Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
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"Each country has its own tax rules and is not bound by another country's tax rules. For multinationals operating in Europe, there is a lot of tax planning involved." puzzle for the EU," according to Tony Edwards, general counsel of NAREIT. "Each country has its own tax rules and is not bound by another country's tax rules. There is some tax uniformity on the citizen level, but not on the business level. For multinationals operating in Europe, there is a lot of tax planning involved." Numerous real estate groups in Europe recognized this as a problem in the mid-2000s, and a joint proposal in 2009 to the European Commission about REITs and cross-border property investment stated: "There is no single REIT regime within the EU; generally taxes are levied by each regime with the result that tax transparency can be lost. This leads to escalating tax charges, which make post-tax returns from a REIT noncompetitive when compared with other investment vehicles and prevents a REIT from being used as a PanEuropean investment vehicle." The absence of harmonious REIT taxation laws is limiting capital flows, especially in Europe, observes Chaim Katzman, chairman of Tel Aviv–based Gazit-Globe. Joe Houlihan, CEO of Cohen & Steers Europe in London, agrees. "We buy shares of listed real estate companies for our clients, and if a company is trying to save on taxes, creating this structure or that entity to make it work, then the investment becomes more com- 40 SCT / M A R C H 2 0 1 3 plicated, less transparent and more challenging for me to value," Houlihan said. "I put a higher risk-premium against it." He offers a broad example. "Germany has a rigid tax code, so some firms create a Luxembourg company or fund which ends up trading on a foreign stock exchange, like the London alternative exchange. It's tough to go through that ownership structure, because there is no transparency. If an investment takes so much time and effort to understand, I'll pass on it." Netherlands-based Corio is one of the largest listed retail property investors in Europe, with a portfolio of €7.3 billion (about $9.8 billion), 98 percent of which is shopping centers. Bas van de Putte, Corio's head of tax, is involved in investigating the harmonization of REIT taxation for the European Public Real Estate Association. The focus of these efforts, he says, is not to make radical changes, which would find little support in the EU, but to create a mutual-recognition system whereby each country recognizes the REIT customs of the others. Even this would be a stretch, he says. "It's probably not going to happen in the next two to three years," he said. "The EU at the moment has bigger issues than creating laws for the listed REIT sector." The question of EU legislation facilitating cross-border REIT investment is very complex, because some countries have such legislation, others do not, and those that do have differing REIT regimes, says Michael MacBrien, general director of the European Property Federation, in Brussels. "From the point of view of today's investor, it's a highly inconvenient situation," MacBrien said. European real estate groups promoted the EU REIT study and the subsequent blueprint for EU legislation presented to the European Commission in 2009. The global financial crisis that began with the failure of Lehman Bros. in 2008 changed everything, MacBrien says. "The banks became the numberone target of regulators, and real estate got caught up in that," he said. "The flavor of the month at EU level is to control the financial-services industry and those perceived to be linked to it. Renewed momentum for EU REIT legislation would require a return to growth in EU cross-border property investment and better identification of REITs with financial and real estate market safety and security." Though difficult, it is not impossible to create such cross-border structures, according to van de Putte. "It's possible between the Netherlands and France," he said. "We have one, for instance; we are investigating whether to do this for Spain, which seems promising, and for Germany. Van de Putte would like to get his company structured in such a way that the bulk of its investments are owned through REITs, but that would mean having to do partial lists in different countries. "It's not impossible, but it's not within our grasp," he said. Different jurisdictions have differing tax laws, and these jurisdictions fail to recognize the tax rules of the others. "Each sovereign country wants its own rules, and they want to impose taxes on business operations in a way that each country sees fit," said Edwards. Pessimism abounds. And so does optimism. "On a much broader level than REIT taxation, it would be helpful to have a more harmonized EU tax base," said van de Putte. "That is something that I expect is not going to happen for another five to 10 years. Every European country is too much involved with its own tax sovereignty." On the other hand, the varying country REIT regimes "will start converging with each other," Houlihan said. "Sooner or later someone is going to say it makes sense to have PanEuropean REIT legislation." SCT