What is a SOCIMI? How it works, requirements and tax treatment

A SOCIMI It is a listed public limited company specialising in investment in the property market. Its main activity consists of acquiring or developing urban properties for rental purposes, although it may also invest in certain companies and property vehicles that meet the requirements laid down by law. In Spain, they are regulated by the Act 11/2009.

It is therefore not enough simply to set up a company that owns properties for let and call it a SOCIMI. The regulations set out requirements regarding the composition of assets, the source of income, the holding period for properties, listing on the stock exchange and the distribution of profits. Furthermore, companies that opt for the special tax regime are taxed at the 0% in corporation tax, although there are special levies in certain circumstances.

These are some of its main rules:

These rules are derived primarily from Articles 3 to 6 and 9 of Law 11/2009.

What is a SOCIMI and what is it for?

A SOCIMI is a listed company specialising primarily in investment in property intended for letting. It enables property assets to be brought together under a corporate structure subject to specific rules governing investment, transparency, listing and the distribution of profits, and allows capital from various investors to be channelled into these assets.

You may invest directly in urban property with a view to letting it, develop property for that purpose, or invest in certain property companies as provided for by law.

What exactly does SOCIMI stand for?

The abbreviation stands for ‘Listed Public Limited Company for Investment in the Property Market’.

The name itself provides several clues. It is a public limited company, its shares must be listed for trading, and its activities are primarily linked to investment in rental property. Where it has opted for the special tax regime, its name must include “Listed Property Investment Company, Public Limited Company” or the abbreviation “SOCIMI, S.A.”.

The law also permits the pursuit of other ancillary activities, provided these remain within the limits set for income derived from activities other than the company’s principal purpose.

SOCIMI and REIT: are they the same thing?

SOCIMIs are modelled on the international model of REIT, Real Estate Investment Trusts, used in various forms across numerous property markets. The explanatory memorandum to Law 11/2009 itself links the Spanish regime to the REIT models in place in other countries.

But SOCIMI and REIT are not legally the same thing. REIT is a generic term for property investment vehicles subject to the regulations of each country. A SOCIMI is the specific legal entity provided for under Spanish law, with its own requirements regarding investment, listing, dividends and taxation.

For this reason, two vehicles operating on a similar economic model may be subject to very different rules depending on where they are incorporated.

How does a SOCIMI work?

The way a SOCIMI operates can be summed up in one idea: It focuses its investment on specific property assets, derives its income mainly from rental income and distributes a significant proportion of its profits to its shareholders, whilst at the same time complying with the legal requirements necessary to maintain their status.

Put simply, the process works like this:

1. It is organised as a public limited company.
2. It invests primarily in urban rental properties, land for specific development projects, or shares permitted by law.
3. It derives its income primarily from those leases or from eligible holdings.
4. It retains the properties and shareholdings for the minimum periods required.
5. It is required to distribute a portion of its profits.
6. Its shares remain listed for trading on the markets covered by the regulations.

A SOCIMI is not required to limit itself to a single type of asset. Depending on its strategy, it may specialise, for example, in residential property, offices, logistics, retail, hotels or other urban properties that meet the legal requirements.

Requirements for becoming a SOCIMI in Spain

Being a listed property company is not enough. Act 11/2009 sets out a series of conditions which determine which companies are eligible to join and remain within the SOCIMI regime.

Among the most important are the minimum capital requirement, the two 80% rules, the holding period for assets, the listing requirement and the mandatory distribution of certain profits.

Minimum share capital

A SOCIMI must have a minimum share capital of 5 million euros. Furthermore, the law stipulates that there may only be one class of shares. Its shares must be of a registered, a requirement set out alongside the obligation to negotiate.

This capital threshold should not be confused with the total value of the property portfolio or with the company’s investment volume. These are distinct concepts.

The 80% rule for assets

The first key rule of the 80% concerns what the SOCIMI’s assets are invested in.

At least 80% of the value of its assets must consist of:

• urban properties intended for letting;
• land intended for the development of properties that will subsequently be let, provided that development begins within the specified timeframe;
• or certain shareholdings in other entities permitted under Law 11/2009.

The regulation itself sets out how this percentage is to be calculated and provides for specific provisions regarding consolidated groups and certain assets.

The 80% income rule

There is a second rule of the 80% and it is important not to confuse it with the previous one.

In this case, the composition of the assets is not analysed, but rather where the revenue comes from.

At least 80% of the income for the tax year covered by the regulation must derive from the letting of property used in the main business activity or from dividends and shares in profits arising from certain eligible investments. The exclusions and specific rules laid down in the Act also apply to this calculation.

Therefore:

80% assets → what the SOCIMI is invested in.

80% income → where it gets its income from.

These are two different requirements and must be met separately.

Minimum holding period for properties

The properties forming part of the assets must remain leased for at least three years.

To calculate this period, the law allows the time during which the property has been offered for rent to be included, subject to a maximum of one year. Eligible shares or holdings are also generally subject to a minimum holding period of three years.

Failure to comply with this condition may have tax implications, as the Act provides for the adjustment of certain types of income where the minimum holding period requirement is not met.

Share price

The shares of a SOCIMI must remain listed for trading throughout the tax year on one of the markets specified in the Act.

It may be a a regulated market or a Spanish multilateral trading facility, from another Member State of the European Union or the European Economic Area or, in certain circumstances, from a regulated market in another country or territory with which there is an effective exchange of tax information.

This distinction is important because the specific requirements of a market such as BME Growth or BME Scaleup should not automatically be treated as if they were general requirements laid down by Law 11/2009 for all SOCIMIs.

Mandatory distribution of dividends

A key feature of the SOCIMI model is that It cannot freely decide to retain all the profits it has made.

The law requires them to be distributed in different percentages depending on their origin:

In the case of certain gains arising from a transfer, the undistributed portion may be reinvested in other properties or shareholdings relating to the principal purpose within the three-year period provided for by law. If it is not reinvested in accordance with these conditions, it must subsequently be distributed.

How is a SOCIMI taxed?

A SOCIMI operating under the special tax regime is taxed under the 0% category for corporation tax, But that does not mean that every transaction or profit is automatically exempt from tax.

Law 11/2009 establishes a regime with specific conditions and provides, amongst other things, for special taxes under 19% and 15% in certain circumstances. Therefore, simply referring to “SOCIMI = 0% tax” gives an incomplete picture of its tax treatment.

Code 0% for corporation tax

SOCIMIs that meet the requirements and opt to be subject to the special tax regime and pay tax at the 0% rate for corporation tax. This option must be adopted by the general meeting and notified to the Tax Authority in accordance with the established procedure and deadlines.

However, this treatment is subject to compliance with the rules laid down in the regulations. For example, failure to observe the minimum holding period may result in the reclassification of rental income that had previously been subject to the special scheme.

That is why it is more accurate to speak of a special tax regime with a rate of 0% rather than claiming that a SOCIMI “does not pay tax”.

Special levy under 19%

The law provides for a special levy 19% on certain dividends or shares in profits distributed to shareholders holding a stake of 5% or more.

This tax applies where such dividends are exempt or are taxed at the shareholder’s end at a rate lower than 10%, subject to the exceptions and conditions set out in the regulation itself.

The specific tax treatment will therefore depend both on the SOCIMI and on the tax status of the shareholder receiving the dividend.

Special levy under 15%

There is also a special levy 15% on certain profits made during the financial year which have not been distributed.

Specifically, it affects the portion of those profits derived from income that has not been taxed at the standard rate of corporation tax and that does not fall within the reinvestment period provided for in relation to certain transfers.

This tax reinforced the distribution logic of the SOCIMI regime and makes it even more important to analyse the source of profits, their distribution and their tax treatment together.

What is the situation with ITP and AJD?

There are also specific rules in the Tax on Property Transfers and Stamp Duty, However, the treatment should not be summarised by stating in general terms that all transactions carried out by a SOCIMI benefit from a 95% tax relief.

The regulations provide, amongst other cases, for an exemption under the corporate transactions category for certain transactions relating to the incorporation of companies, capital increases and non-cash contributions, as well as a 95% tax relief on the acquisition of properties intended for letting and land intended for the development of properties for letting, provided that the specified maintenance requirements are met.

Therefore, tax treatment must always be analysed with due regard to what operation is being carried out and what conditions apply.

The same applies to gains arising from the transfer of assets: it is not correct to state in general terms that “capital gains realised by SOCIMIs are not subject to tax”. The outcome will depend on the applicable tax regime, compliance with the relevant requirements and the specific circumstances of the transaction.

Where a transaction has significant tax implications, it is advisable to carry out a specific review before making any decisions.

Advantages and risks of a SOCIMI

A SOCIMI can provide an efficient structure for organising investment in rental property and gaining access to the capital markets. In return, it requires that a number of corporate, property, tax and market conditions be maintained on an ongoing basis.

The fact that a SOCIMI pays dividends does not guarantee a specific future return. Nor does the tax regime eliminate the risks associated with the property market, debt, rental performance, occupancy rates or the price of its shares.

Therefore, the suitability of this structure depends on the portfolio, the objectives of its shareholders and the planned investment and management strategy.

SOCIMI, REIT, property fund and property company: the differences

Although they can all provide exposure to the property market, SOCIMIs, REITs, property funds and conventional property companies are governed by different legal structures.

The most obvious difference between a SOCIMI and a conventional property company is that the latter is not automatically subject to the specific rules of the SOCIMI regime regarding the composition of assets and income, share prices or the distribution of profits.

As regards REITs, the similarity is mainly conceptual. Each jurisdiction sets its own requirements.

This comparison is for guidance only. The requirements and tax treatment depend on the regulations applicable to each vehicle.

How can you invest in a SOCIMI?

The most straightforward way to invest in a SOCIMI is to purchase shares in a listed company, just as is the case with other companies listed on the relevant market.

There may also be indirect exposure to this type of company through certain funds or other investment vehicles that include SOCIMIs or REITs in their portfolios.

Before analysing an investment, it is worth finding out what lies behind those shares. Among other things, the following may be relevant:

• the composition and quality of the property portfolio;
• the location of the assets;
• the occupancy rate;
• contract income and expiry dates;
• indebtedness;
• the liquidity of the shares;
• the dividend policy;
• the investment and divestment strategy;
• and the risks inherent in the markets in which it operates.

Investing in a SOCIMI is not the same as buying a property directly: you are acquiring a stake in a company that owns and manages a specific portfolio of assets and liabilities.

How is a SOCIMI valued?

Valuing a SOCIMI requires to examine both the company and the properties that make up its portfolio. The composition of the portfolio, its rental income, tenancy agreements, occupancy rates, location and market outlook all influence the economic assessment of the company.

Valuation may be required at various stages: contributions of assets, corporate transactions, initial public offerings, financing, sales and acquisitions, regular portfolio monitoring, reporting or strategic decision-making.

That is why having a specialist consultancy for SOCIMIs It enables us to address both the property aspect and the vehicle’s specific requirements in a coordinated manner.

This does not mean that all SOCIMIs are required by a single regulation to value all their assets every year. Valuation requirements depend on the market on which they are listed, the transactions they carry out, their disclosure obligations and the specific circumstances of each company.

Valuation of non-monetary contributions

There is one scenario in which Act 11/2009 itself is particularly explicit.

When they are carried out certain non-cash contributions of property for the purpose of forming a SOCIMI or increasing its share capital, The regulation requires that such properties be valued at the time of their contribution and stipulates that a valuation firm, as provided for in the legislation governing the mortgage market, must be involved.

The valuation plays a particularly important role here: it provides an independent technical basis for determining the value of the property being contributed to the company’s capital.

Why it is important to know the value of your investment portfolio

A building is not valued solely on the basis of its square metres. There are many more variables at play in a property portfolio.

To understand the performance of a SOCIMI’s assets, it may be necessary to analyse, amongst other things:

• what types of assets make up the portfolio;
• where they are located;
• what the quality of the assets is;
• what is its condition;
• what types of tenancy agreements there are;
• what income they generate;
• what is your occupancy rate;
• when the contracts expire;
• what investments they may need;
• and how the market is developing in each location.

Furthermore, a portfolio can change over time. Buying, selling, refurbishing, repositioning or adding new properties alters both its composition and its risk profile and income generation.

The assessment therefore helps to to translate the physical and economic characteristics of assets into useful information for management and decision-making.

When is it advisable to seek specialist advice for a SOCIMI?

Advice takes on particular importance when a decision affects both property assets, corporate structure and market access.

It can be useful, for example, when:

• to look into setting up a new SOCIMI;
• to convert an existing property;
• check whether a portfolio meets the investment vehicle’s requirements;
• value properties or portfolios;
• to make contributions in the form of assets;
• prepare for a listing on a trading market;
• to analyse acquisitions or divestments;
• or strategically review the portfolio.

In these situations, the Advice for SOCIMIs It enables property valuations to be tailored to the specific requirements of the process and allows us to work alongside any other legal, financial, tax and market advisers who may be involved.

Are you considering setting up a SOCIMI, restructuring a property portfolio, or preparing a valuation or market listing? Find out about the service from specialist advice for SOCIMIs from Gesvalt and find out how we can help you at every stage of the process.