On June 2, 2020, certain proposed amendments to the Enforcement Decree of the Local Tax Act (the “Local Tax Act”) were promulgated (the “Amendments”) changing the scope of certain tax benefits granted to real estate funds (“REFs”) and real estate investment trust companies (“REITs”). The Amendments took effect as of June 2, 2020 with certain transitional measures.
Before the Amendments, REFs and REITs enjoyed a flat property tax of 0.24% per annum on the land they owned (compared to an incremental tax rate of up to 0.48% for regular companies) and an exemption of aggregate real estate tax (in contrast to an incremental tax rate of up to 0.84% for regular companies). After the Amendments, however, such flat property tax rate on land and aggregate real estate tax exemption for private REFs/REITs will no longer apply in principle (while certain transitional rates and exceptions exist as explained below). Instead, the following tax rates for property tax and aggregate real estate tax will generally apply to the land owned by private REFs/REITs in accordance with the Amendments:
|Before the Amendments||After the Amendments|
Please note, however, that the Amendments only apply to land but not to buildings. The land owned by the following categories of REFs and REITs will continue to enjoy the reduced property tax rate and the aggregate real estate tax exemption:
- Public REFs and REITs;
- Private REITs whose investors are comprised only of (i) REITs listed on the stock exchange, (ii) REFs that are not private REFs, or (iii) a trust company that manages a specified money trust1 entrusted by 50 or more trustors; and
- Private REFs (i) whose investors are comprised only of (a) REITs listed on the stock exchange, (b) REFs that are not private REFs, or (c) a trust company that manages a specified money trust entrusted by 50 or more trustors, AND (ii) which invests in excess of 80% of the fund assets into real estate.
Lastly, as a transitional matter, under the Addendum to the Amendments, we believe that for land acquired by private REFs/REITs on or before June 1, 2020, to the extent there is no change in the ownership of the land, the flat tax rate of the property tax and the exemption of the aggregate real estate tax on the land will continue to apply for a certain time period in proportion to the annual rates provided in the below table:
|Percentage of land recognized for flax tax on land for property tax and exemption of aggregate real estate tax on land||100%||100%||80%||60%||40%||20%|
The application of the foregoing summary on the Amendments and transitional measures may vary depending on the acquisition timing of each individual asset, the acquiring entity and the specific asset type. As such, a detailed analysis on the application of the new tax regime under the Amendments to specific assets or investment opportunities will be needed.