VAT Implications for Real Estate Investment Trust

REAL ESTATE INVESTMENT TRUST

Generally, life cycle of a real estate asset comprises of land acquisition, construction of the property, sale/lease of the property. However, there is an alternate way of earning from real estate assets which is picking up pace known as Real Estate Investment Trust (‘REIT’).

Simply stating REIT is a Trust/ corporation that owns and operates various commercial assets/ properties which yield a regular stream of income which is distributed among the unitholders. Thus, one can say that the model is similar to a model of buying shares on a stock exchange.

As for various types of REITs, there may be specific REITs with single type of assets or a diversified REIT (with varied nature of real estate assets such as commercial buildings, shopping malls, hotels, resorts etc.), exchange-listed, non-listed etc. Accordingly, it is important to understand how a REIT is structured, but before that we provide below various stakeholders and their roles in brief:

• Stock Exchange - Units of REITs are enlisted on the stock exchange and offered through IPO’s. Thereafter, such units are traded like normal shares However, there are REITs which are non-exchange traded as well.

• Trustees - They oversee the functioning of the entire Trust who act on behalf of the unit holders.

• Brokers – REIT units are bought through a borkers

• Unit holders - Unit holders which are basically the investors in a trust who invest and buy units in the trust. The REIT distribute profits in form of dividend to such unit holders

• REIT Manager- Managing the overall REIT functions which include enlisting the REIT on stock exchange, operation and investment strategies, Invests and seeks benefits etc.. It may be an individual or an asset management company. Such managers charge fees from REITs for assisting in running the operations

• Property Manager- Manages the Real Estates from an O&M perspective. It recovers a management free from REIT

• Real Estate Assets- All the real estate assets which are owned under the REIT from which income

is generated and then distributed among the unitholders

The next important step is to understand how do unit holders invest and earn income from such REIT’s. As mentioned above, REITs are similar to buying stocks in the market. Thus, a subscription is also similar to applying for stocks/ units in an IPO. Thereafter, such units are then traded in a secondary market.

Now analyzing the above structure from a VAT standpoint gives rise to various multiple transactions which are as follows:

• Conversion of a real estate asset of a company into a REIT
• Brokerage Fees recovered from various unitholders
• Assigning units to respective unit holders/ investors
• Buying and Selling units by unit holder to other unitholders
• Fees paid to Property manager, REIT managers
• Distribution of dividends to various unitholders
• Earnings of REIT from leasing/ sale of residential or commercial properties etc.

Additionally, there are various other aspects while operating a REIT such as in certain cases real estate companies also convert and form a REIT, REIT may also be allowed to hold non-real estate assets, REIT manager may be located outside the country of establishment of such REIT. The above factors and few other aspects depend on the jurisdiction in which such REIT’s are established as each Jurisdiction have laid out different regulations for governing such structures.

Thus, VAT implications also may differ depending on the governing structures in each of such jurisdictions.

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