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LONDON-REIT structures in the Netherlands, Belgium, Spain and France may be running afoul of European Commission law, warns a new report for the European Public Real Estate Association. The EC Treaty stipulates that restrictions cannot be put on the movement of citizens, goods, services, capital or payments within the EU. But a number of the existing European REIT systems, namely those in the Netherlands, Belgium and Spain, specify that the REIT must be resident. This means a non-resident company with property investments in the country is not eligible for REIT status. Trust rules in Belgium and France stipulate that the REIT must be listed on the domestic stock exchange.

The report says that these are “elements that lead to a restriction of EC Treaty freedoms” and make the REITs “unattractive for foreign investors.” The report adds that, to date, “little attention has been focused on the potential incompatibilities of these regimes with community law.”

But the report warns that “EU law does not permit many of these restrictions and it may simply be a matter of time before these impediments are challenged by taxpayers or by the European Commission.” The complication is a failure to harmonize tax and regulatory treatment of REITs, the report goes on to say. Tax issues are the preserve of member states, but their discretion is limited. Tax treatment “must be consistent with EC law,” and so may not restrict movement of citizens, good, services, capital and payment. In this respect EC law “is binding and overarching.”

The problems have attracted the attention of UK authorities, who are currently consulting on the introduction of REITs. Here the report notes that the “UK is looking to make UK-based REITs compatible with EU law so a company resident outside UK could have equivalent tax treatment.”

But the most “definitive” solutions, says the report, would be “the introduction of a uniform EU REIT regime in Europe.” This would “eliminate distortions and barriers in the European cross border tax treatment of REITS.” EPRA is now consulting on how this might work. The association’s chief, Nick van Ommen, in an interview earlier this year, expressed his confidence in the passage of UK REIT legislation by 2006.

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