25 January 2020 – El Confidencial

Much ado about nothing. The draft legislation to tax the profits of Spain’s Socimis, as proposed by the new PSOE-Podemos coalition government, is barely worth the paper it is being written on. The measures have no real capacity to raise funds nor will they have any impact on the price of rental homes.

As it currently stands, Socimis (the collective investment vehicles that specialise in rental properties) are exempt from paying corporation tax, provided they distribute at least 80% of their profits as dividends, as well as comply with a handful of other obligations. The Socimi structure is not unique to Spain; it is equivalent to the REIT structure, created in the US in the 1960s, which is now widespread across Europe.

The effect is the structure is that the shareholders of Socimis/REITS are forced to pay tax on their earnings, rather than the Socimis themselves. In Spain, the draft legislation states that the remaining 20% of Socimis’ profits will now be subject to corporation tax at a rate of 15%. But, if a Socimi distributes 90% of its profits as dividends, then it will only pay tax on the remaining 10%. If it distributes 100% of its profits as dividends, then it will continue to pay no tax.

In the case of the large Socimis, such as Merlin, Colonial and Lar España, which are all listed on the main stock market, the impact of the new legislation will be negligible since they distribute almost all of their profits, if not more, as dividends.

In the case of the rest of the Socimis, the vast majority of which are listed on the Alternative Investment Market, the reality is that they have not been created nor do they operate within the spirit of the law. A few, such as Millenium and Castellana Properties, would like to join the main stock market when they are large enough, but most are simply used by family offices and large international funds to avoid corporation tax. As such, expenses or intragroup loans will likely be “created” to reduce their profits sufficiently.

Original Story: El Confidencial

Translation/Summary: Carmel Drake

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