AT A GLANCE:

A REIT is generally subject to income tax on its taxable net income under the REIT Act and the National Internal Revenue Code, as amended.

How is a REIT taxed?

Under Section 10 of Republic Act No. 9856, otherwise known as the Real Estate Investment Trust (REIT) Act of 2009, a REIT shall be subject to income tax under Chapter IV, Title II of the National Internal Revenue Code of 1997, as amended, on its taxable net income as defined in the REIT Act. 

The law further provides that, in no case, shall a REIT be subject to the minimum corporate income tax (MCIT) under the NIRC. For purposes of computing the taxable net income of a REIT, dividends distributed from its distributable income after the close of a taxable year and on or before the last day of the fifth (5th) month following the close of the taxable year shall be considered as paid on the last day of such taxable year. (Section 10,Republic Act No. 9856)

The special tax treatment under the REIT Act, however, is subject to the REIT’s compliance with the requirements of the law and its implementing regulations.

What Tax Incentives are Available to REITs?

Subject to compliance with the requirements of the REIT Act and its implementing tax regulations, the following tax incentives and privileges are provided:

1. One percent (1%) creditable withholding tax – Income payments to a REIT shall be subject to a lower creditable withholding tax of one percent (1%). (Section 11, Republic Act No. 9856)
2. Fifty percent (50%) of the applicable Documentary Stamp Tax (DST) — The sale or transfer of real property to a REIT, including the sale or transfer of any and all security interests thereto, is subject to fifty percent (50%) of the applicable DST. (Section 12, Republic Act No. 9856)
3. Fifty percent (50%) of applicable registration and annotation fees — All applicable registration and annotation fees related or incidental to the transfer of assets or security interests thereto are reduced to fifty percent (50%) of the applicable fees. (Section 12, Republic Act No. 9856)
4. Tax treatment of listed investor securities — Under Section 13 of the REIT Act, certain transactions involving listed investor securities are subject to specific tax treatment, including exemption from DST on sales, barter, exchanges, or other dispositions through the Exchange and exemption from the tax imposed under Section 127(b) of the NIRC on initial public offerings and secondary offerings. (Section 13, Republic Act No. 9856)

A transfer of real property to a REIT may likewise qualify for tax-free exchange treatment under Section 40(C)(2) of the NIRC, subject to the requirements prescribed by the Tax Code and applicable regulations. Revenue Regulations No. 3-2020 amended the implementing tax regulations on REITs and specifically addressed the tax treatment of qualifying transfers to REITs.

When may a REIT lose its Special Tax Treatment or Tax Incentives?

The special income-tax treatment under Section 10 of the REIT Act may cease to apply upon the occurrence of any of the following events, subject to the curing period prescribed in the implementing rules and regulations:

1. Failure to maintain its status as a public company as defined in Section 8.1 of this Act;
2. Failure to maintain the listed status of the investor securities on the Exchange and the registration of the investor securities by the Commission; and/or
3. Failure to distribute at least ninety percent (90%) of its distributable income required under Section 7 of the REIT Act.

Upon the occurrence of any of these events, the REIT becomes subject to income tax on its taxable net income as defined under the NIRC rather than under the special definition provided by the REIT Act, subject to the applicable curing period. (Section 10, Republic Act No. 9856)

For the tax incentive on the transfer of real property under Section 12, the fifty percent (50%) DST becomes due and demandable, together with the applicable surcharge, penalties, and interest, upon the occurrence of specified events, including failure to list within the prescribed period, failure to maintain public company status, failure to maintain the listed status of investor securities, or failure to distribute at least ninety percent (90%) of distributable income, subject to the applicable curing period. (Section 12, Republic Act No. 9856; RR No. 13-2011, as amended by RR No. 3-2020)

Are REITs Subject to Value-Added Tax (VAT)? 

Yes. Under Section 15 of Republic Act No. 9856, A REIT shall still be liable for Value-Added Tax (VAT) for transactions which are taxable under the National Internal Revenue Code and other pertinent BIR Regulations on its gross sales from any disposal of real property, and on its gross receipts from the rental of such real property.

Nonetheless, a REIT shall not be considered as a dealer in securities and shall not be subject to VAT on its sale, exchange or transfer of securities forming part of its real estate – related assets.(Section 15, Republic Act No. 9856)

What Happens if a REIT is Delisted?

Under Section 17 of Republic Act No. 9856, if a REIT is delisted from the Exchange, whether voluntarily or involuntarily, for failure to comply with the provisions of the REIT Act or the rules of the Exchange, the tax incentives granted under the Act are ipso facto revoked and withdrawn as of the date the delisting becomes final and executory.

Any tax incentives availed of by the REIT thereafter shall be immediately refunded to the Government, together with the applicable surcharge and penalty under Section 19 of the Act. (Section 17, R.A. No. 9856)

Where the delisting is for causes highly prejudicial to the interest of the investing public, such as specified violations of the disclosure and related-party provisions or insolvency due to the acts identified in the law, the responsible persons shall refund to the investors, at the time of final delisting, the value of their shares. (Section 17, R.A. No. 9856)

How are Dividends Paid by REITs Taxed?

Cash or property dividends paid by a REIT are generally subject to a final tax of ten percent (10%), subject to the exceptions provided under Section 14 of Republic Act No. 9856, including applicable preferential tax treatment under a tax treaty and the exemption applicable to domestic and resident foreign corporations under the Tax Code.

The seven-year exemption formerly granted to Overseas Filipino Investors under the REIT Act has already expired because it was expressly limited to seven years from the effectivity of the implementing tax regulations. Revenue Regulations No. 13-2011 became effective on August 11, 2011, making the seven-year period expire on August 10, 2018.

Related Articles: Fit and Proper Rule Under the Real Estate Investment Trust (REIT) Act of 2009

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.

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