MEMO TO : KBS

FROM : ZOC
Subject : Real Estate Investment Trust (REIT)
Date : 29 May 2018

1. REIT Law or Republic Act No. 9856

 "Real Estate Investment Trust' or "RElT' is a stock corporation established in

accordance with the Corporation Code of the Philippines and the rules and
regulations promulgated by the Commission principally for the purpose of owning
income - generating real estate assets. For purposes of clarity, a REIT, although
designated as a "trust", does not have the same technical meaning as "trust" under
existing laws and regulations but is used herein for the sole purpose of adopting
the internationally accepted description of the company in accordance with global
best practices.1
 "Income-Generating Real Estate" means real property, which is held for the
purpose of generating a regular stream of income such as rentals, toll fees, user's
fees and the like, as may be further defined and identified by the Commission.
The Commission may promulgate rules to include real rights over real property,
provided they generate interest or other regular payments to the REIT.2
 “Public Shareholder” means a shareholder of a REIT other than the following
persons (non-public shareholders):
i. The Sponsor/Promoter of the REIT;
ii. A director, Principal Officer or Principal Stockholder of the Sponsor/Promoter
of the REIT;
iii. A director, Principal Officer or Principal Stockholder of the REIT;
iv. An associate of a director, Principal Officer or Principal Stockholder of the
REIT or its Sponsor/Promoter;
v. A Related Corporation to the REIT or its Sponsor/Promoter; and,
vi. Any person who holds legal title to the shares of stock of the REIT for the
benefit of another for the purpose of circumventing the provisions of this Act.3
 Investment in the REIT - Investment in the REIT shall be by way of
subscription to or purchase of shares of stock of the REIT.4
 Nationality Requirement - REIT that owns land located in the Philippines must
comply with foreign ownership limitations imposed under Philippine law.5

2. Requirements6

2.1 Minimum Public Ownership - A REIT must be a public company and to be

considered as such, a REIT, must: (a) maintain its status as a listed company; and (b)

1
Section 3(cc), RA 9856
2
Section 3(m), RA 9856
3 Section 3(aa), RA 9856
4
Section 4
5
Section 6
6
Section 8

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upon and after listing, have at least one thousand (1,000) public shareholders each
owning at least fifty (50) shares of any class of shares who in the aggregate own at least
one - third (1/3) of the outstanding capital stock of the REIT.

2.2 Capitalization - A REIT must have a minimum paid - up capital of Three hundred
million pesos (Php300, 000.000.00).

2.3 Investment in Synthetic Investment Products - A REIT may invest not more than
five percent (5%) of its investible funds in synthetic investment products.

2.4 Income-Generating Real Estate - At least seventy - five percent (75%) of the
deposited property of the REIT must be invested in, or consist of, income - generating
real estate.

2.5 Property Development - A REIT must not undertake property development

activities whether on its own, in a joint venture with others, or by investing in unlisted
property development companies, unless it intends to hold the developed property upon
completion. The total contract value of property development activities undertaken and
investments in uncompleted property developments should not exceed ten percent (10%)
of the deposited property of the REIT.

2.6 Single Entity Limit - Not more than fifteen percent (15%) of investible funds of the
REIT may be invested in any one issuer's securities or anyone managed fund, except with
respect to government securities where the limit is twenty - five percent (25%).

2.7 Foreign Assets - A REIT may invest in local or foreign, assets, subject to the terms
of its articles of incorporation. Where an investment in a foreign real estate asset is made,
the REIT should ensure that the investment complies with all the applicable laws and
requirements in that foreign country such as, but not limited to, foreign ownership
restrictions, if any, and requisites of having good and valid title to that real estate.

2.8 Joint Venture - When investing in real estate as a joint owner, the REIT should make
such investment by acquiring shares or interests in an unlisted special purpose vehicle
constituted to hold/own the real estate and the REIT should have freedom to dispose of
such investment. The joint venture agreement, memorandum and articles of association
or other constitutive documents of the special purpose vehicle should provide for a
minimum percentage of distributable profits of the special purpose vehicle that will be
distributed and grant the REIT veto rights over key operational issues of the special
purpose vehicle. .

2.9 Aggregate Leverage Limit - The total borrowings and deferred payments of a REIT
should not exceed, 'thirty - five percent (35%) of its deposited property: Provided,
however, That the total borrowings and deferred payments of a REIT that has a publicly
disclosed investment grade credit rating by a duly accredited or internationally
recognized rating agency may exceed thirty - five percent (35%) but not more than
seventy percent (70%) of its deposited property.

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2.10 Related Party Transactions - Any contract or amendment thereto, between the
REIT and related parties, including contracts involving the acquisition or lease of assets
and contracts for services, must comply with minimum requirements under the law.

2.11 Valuation - A full valuation of a REIT's assets must be conducted by an

independent appraisal company, duly accredited by the Commission, at least once a year.

2.12 Fund Manager - A REIT must appoint a fund manager (corporation) that is
independent from the REIT and its sponsor(s)/ promoter(s) and shall be subject to
minimum requirements.

2.13 Independent Directors - At least one - third of the board of directors of a REIT
must be independent directors.

2.14 Fit and Proper Rule - The SEC shall prescribe or pass upon and review the
qualifications and disqualifications of individuals elected or appointed as directors or
officers of the REIT, REIT fund managers, REIT property managers, distributors and
other REIT participants and disqualify those found unfit.

The REIT shall also comply with the reportorial and disclosure requirements prescribed
by the Corporation Code, the SRC and the SEC.7

3. Taxation

3.1 Income Taxation8

 REITs are subject to the 30% income tax on its taxable net income, as defined in
RA 9856
o “Taxable Net Income" means the pertinent items of gross income
specified in Section 32 of the NIRC, less all allowable deductions
enumerated in Section 34 of the NIRC, less the dividends distributed by a
REIT out of its distributable income as of the end of the taxable year as:
(a) dividends to owners of the common shares; and (b) dividends to
owners of the preferred shares pursuant to their rights and limitations
specified in the articles of incorporation of the REIT.9
 In no case shall a REIT be subject to the minimum corporate income tax
 A REIT shall be subject to the income tax on its taxable net income as defined in
the NIRC, instead of its taxable net income as defined in RA 9856, upon the
occurrence of any of the following events subject to such curing period as may be
prescribed in the IRR of this Act:

i. Failure to maintain its status as a public company

7
Section 9
8 Section 10
9 Section 3(mm)

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 ii. 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

Iii. Failure to distribute at least ninety percent (90%) of its distributable

income

3.2 Lower Creditable Withholding Tax - Income payments to a REIT shall be subject
to a lower creditable withholding tax of one percent (1%).10

 Withholding Tax on Income Payments made to a Domestic Corporation

under BIR RR Nos. 2-1998 and 17-2003
o Interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar
arrangements derived from sources within the Philippines — Twenty
Percent (20%).
o Royalties derived from sources within the Philippines — Twenty percent
(20%).
o Interest income derived from a depository bank under the Expanded
Foreign Currency Deposit System, otherwise known as a Foreign
Currency Deposit Unit (FCDU) — Seven and one-half percent (7.5%).
o Income derived by a depository bank under the Expanded Foreign
Currency Deposit System from foreign transactions with local commercial
banks including branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with Foreign
Currency Deposit System Units and other depository banks under the
expanded foreign currency deposit system including interest income from
foreign currency loans granted by such depository bank under the said
expanded foreign currency deposit system to residents — Ten percent
(10%).
o On capital gains presumed to have been realized from the sale, exchange
or other disposition of real property located in the Philippines classified as
capital assets, including pacto de retro sales and other forms of conditional
sales based on the gross selling price or fair market value as determined in
accordance with Sec. 6(E) of the Code, whichever is higher — Six percent
(6%).

3.3. Transfer of Real Property. - Any existing, law to the contrary notwithstanding, the
sale or transfer of real property to REITs, which includes the sale or transfer of any and
all security interest thereto, shall be subject to fifty percent (50%) of the applicable
Documentary Stamp Tax (DST).

 DST - 1.5% x Selling Price/Consideration or Fair Market Value, whichever is

higher

10 Section 11

4
All applicable registration and annotation fees to be paid, related or incidental to the
transfer of assets or the security interest thereto, shall be fifty percent (50%) of the
applicable registration and annotation fees.

3.4 Issuance and Transfer of Investor Securities.

i. The original Issuance of investor securities shall be subject to DST

ii. Any sale, barter, exchange or other disposition of listed investor securities
through the Exchange shall be subject to the stock transaction tax

iii. Any sale, barter or exchange or other disposition of listed investor securities
through the Exchange shall be exempt from the DST

iv. Any initial public offering and secondary offering of investor securities shall
be exempt from the tax imposed under Section 127(b) of NIRC of 1997, as
amended.

3.5 Dividends Paid by REITs. - Cash or property dividends paid by a REIT shall be
subject to a final tax of ten percent (10%), unless: (a) the dividends are received by a non-
resident alien individual or a non-resident foreign corporation entitled to claim a
preferential withholding tax rate of less than ten percent (10%) pursuant to an applicable
tax treaty; or (b) the dividends are received by a domestic corporation or resident foreign
corporation, or an overseas Filipino investor in which case, they are exempt from income
tax or any withholding tax: Provided, That in the case of overseas Filipino investors, they
are exempt from the dividends tax for seven (7) years from the effectivity of the tax
regulations implementing this Act.

3.6 VAT on Gross Sales or Gross Receipts of RElTs. - A REIT shall be subject to
value - added tax (VAT) on its gross sales from any disposal of real property, and on its
gross receipts from the rental of such real property. 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.

4. Amendments to the REIT

 TRAIN - Section 109 of the Tax Code has been amended to include transfers of
property under Section 40 (c) (2) of the Tax Code or tax-free exchanges as
exempt from value added tax.
o With the above amendment of the Tax Code, stakeholders are expecting
the BIR to issue the amendment to Section 7 of Revenue Regulations No.
013-2011, which imposed a 12% percent VAT on the transfer of property
to the REIT even under tax-free exchange conditions.
o With the amendment, property owners can now transfer qualified real
property assets to the REIT corporations without incurring the 12 percent
value added tax.

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  SEC- Possible decrease in the minimum public ownership requirement
o The REIT law provided that the MPO shall not be less than one-third (1/3)
of the outstanding capital stock of the REIT. Pursuant to this, the
implementing rules and regulations issued by the SEC imposed an MPO
equivalent to at least 40 % of the outstanding capital stock of the REIT in
the initial year. This MPO must be increased to 67% within three years
from listing.
o The SEC earlier said it would be amenable to review its MPO requirement
should the DOF also review the VAT imposition on the initial transfer of
properties to REIT companies.

5. Registration of REIT with as Public Company with Market and Securities

Regulation Department of the SEC
 Submission of REIT Plan (Prospectus)
o No shares of stock of the REIT shall be offered for subscription or sale to
Public Shareholders except in accordance with a REIT Plan registered
with and approved by the Commission. The shares of stock of the REIT
shall be registered with the Commission in accordance with the SRC and
listed in accordance with the rules of the Exchange.

 Contents of REIT Plan – See Rule 4, Section 1.3 of IRR

 A REIT shall, from the time of incorporation, issue shares to, or record the
transfer of all its shares into the name of shareholders, investors or, securities
intermediary in the form of uncertificated shares. It shall engage the services of a
duly licensed transfer agent to monitor subsequent transfers of the shares.
 The REIT shall engage a Fund Manager and a Property Manager in accordance
with the IRR. The fees received by the Fund Manager and the Property Manager
from the REIT shall not exceed one percent (1%) of the Net Asset Value of the
assets under their respective management.
 A REIT shall appoint a duly accredited independent Property Valuer to prepare a
full valuation of a REIT’s assets at least once a year in accordance with the
applicable rules of asset valuation and valuation methodology prescribed by the
Commission.