Introduction
We have prepared this note in order to set out some initial information and considerations in relation to the use of a real estate investment trust ("REIT") which will list on The International Stock Exchange (formerly known as the Channel Islands Securities Exchange) ("TISE").
In summary, this note includes information in relation to:
- the UK REIT regime;
- advantages of using a Jersey company as the REIT vehicle;
- TISE listing process and listing document requirements;
- TISE's continuing obligations requirements; and
- Carey Olsen and our REIT experience.
We trust that the above will be of assistance.
What is a REIT?
Background and benefits
The REIT regime was introduced in the UK in 2007 in order to encourage investment in the UK real estate sector. Take-up beyond the largest property investment companies was relatively limited in the early years of the regime due to the state of the general economic climate and a perceived burden in complying with the REIT regulations.
Since the implementation of certain material enhancements to the regime in 2012 (including the abolition of a 2% entry charge on seeding assets and a general simplification of the qualifying conditions), numbers of new and converting REITs have continued to rise steadily.
The REIT is now an important and popular structure utilised by various leading real estate companies.
The principal attraction of the regime is that a REIT is not liable to pay UK corporation or capital gains tax on the profits (including rental income) arising from its property investments.
The following is by way of background only and is intended to provide a high level summary of the key qualifying conditions. Specific English legal and tax advice should be taken to confirm the precise requirements and ensure that the proposed structure complies with the applicable REIT regulations and guidance and to obtain all necessary clearances and confirmations from HMRC prior to implementation.
Qualifying conditions
In order to qualify as a REIT there are a number of conditions that must be met, certain of which are set out as follows.
The REIT must be a company
The company does not however need to be incorporated in the UK and may therefore be incorporated in Jersey. Many UK REITs are structured as Jersey companies.
The REIT must be UK tax resident
Jersey companies are by default tax resident in Jersey but it is straightforward and common for Jersey companies to become UK tax resident, provided that the company is centrally managed and controlled and actually resident for tax purposes in the UK. This is usually accomplished by a majority of the board being comprised of UK residents and board decisions being taken in the UK.
The REIT must be listed on a recognised stock exchange
For these purposes, TISE is a recognised stock exchange. Moreover, TISE has recently (September 2016) updated Chapter 7 of its Listing Rules in order to streamline the process for listing a UK REIT and to remove certain previous listing conditions.
Please refer to page 3 of this note for further information in relation to TISE and the listing process.
The REIT must not be a close company for UK purposes
This broadly means that the REIT cannot be controlled by five or fewer participators though there are various exemptions for institutional investors, sovereign wealth funds and the like. The REIT regime allows three accounting periods to satisfy this requirement.
The REIT must not be an open-ended investment company and the only shares the REIT can have in issue are a single class of ordinary share capital and various classes of relevant preference shares
This is a common structure for Jersey companies, which in this context may operate exactly like a UK company.
The REIT must not be party to any profit participating and other types of prohibited loans
Other conditions / considerations
Business conditions
Naturally the REIT's business must focus on real estate. This will be satisfied where at least 75 per cent of the REIT's activities by reference to income and asset values relate to property investment business. In addition, the diversification rules require the business to hold at least three properties, each representing no more than 40 per cent of the total value of the property assets in the business.
90% distribution requirement
The REIT must distribute as property income dividends 90% of the income of its property rental business for the profits of the business to be exempt from tax. There is no requirement for the company to distribute any gains on disposal of properties that are part of the business. The 90% distribution requirement may be satisfied by using stock/share dividends.
None of the above conditions cause any material issues from a Jersey legal, regulatory or TISE perspective.
Why use a Jersey company?
Key advantages of Jersey
- Jurisdictional standing
- Flexible corporate law and regulation
- Robust court system
- Choice of fast-track regulatory regimes
- Tax neutrality
- Likely to be unaffected by Brexit
What follows is a snapshot of some the key advantages of selecting a Jersey company as the REIT vehicle.
Key advantages include:
Jurisdictional standing
Compliance
Jersey is well-established as a key international finance centre for the structuring of business and operates the highest levels of compliance with international anti-money laundering and anti-terrorist-financing standards. Jersey was ranked by MONEYVAL (a Council of Europe body) in 2016 in the principal tier of jurisdictions assessed under the global Financial Action Task Force international standards. Jersey's excellent standing in this respect has also been acknowledged by independent assessments from some of the world's leading bodies including the Organisation for Economic Co-operation and Development (OECD).
Expertise
Jersey has robust and mature legal, finance, corporate and administration sectors with many decades of experience in global business.
Listings
Jersey companies remain an extremely popular choice for listing and holdings vehicles for global business, with many Jersey companies being listed on the UK, United States and Asian markets.
Flexible corporate law and regulation
Jersey corporate law is based on UK corporate law but with certain enhancements that allow for a more flexible and practical regime. It therefore allows UK business to operate within a familiar legal landscape but to operate with greater freedom. Some key highlights include:
No legal requirement for Jersey resident directors
While Jersey directors are often appointed for reasons of tax residency, this is not a legal requirement and as such it is possible to appoint directors from the UK or elsewhere. This allows for a flexible approach as to management and control (see below in relation to tax domicile).
Flexible capital maintenance regime
Jersey has a much more flexible capital maintenance regime than the UK - it has no equivalent to the UK "distributable reserves" / "profits available for distribution" concepts. Subject to the board giving a 12-month forward-looking cash-flow based solvency test, a Jersey company may fund a distribution from any source other than its nominal capital account (in the case of a company whose shares have a nominal value) or any capital redemption reserve. This specifically includes the share premium account and potentially allows a loss to be run in the profit and loss account. The regime is particularly helpful given the 90% distribution requirement noted above.
In addition, redemptions or repurchases of shares may be funded from any source and Jersey also operates a dual regime with respect to formal reductions of capital which can either be sanctioned by the court or effected without any court input.
No statutory pre-emption on share issuances or transfers
No financial assistance rules
Choice of GAAP
Flexible constitution
Jersey allows great flexibility in the constitutional documents – in particular, the thresholds for special resolutions can be set at any level greater than 2/3 (the default position) and there can be different thresholds for different types of special resolution. It is also possible to hardwire into the constitution relevant investor protections and joint venture provisions as may be required.
Corporate reorganisations
Jersey allows many options with respect to corporate reorganisations, including true legal mergers, migrations/ continuances and in due course will also allow demergers.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
