2. REITs with credit ratings will now have a single-tier leverage limit equating to 45% instead of a previous upper limit of 60%. REITs without a credit rating will have a 35% leverage limit.

The single-tier leverage limit will have a major impact on REITs in the country.

An increased leverage limit is good news for Singapore REITs. Two-thirds of REITs in the country have a credit rating and could benefit from leverage ratios as high as 60% previously, but most REITs have leverage ratios in the 35% range.

Increased leverage ratios will allow REITs to borrow more money, which will have an effect on balance sheets.

Several changes have been made to the requirements of managers and directors of a REIT. These changes include:

  • Independent Directors: Half of an REIT’s board must be comprised of independent directors. These directors will monitor the performance of the board and will help to balance the interests of both the REIT and its investors.
  • Manager Fees: Managers must explain how performance fees are derived. Furthermore, managers must justify how each fee is charged. The interests of unit holders and the company will be strengthened as a result. This practice is followed by many REITs already, but it is now a requirement.
  • Managers Must Prioritize the Interest of Unitholders: Managers now have a legal right to prioritize the interest of unit holders over themselves and their sponsors. If managers fail to adhere to this change, they may face jail time.

All of the changes set in motion by the MAS will take effect from 1 January 2016. The changes, especially the leverage ratio changes, will give REITs further control of their financial actions in 2016 and beyond.

Real estate investment trusts have been a thriving force for Singapore, and the changes made reflect the IRAS’s intent to ensure that Singapore REIT’s still offer the best returns in Asia. MAS has further strengthened the industry by listening to the recommendations and concerns of the industry.

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