SMALL investors, including overseas Filipino workers looking for a safe investment haven for their hard-earned money, should welcome this development.

Republic Act No.9856, which took effect on February 9, 2010, provides for the legal framework for the operation of real estate investment trust or REIT in the Philippines. Under the Declaration of Policy of the REIT Law it states: "It is the policy of the state to promote the development of the capital market, democratize wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines, use the capital market as an instrument to help finance and develop infrastructure projects, and protect the investing public by providing an enabling regulatory framework and environment under which real estate investment trusts, through certain incentives granted herein, may assist in achieving the objectives of this policy."

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A REIT is basically a stock corporation organized principally for the purpose of acquiring and owning income-generating real estate assets. In turn, the established REIT company shall offer its shares to the investing public through subscription to or purchase of such shares of stock of the REIT. As a requirement, shares of stock of the REIT must be registered with the Securities and Exchange Commission (SEC) and listed on and traded at the Philippine Stock Exchange (PSE).

With the stocks traded at the stock exchange, individual investors may invest in these firms, allowing companies to raise funds from their REITs. The law likewise provides for certain tax incentives but to continue enjoying these, the REIT must maintain its status as a listed company and annually give out at least 90% of distributable income to shareholders.

For a corporation to be registered as REIT and maintain its status, it has to comply and observe these requirements:

1. A REIT must be a public company and maintain its status as a listed company in the stock exchange. Upon and after listing, it must have at least 1,000 public shareholders each owning at least 50 shares of any class of shares and who own at least 1/3 of the outstanding capital stock of REIT, on the aggregate.

2. A REIT must have at least P300 Million minimum paid-up capital, which could be in the form of real estate properties, stock, bonds and similar investments allowed by SEC.

3. A REIT can invest not more than 5% of its investible funds in synthetic investment products such as credit notes, debt obligations and other acceptable credit instruments.

4. A REIT is required to invest 75% of its deposited real property in income-generating real estate such as malls, commercial centers, office buildings and the like.

5. As a rule, REIT cannot undertake property development on its own except when it intends to hold the developed property upon completion. In which case, such investment should not exceed 10% of the REIT property holdings.

6. A REIT may invest not more than 15% of its funds in one issuer's securities or managed funds. With respect to investment in government securities, the limit is raised up to 25%.

7. In case of foreign investment, the REIT must ensure that it complies with all applicable laws and requirements in the foreign country.

8. In joint venture, REIT can make investment by acquiring shares or interests in an unlisted special purpose vehicle constituted to hold or own real estate.

As was mentioned earlier, one of the advantages of the REIT are perks in terms of tax incentives it can enjoy and is granted by law. Some of the more prominent incentives that REIT are bound to enjoy include the following:

1. They will not be subject to the minimum corporate income tax (MCIT) mandated in the National Internal Revenue Code (NIRC).

2. Any sale or transfer of real property to a REIT, including the sale or transfer of any and all security interest shall be subject to only 50% of the applicable documentary stamp tax (DST).

3. All applicable registration and annotation fees relative or incident to such transfers shall only be required to pay 50% of the applicable fees,

4. Any sale, barter, exchange or other disposition of listed investor securities through the PSE, including cross or block sales with prior stock exchange approval shall be exempt from DST.

5. Any initial public and secondary offering of investor securities shall be exempt from the initial public offering (IPO) tax imposed under the National Internal Revenue Code (NIRC).

6 A REIT shall not be considered as a dealer of securities and shall not be subject to the imposition of value-added tax (VAT) on its sale, exchange or transfer of securities forming part of its real estate-related assets.

These incentives shall be enjoyed by the established REIT as long as it retains its REIT-related activities. However, in the event the REIT is delisted from the exchange, violations or failure to comply with the provisions of the law or rules of the exchange, the tax incentives shall be revoked and withdrawn.

While the REIT shall be exempt from the imposition of the MCIT however, dividends received by individual investors shall be subject to the tax imposed on dividends income received. The good news as far as this issue is concerned is the exemption of overseas Filipino worker investors from the imposition of the dividends tax for a period of seven (7) years from the effectivity of the tax regulations implementing the REIT law. Also, if a domestic corporation is the REIT investor, the dividends received will be exempt from tax.

With this kind of an investment scheme, the ordinary Filipino can look at this alternative vehicle by subscribing to or purchasing shares of stock of the REIT via the stock exchange. This is one way of democratizing wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines. Ordinary citizens now have the chance of owning shares in a REIT, which under the law should be a financially stable, operationally profitable and well-managed real estate investment institution with a minimum paid-up capital of at least P300 Million, (to be continued next week)

The writer is a Certified Public Accountant and the president of the Baguio Realtors Board. Apart from being a Real Estate Practitioner as a Real Estate Broker and Educator, Lecturer and Resource Person; he is likewise a Business Management/NGO/Cooperative Consultant, Project Development Consultant and Financial Advisor/Loan Broker.

For comments and more information of Real Estate Updates and Studies, you may get in touch with him at Unit 303 3/F Otek Square, Otek Street, Baguio City, Tel Nos. 427-1971 or 442-1176, Mobile Phone No. 0909-404-8863 or email: bertcapilifaliahoo.com or bertcapili65(Shotmail.com