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However, with the aim of absorbing the stock of new housing in the hands of banks, and in general of reactivating the real estate market, the Government has adopted (or announced) a raft of measures to boost investment in real estate. The first set of measures, in force since May, relates to the tax regime for vehicles created for holding and managing real estate assets by financial institutions, aiming to promote and facilitate the creation of asset-owning companies whose shares could be attractive to institutional investors in Spain and abroad.

That regime, regulated in Royal Decree-Law 18/2012 on the Writedown and Sale of Real Estate Assets in the Financial Sector, provided financial institutions wishing to create these vehicles with great flexibility, broadly allowing them to apply the tax neutrality regime established for business restructurings to transfers of assets to those vehicles, thus deferring the taxation of any capital gain under corporate income tax and, even more importantly, eliminating any indirect and municipal taxation.

Moreover, to definitively help mobilize these real estate portfolios owned by the banks, the Law approved two additional measures: (i) real estate transfer tax will not apply to the acquisition of shares in the asset-owning vehicles; and (ii) a 50% reduction in corporate income tax, personal income tax and nonresident income tax will apply to any capital gains arising in the future relating to the transfer of real estate acquired between the date on which the Law entered into force (May 11, 2012) and December 31, 2012.

A second raft of measures is included in the Draft Bill on Measures for Flexibilizing and Promoting the Residential Lease Market.

The first measure relaxes the special corporate income tax regime for entities engaged in the lease of residential property (consisting in an 85% reduction in the tax payable), reducing the requirements as to the number of residences and the holding period, and eliminating also any restrictions on floor area.

The second key measure contained in the Bill is the virtually complete elimination of the special tax on real estate owned by nonresident entities. To date, in certain circumstances nonresident entities were subject to a special tax of 3% of the cadastral value of real estate owned in Spain. With the envisaged reform, only entities resident in a tax haven will be subject to that special tax.

Lastly, probably the most important measure included in the Bill is the reform of the regulations and tax regime of Listed Corporations for Investment in the Real Estate Market (SOCIMIs).

The approach taken by the legislator has been to eliminate some of the regime’s constraints by relaxing or removing certain requirements that were difficult to apply in practice. Moreover, significant changes have been made to the tax regime itself to bring it more in line with the REIT regimes applicable in other countries and make it more attractive, especially to non-Spanish investors.

In summary, changes to the Spanish REIT regime should make it easier and more feasible to set up a SOCIMI.

Under the new tax regime, foreign REITs investing in a Spanish SOCIMI could end up bearing no tax in Spain if dividends received from Spain are to be fully distributed by the foreign REITs to their shareholders, and if these shareholders are taxable at a minimum rate of 10%.

Moreover, under the new tax regime, other foreign (corporate and individual) investors in a SOCIMI could benefit from lower taxation than under the existing regime.

It is, therefore, worth exploring what these expected changes in the REIT regime can offer to foreign real estate investors, as their after-tax return is likely to be higher if they can benefit from the tax advantage (to be continued).