A primer to understanding the P-REIT

10. PROFIT DISTRIBUTION

The P-REIT is required to annually distribute 90 percent of its Distributable Income to its stockholders. Distributable Income means the unrestricted capital of the P-REIT but excludes proceeds from the sale of the P-REIT’s assets that were reinvested within the year. However, the percent of dividends to be received by the public stockholders over the total dividends distributed should not be less than the percent of public shareholders’ share ownership over the total shares of the P-REIT. This feature is intended to avoid dividend schemes that would, in effect, diminish the required ownership and participation of public shareholders as required by the REIT Law.

A. Taxation

11. TAXATION OF THE P-Reit

As mentioned before, a REIT is generally not subject to income tax at the company level. In Philippine context, however, this tax exemption is translated into taxing only the residual net income of the P-REIT. Thus, the REIT Act provides that a P-REIT shall be subject to income tax on its taxable net income. The definition, however, of “taxable net income” under the REIT Act and Implementing rules is gross income as less allowable deductions AND less the dividends distributed to its shareholders out of the Distributable Income. This means that if the P-REIT will distribute 90 percent of its Distributable income as dividends, the P-REIT will be subject to income tax only on the remaining 10 percent of its income.  

Additional tax incentives available to the P-REIT under the Act are: a) an exemption from the minimum corporate income tax imposed under the Philippine tax code; b) a lower creditable withholding tax rate of 1 percent for income payments received by the P-REIT; and c) a 50-percent discount on the documentary stamp tax due on transfers of real property to the P-REIT for two years starting from the date of the P-REITs initial availment of incentives. 

For value-added tax (VAT) purposes, however, income received by the P-REIT from rentals of its real property is subject to VAT. Also subject to VAT are sales arising from the disposal of its real properties.

12. EFFECT OF DELISTING

P-REITs which have been delisted from the Stock Exchange for failure to comply with the requirements imposed under the REIT Act or the rules of the Exchange will have its tax incentives withdrawn on the date when its delisting with the Exchange becomes final. At such an instance, the P-REIT become taxable as a regular corporation and the tax incentives availed of by the P-REIT is required to be refunded to the government including interests and penalties. 

13. TAX ON THE SHAREHOLDERS

Dividends distributed by the P-REIT will generally be subject to a final withholding tax of 10 percent. Exemptions from the 10-percent withholding tax would be investors who are:

a. non-resident foreign individuals or corporations entitled to claim a tax rate lower than 10 percent under a tax treaty

b. domestic corporations or resident foreign corporations and

c. overseas Filipino investors, for the first seven years from the effectivity of the Implementing rules of the REIT Act.

The passing of RA 9856 couldn’t have been more well-timed for the Philippines. With a new President who wants to drum-up foreign investments in the Philippines by making it a predictable and consistent place of investment, the introduction of the P-REIT would be a good step in making it an actuality.

(Evelyn Garcia-Cantre is a Senior Manager of Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])