Belgium recently introduced the regulatory framework for an attractive new real estate investment vehicle, the specialized real estate investment fund (gespecialiseerd vastgoedbeleggingsfonds (GVBF) / fonds d’investissement immobilier spécialisé (FIIS)) (SREIF).
This new type of closed-ended fund will target qualifying professional investors only, and will be subject to "light-touch" supervision. A fast registration procedure is available and no license is required. In terms of investment policy, no diversification requirements or limits on leverage apply, and the fund may hold real estate in Belgium as well as abroad. To the extent a SREIF qualifies as an "alternative investment fund" under the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD), its manager is in principle subject to that directive (as implemented in Belgium).
The fund offers interesting new opportunities to structure investments for both Belgian and foreign institutional investors in Belgian, as well as foreign real estate portfolios. Investment and operational income is exempt from corporate taxation at the level of the SREIF. In addition, a favorable treatment applies in relation to income derived by the fund from foreign real estate income.
Fast registration and "light touch" supervision
Since only institutional investors are allowed to invest in SREIFs, SREIFs are subject to a very light regulatory regime. The fund must apply for registration with the SPF Finances (Ministry of Finance). The SPF Finances carries out a check to assess whether the relevant formal requirements1 are met ("check the box"), but does not proceed to any further checks, e.g. no check on the investment policy, valuation of the assets, creditworthiness of the fund, etc. In principle, the registration process can be completed within 30 business days of the date on which the file is complete.2
SREIFs are not subject to ongoing prudential supervision by the Belgian FSMA (the financial conduct authority), although the FSMA can monitor matters such as (i) whether an SREIFs does indeed only target qualifying investors (see below) and (ii) compliance with the AIFMD requirements by the manager (to the extent the SREIF qualifies as an AIF for purposes of the AIFMD – in that respect, see below).
The fund offers interesting new opportunities to structure investments for both Belgian and foreign institutional investors in Belgian, as well as foreign real estate portfolios.
Target investors: qualifying investors
A SREIF is only open to "qualifying investors". There are two types of qualifying investors:
- professional investors and eligible counterparties, within the meaning of MiFID; and
- "opt in" professional investors: any type of legal entity, under Belgian or foreign law, may register with the FSMA to qualify as "opt in" professional investors. This feature opens the vehicle to a large group of potential investors. Note, however, that individuals cannot opt in.
SREIFs must take a number of measures in order to ensure that their securities are held by qualifying investors only, such as including a transfer restriction banner on all documents relating to the financial instruments they issue, solely issuing financial instruments in registered form and refusing to register transfers of their financial instruments in their register if the transferee is not a qualifying investor. In addition, SREIFs may not list securities on a regulated market or multilateral trading facility open to the public.
If a financial instrument issued by an SREIF ends up being held by a non-qualifying investor as a result of the intervention of a third-party, the SREIF will not lose its status as an SREIF to the extent that it is able to demonstrate that it has taken all the necessary measures to ensure that the financial instruments issued by it are held by qualifying investors alone.
SREIFs can issue shares as well as bonds and other types of financial instruments and are not subject to a minimum number of investors’ requirement.
Application of the AIMFD
To the extent that it qualifies as an "alternative investment fund" under the AIFDM, an SREIF is in principle subject to that directive (as implemented in Belgium). This means that the manager of such SREIF must comply with the AIFMD’s requirements regarding, for example, obtaininga license, liquidity requirements, the appointment of a custodian, etc. However:
- the de minimis exemptions under the AIFMD can apply (assets under management of less than EUR100mio, or less than EUR500mio in case there is no leverage); if so, then only limited notification and reporting obligations apply; and
- even if a real estate investment fund does not qualify as an alternative investment fund under the AIFMD, it can still opt to be an SREIF in order to benefit from the favorable tax treatment that this regime confers. This would be relevant for, among others, the following types of entities exempt from the AIFMD: (i) entities with only a sole investor, (ii) employment participation schemes and (iii) family offices.
Investment policy and regulatory requirements
Very limited restrictions on investment policy
SREIF investments are subject to very limited restrictions:
- Broad range of real estate assets : Investments must be limited3 to "real estate assets", irrespective of the location of such assets, including (subject to certain conditions) investments in real estate held through foreign REITS and public concessions. Subject to certain conditions, SREIFs can even be lessors or lessees ;
- Minimum assets under management : At the end of the second financial year following registration as an SREIF, the aggregate value of the real estate assets held by the fund must amount to at least EUR10mio ;
- No diversification requirement : an SREIF may invest in one single asset or in only one type of real estate assets ;
- No leverage limitation : No leverage limitation applies ;
- Hedging transactions : To the extent it is not for speculative purposes and consistent with a pre-established policy, SREIFs may purchase hedging instruments ;
- No activities as a property developer : SREIFs may not act as property developers ; and
- Disclosure of the investment policy : The articles of association and information document of any SREIF must specify the type of assets in which the SREIF is allowed to invest, the investment policy of such SREIF, and, as the case may be, any self-imposed diversification requirements or leverage limitations (as indicated above, there are no such mandatory requirements or limitations).
Calculation of the net asset value by an independent expert
The net asset value of a SREIF must be calculated at least once at the end of every financial year (though the fund regulations may require a more frequent calculation of the net asset value).
The valuation of the real estate must be carried out by an independent expert.
A valuation of the real estate by an independent expert is also required in the case of a merger, demerger or similar transaction or a contribution of a universality of assets or a branch of activities. This valuation is not binding upon the SREIF, but the SREIF will need to provide a specific justification for the transactions in light of the independent valuation. An independent valuation is also required for acquisitions or transfers of real estate assets representing more than 1 per cent. of the consolidated net assets of the SREIF. A differential between the sale or purchase price of the applicable assets and the valuation by the independent expert in excess of 5 per cent. triggers a specific requirement to justify the transaction in the annual report of the SREIF.
Specialized recognized auditor required
SREIFs must appoint an auditor recognized by the FSMA. The auditor is subject to specific rules with respect to appointment, replacement, independence and remuneration.
Information document and annual financial report
SREIFs must make an information document available to prospective investors, prior to the investors making their investment decision. The information document must, among other things, include information regarding investment and dividend policies, as well as costs and fees payable to the manager of the SREIFs must also publish an annual financial report, which must include an inventory of the real estate that is held. For each category of real estate held by a SREIF, the purchase price, value insured and real value (as determined by the independent expert) must be listed.
Accounting according to IFRS
The accounts of a SREIF must be prepared according to IFRS.
Mandatory distribution of profits
SREIFs must distribute no less than 80 per cent. of their distributable profits.
Duration of the SREIF and exit
Maximum duration of 10 years, subject to extensions
SREIFs may be established for a maximum of 10 years only (as from incorporation, or, as the case may be, registration of the list of SREIFs). If permitted by the articles of association, the general meeting of shareholders may extend the duration of a SREIF for subsequent periods of 5 years4. Absent an extension of its duration, a SREIF will be liquidated upon reaching its statutory maturity (the SREIF status will nevertheless be maintained during the liquidation procedure).
Exit by investors
Since SREIFs are closed-ended funds, investors may not request the redemption of their shares. Investors will be allowed to exit: (i) at the end of the duration of the fund (10 years, unless extended), (ii) if the shareholders decide to liquidate the fund early or (iii) upon transferring their shares or other financial instruments (subject to compliance with any applicable transfer restrictions). As mentioned above, investors may only transfer their shares or other financial instruments to other qualifying investors.
Favorable tax regime benefiting SREIFs and their investors
Tax treatment of SREIFs
SREIFs are subject to corporate income tax, but similarly to the rules applicable to other regulated investment funds, the taxable basis is in principle limited to "abnormal or benevolent advantages" and rejected deductible expenses. This means that the operational and investment income (e.g. income from leases) received by the SREIF will beexempt from corporate income tax, making the SRIF a tax transparent vehicle in this respect. Like other Belgian regulated investment funds, SREIFs are subject to a tax of 0.01 per cent. calculated on the basis of the assets invested.
No stock exchange transaction tax
Transactions in the fund units are not subject to the stock exchange transaction tax.
Upon registration of an SREIF, a specific "exit tax" of 16.995 per cent. is due on latent or realized capital gains. Such "exit tax" is also triggered when a company contributes assets to a SREIF.
Specific WHT exemptions
The availability of specific WHT exemptions forms an important feature of the new fund.
SREIFs are exempt from WHT with respect to distributions to foreign investors, insofar as these distributions stem from foreign real estate. Other existing exemptions from WHT may also apply, as well as access to existing double taxation treaties. Distributions to Belgian corporate investors also benefit from a favorable regime to the extent that these distributions are sourced from foreign real estate income.
Entry into force
The relevant Royal Decree entered into force on 28 November 2016. Some tax benefits are already available for 2016 with respect to income generated after 1 July 2016.
1 The formal requirements are limited: an application must contain a copy of the articles of association of the company, a copy of certain documents required by company law, a declaration by the company that the legal requirements for the status as SRIF are fulfilled and evidence of the appointment of a custodian under the AIFMD (to the extent the AIFMD applies).
2 Article 4 of the Royal Decree of 9 December 2019 with respect to specialized real estate investment funds (the Royal Decree).
3 Liquidities and limited ancillary or temporary investments are nonetheless allowed.
4 For the first meeting, the quorum is constituted by investors representing at least half of the capital. The second meeting is not subject to a minimum quorum requirement. Note, however, that the decision to extend the duration of the fund must be approved by a unanimous vote (of all shareholders represented at the meeting).
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