The history of REITs (Real Estate Investment Fund) dates back to 1880 in the USA. At this time the investors have alleviated the double taxation, as these companies were not liable to tax at the corporate level if the profits were distributed to the shareholders. This tax benefit was abolished in the 30ies of the 20th century and all passive investments were firstly taxed at the corporate level and again subject to personal income tax. In contrast with the companies investing in shares and bonds REITs were not successful in amending this legislation until 1960 when the president Eisenhower reinforces the tax holiday for REITs in their capacity of a transitory unit. With slightly changes this law is preserved till nowadays. Today more than 300 publicly traded companies operate in the United States holding assets of more than USD 300 billion as 2/3 of them are listed on the stock exchanges.
The history of REIT in Bulgaria is shorter. The basics are laid with the enforcement of the Special Investment Purpose Companies Vehicles Act promulgated on 20 May 2003, already amended several times in a way to protect the investors and is in force as of 25th of April 2006. The Bulgarian Parliament considering the described above tax holidays has implemented similar rules and the tax benefits are fully applicable for each REIT duly registered and licensed in Bulgaria.
In order to classify a company as REIT and to benefit from the advantages of a transitory unit exempt from taxation at the corporate level, it has to meet the following requirements:
- Structure of a public limited company;
- Obtain license from the Financial Supervision Commission to perform activity as REIT;
- No limits for transfer of paperless shares;
- Founders could be not more than 50 legal entities;
- Pay out of at least 90 percent of the taxable profit in the form of dividend;
- Minimum 30% of the capital of REIT upon establishment should be subscribed by institutional investor;
- Upon incorporation REIT the meeting of the shareholders must take a decision that the initial increase of capital should be minimum 30%;
- Investment of up to 10% of the capital in the property management company;
- Increase of capital based on art. 197 of the Commercial Act (increase of the capital by way of transforming part from the profit into a capital) is not allowed;
- Exempt from profit tax at the corporate level;
- Tax breaks:
* REITs are exempt from corporate tax.
* No capital gains tax for trading with shares of REITs.
* Dividend tax is 5%, which is 5% lower than the corporate tax for legal entities (i.e. 10%);
- Liquidity – the shares of REITs are among the most liquid on the Bulgarian Stock Exchange – Sofia;
- Unique – REITs provide the opportunity to everybody to invest small amount of money in a diversified real estate portfolio.
Local as well as foreign capitals can secure the investments for the REIT’s market. As a rule REIT are owned by significant number of individuals and large institutional investors including pension funds, insurance companies, banks and mutual funds. The investment purposes of holding shares in REIT are identical to those of investing in any other type of shares – current dividend yield and long term increase of the value of the shares.
The majority of the shares in REIT could be acquired through the stock exchanges as stock exchange brokers undertake the orders. The financial consultants can significantly facilitate the dismantling of the investment perspectives for individual investors. REIT also provides annual and quarterly financial statements, prospectus for public offering of securities and other financial information necessary for the investors.
The investment in REIT also secures diversification of the investment portfolios as the return on investment in REIT is in low correlation with the yield of other securities in other industry sectors.
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