Overseas Filipinos get tax breaks on REITs investments

Overseas Filipinos investing in local real estate investment trusts (REITs) will be exempted from income tax or withholding tax on dividends from this new asset class for the next seven years, giving small investors an opportunity to take part in the local capital market.

The Bureau of Internal Revenue (BIR) is set to issue a new regulation upholding the seven-year tax exemption for overseas Filipinos investing in REITs, with the date of reckoning starting on Jan. 20, 2020, the day the new implementing rules were signed, Finance Undersecretary Antonette Tionko said in a recent briefing.

The tax exemption for overseas Filipinos who receive dividends from REITs was contained in the REIT Act of 2009.

The tax regulations were issued during the term of Revenue Commissioner Kim Jacinto-Henares in 2011 but REIT did not take off as an asset class then due to two issues. The first was that it was not acceptable for potential REIT issuers to sell down up to 67-percent ownership to the public. The old Philippines rules stated that the minimum public ownership should be 40 percent on year one, which would go up to 67 percent by year three. On the other hand, comparable requirements across the region were much lower: 20 percent in Japan, 25 percent in Singapore, Australia, Hong Kong and 30 percent in Malaysia.

Another major issue was that the BIR then subjected to the value-added tax the transfer of property to the REIT, making any prospective structure costly. This was, however, at a time when the government was trying to consolidate fiscal gains in order to merit investment grade status from major global rating agencies.

Under a new framework recently approved by the Department of Finance, Securities and Exchange Commission and BIR, the minimum public ownership requirement was reduced to 33 percent. The transfer of assets to the REIT is now tax-exempt.

To uphold the tax exemption for overseas Filipinos, Tionko said the BIR would only have to issue a revenue regulation pertaining to the date of the signing of the new implementing rules as the starting period for the seven-year exemption.Otherwise, cash or property dividends paid by a REIT are subject to a final tax of 10 percent, unless the dividends are received by a nonresident alien individual or a nonresident foreign corporation entitled to claim a preferential withholding tax rate of less than 10 percent pursuant to an applicable tax treaty.

A REIT gives investors the option to invest directly in the finished products that are already earning money—such as residential and office rental units, hotels or shopping malls or even infrastructure ventures like toll roads, telco towers, hospitals, warehousing/cold storage chains, and power plants—and not just the property developer itself. This was meant to attract investors because the Philippine REIT law of 2009 required the distribution of 90 percent of income annually.Finance Secretary Carlos Dominguez III is confident that overseas Filipinos, after buying a house or sending their children to school, can next look at investing in REITs as a way of improving their earnings as opposed to just putting their savings in bank deposits that offer meager interest.

This will “offer a secure opportunity for small investors to participate in thriving property and construction development segments,” Dominguez said.