Here, we provide a global roundup of the latest legislative changes likely to impact real estate fund managers. From shifts in tax regulations to new sustainability reporting requirements, these updates reflect broader trends toward increased transparency, environmental responsibility, and regulatory rigor.
Reserved Investor Funds (RIFs) draft regulations
In response to a review of the UK funds regime, the UK government is proposing a new unauthorised contractual scheme, known as the RIF, aimed at certain investors. This scheme could provide an ‘onshore’ alternative to existing ‘offshore’ structures for UK real estate investments.
Following a consultation period from April to June 2023, draft regulations for the RIF were released in April 2024. These regulations were open for consultation until 14 May 2024, and were authorised under the Finance Act (No. 2) 2024. The following points are based on the draft regulations, which may be revised before they are finalised.
The ‘restricted’ RIF regime
The ‘restricted’ RIF regime, which requires an election to apply, will be available only under the following conditions:
- The RIF is continuously ‘UK property rich’: This ensures non-resident investors are subject to tax, similar to the Fund Exemption Election applicable to ‘offshore’ funds. There are specific consequences for failing to meet this condition
- The RIF’s investors are all tax-exempt: This applies to investors who are exempt from tax on gains due to non-residence, including UK registered pension schemes, certain overseas pension schemes, and sovereign immune investors. This is akin to the treatment of a UK exempt unauthorised unit trust
- The RIF doesn’t invest in UK property or UK property-rich companies: There is an exception for investments of less than 10% in certain UK property-rich collective investment vehicles. If the RIF avoids UK property investments, there should be no UK tax loss for non-resident investors
Potential impact on RE fund managers
Following the successful implementation in the UK of the Private REIT regime, the RIF is expected to be also highly attractive as a fund vehicle for investment in UK commercial real estate for tax exempt investors (as mentioned above under the restriction rules). Unsurprisingly, this new vehicle has already received the backing of the Association of Real Estate Funds (AREF).
Summary of the Corporate Sustainability Reporting Directive
Since 2018, large companies in the EU have been required to make sustainability disclosures under the Non-Financial Reporting Directive (NFRD). However, in January 2023, the Corporate Sustainability Reporting Directive (CSRD) was introduced, expanding and enhancing these requirements significantly. The new directive aims to increase transparency and broaden the scope of reporting, affecting approximately 50,000 companies.
Key points of the CSRD
- Expanded scope: Starting with reports for fiscal year 2024, companies currently covered by NFRD will begin reporting under CSRD. From 2026, even more large companies will be required to disclose sustainability information. Small- to medium-sized enterprises (SMEs) will also fall under the directive starting in 2027
- Increased reporting requirements: The CSRD introduces more comprehensive reporting obligations, including a mandatory audit and assurance process to prevent greenwashing. This is intended to provide investors with better information on sustainability-related risks and promote transparency about the impact of companies on people and the environment
- Company eligibility: The CSRD will apply to large companies that meet at least two of the following criteria:
- 250 employees (down from 500 under NFRD)
- €40 million in turnover
- €20 million in total assets. Additionally, companies listed on EU-regulated markets and non-EU companies with substantial EU turnover will be subject to CSRD. Listed micro-enterprises are exempt
- Reporting standards: Under CSRD, companies must report on their sustainability impacts, risks, and opportunities, covering a broad range of environmental, social, and governance factors. The reporting will follow the EU Sustainability Reporting Standards (ESRS), which are being finalised
Preparation for CSRD: Companies should begin preparing now by understanding the new requirements and assessing their current reporting processes. Although reporting starts in 2025, early preparation is crucial to meet the updated standards and ensure compliance.
Summary of Dutch Supreme Court Ruling on German Sondervermögen
On 14 June 2024, the Dutch Supreme Court made a significant decision regarding the tax treatment of German Sondervermögen investing in Dutch real estate. The court ruled that a German Sondervermögen doesn’t qualify as a ‘special-purpose fund’ (doelvermogen) if it issues participation rights entitling holders to the fund’s capital. Consequently, such funds aren’t subject to Dutch corporate income tax (CIT) on income derived from Dutch real estate.
Key insights
- Legal form: The Dutch Supreme Court decided that a Sondervermögen should be considered a foreign legal form equivalent to a Dutch mutual fund for joint account (fonds voor gemene rekening)
- Tax status: The Dutch Supreme Court ruled that German Sondervermögen aren’t subject to Dutch CIT on income from Dutch real estate
- Refunds possible: German Sondervermögen previously subject to Dutch CIT may be eligible for refunds of any Dutch CIT paid, subject to individual review
- Future changes: Starting in 2025, new Dutch tax classification rules will address the Supreme Court ruling, altering the tax treatment of such funds
Impact
- General application: The ruling is applicable to other German Sondervermögens and similar foreign legal forms with multiple investors that directly invest in Dutch real estate and issue capital-entitling participation rights. These entities shouldn’t be subject to Dutch CIT for current and prior tax years, potentially leading to tax refunds
- German tax treaty: The tax treaty position with Germany might also be relevant in determining tax implications
Looking forward
- Upcoming changes: New Dutch tax classification rules effective 1 January 2025, will include non-transparent foreign legal forms like Sondervermögen on the list of non-resident taxpayers. Thus, from 2025, these entities will be subject to Dutch CIT on Dutch real estate income
- End of FBI-regime: The FBI-regime will no longer apply to Dutch entities directly owning Dutch real estate starting 1 January 2025, affecting the applicability of similar arguments by foreign entities.
How IQ-EQ can help
Our team of experts offers comprehensive, tailored support services, powered by cutting-edge software and a robust data platform. From corporate structures to fund management, we tailor the appropriate solutions across various jurisdictions. Discover how we can help you establish and administer everything from special purpose vehicles to REITs.
Contact us today to learn more about how we can support your real assets needs.
About the author
Tamas Mark is Global Head of Real Assets at IQ-EQ, based in Luxembourg. With over 20 years’ experience in the industry, Tamas has extensive knowledge of managing complex real estate structures holding assets across many property sectors.
