02 Introduction 03 Economic views Benelux real estate insights 06 The day after tomorrow – a short perspective on the financial crisis Issue 1 – November 2009 09 Belgian and Dutch REIT going cross­border in the light of the European fundamental freedoms

Contents 12 European Alternative Investment Fund Manager’s (AIFM) Directive 14 Fraud within Real Estate companies – lessons (to be) learned 16 Tax updates 20 Recent publications

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Introduction

Welcome to the first issue of Through Benelux real estate Insights, Benelux real estate insights, our aim is to inform investors in the an e­publication co­produced by region on certain topics relevant to the real estate industry. PricewaterhouseCoopers real estate teams in The Netherlands, Following five consecutive quarters of Belgium and Luxembourg. contraction of the Euroland economy, commentators report on signals of Benelux real estate insights stabilisation of economic output. Despite follows the successful launch of these recent positive signals there are UK real estate insights last year. still significant differences in economic performance of Euroland’s member states. Following France and Germany reporting GDP growth again in the second quarter, the Belgian and the Netherlands are reporting GDP growth in the third quarter. Consumer and business confidence has clearly improved. While the economy is stabilising, the property sector is entering an occupier crisis partly caused by rising unemployment. Together with the limited liquidity and shortage of bank financing, this has caused many investors to stay out of the market. In the meantime yields have moved up industry in the Benelux region. developments of the REIT regimes in significantly. The Dutch ROZ/IPD index Unfortunately, the market has been faced Belgium and the Netherlands and a reported a ­3% annual return over the with serious fraud in large real estate number of tax developments in the third quarter. At the same time brokers organisations. How vulnerable is your Benelux countries. report an increase in investment volume organisation for fraud? From the compared to the first quarter and regulatory field we will report on the draft Jeroen Elink Schuurman speculate about stabilising yields in the AIFM directive published by the EU Real Estate Tax Leader months to come. recently. When implemented this PricewaterhouseCoopers (Netherlands) directive will have significant In this issue of Benelux Real Estate consequences for the real estate fund Insights we present to you a number of industry. Further we will report on recent subjects relevant to the real estate 2 Benelux real estate insights Print Quit Home

Economic views – Euroland

Economic output in Euroland Euroland appeared to stabilise in Q2 2009 Economic growth profile The Euroland economy contracted for a but has now contracted for five fifth consecutive quarter in Q2 2009, with 4% consecutive quarters. Fiscal and output 0.2% lower than in the previous monetary policy measures have quarter and 4.8% lower y­o­y. However, 2% boosted demand, but consumer the pace of contraction has moderated 0% spending and business considerably from the 2.4% q­o­q reduction in output recorded in Q1 investment remain weak. (see Chart 1). ­2%

As might be expected within a regional ­4% economic bloc, the aggregate figures ­6% mask quite varied economic 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f 2010f performance amongst Euroland’s sixteen member states. The economies of Annual GDP change Long term average Source: Eurostat; PricewaterhouseCoopers forecasts (f). France, Germany, Portugal, and Slovenia all grew in the second quarter; economic output in Ireland was unchanged compared to the first quarter; and Spain, Chart 1: GDP growth in selected Euroland economies

Italy, the Netherlands, and Finland all 2% contracted further. 0% The near stabilisation in economic ­2% output has been accompanied by increasing consumer and business ­4%

confidence, particularly in the services ­6% sector. The composite Euroland Economic Sentiment Indicator rose to ­8% AT DE ES FR IE IT NL PT SI Euroland 82.8 in September from 80.8 in August, and an historic low of 64.6 in March 2008 Q3 2008 Q4 2009 Q1 2009 Q2 Source: Eurostat (see Chart 2 overleaf).

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Economic views – Euroland

Chart 2: Euroland composite economic sentiment index

120

110

100

90

80

70

60 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09

Composite Economic Sentiment Index Source: Eurostat

However, consumers in Euroland still Weak consumer spending is likely to being diverted towards new car Euroland suggest expectations of a appear unwilling to spend. Retail sales have been caused primarily by the high purchases. Overall consumer continued mild contraction in the volumes continue to decline – total retail and rising unemployment rate, which will expenditure increased by a marginal manufacturing sector, and expectations trade in Euroland was 2.6% lower in weigh heavily on household budgets and 0.1% in Q2 2009 compared to the of an expansion in the services sector. August than a year earlier, compared to a sentiment. The Euroland unemployment previous quarter, but was 4.8% lower 1.6% decline in the year to July. Sales of rate rose to 9.6% of the labour force in year­on­year. Export businesses continue to be durable goods have contracted more August, compared to 9.5% in July. Over affected by weak demand amongst rapidly than food sales. 3.2 million jobs were lost in Euroland in Weak consumer demand is at least some of Euroland’s key trading partners. the year to August. Spain, Ireland and partly responsible for continued Demand is likely to be constrained The downward trend in spending was Slovakia have the highest unemployment investment restraint by businesses, with further by the strength of the euro, which despite the current price deflation and rates in Euroland at 18.9%, 12.5% and investment expenditure 11.4% lower in has appreciated against other major evidence of positive wage growth – 11.6% of their labour forces respectively. Q2 compared to a year earlier. currencies in recent months. However, consumer prices across Euroland fell by the pace of decline in export volumes 0.3% in the year to September whereas In addition, the published retail sales Industrial new orders increased for the slowed to 1.5% in Q2 2009 relative to labour costs were 4% higher in Q2 2009 figures do not include vehicle auto sales, second consecutive month in July, rising the previous quarter, from 9.2% in Q1. compared to a year earlier – which which have been boosted by car by 2.6% compared to June, suggesting should boost consumer purchasing scrappage schemes in some Euroland that conditions in the sector have power, other things equal. economies. This may have resulted in stabilised. However, forward looking some expenditure on durable goods surveys of business confidence in Continued 4 Benelux real estate insights Print Quit Home

Economic views – Euroland

Outlook Euroland latest GDP forecasts

Despite growth in the key Euroland economies of France and Germany in GDP (annual %change) 2008 2009f 2010f GInflation (HICP %change, annual 2008 2009f 2010f Q2, the outlook for the Euroland Euroland 0.7 ­4.1 0.6 Euroland 3.3 0.3 1.4 economy remains weak. We forecast a contraction of 4.1% in 2009 with only Austria 1.8 ­3.8 0.0 Austria 3.2 0.3 1.1 a modest recovery of 0.6% in 2010. Belgium 1.1 ­3.4 0.1 Belgium 4.5 0.1 1.0 Finland 0.9 ­5.7 0.5 Finland 3.9 1.6 1.3 Jeroen Elink Shuurman France 0.4 ­2.2 1.2 France 3.2 0.1 1.2 Real Estate Tax Leader PricewaterhouseCoopers (Netherlands) Germany 1.3 ­5.0 1.3 Germany 2.8 0.3 1.0 Greece 2.9 ­1.1 0.8 Greece 4.2 1.2 2.0

Yael Selfin Ireland ­3.0 ­7.9 ­1.8 Ireland 3.1 ­1.6 0.4 Head of Macro Consulting Italy ­1.0 ­5.1 0.2 Italy 3.5 0.7 1.4 PricewaterhouseCoopers (UK) Netherlands 2.1 ­4.2 0.3 Netherlands 2.2 0.9 0.9

Portugal 0.0 ­3.4 0.1 Portugal 2.7 ­0.7 0.9

Slovakia 6.4 ­5.2 1.5 Slovakia 3.9 1.1 2.0

Slovenia 3.5 ­6.2 0.5 Slovenia 5.6 0.7 1.9

Spain 1.2 ­3.8 ­0.7 Spain 4.1 ­0.2 1.5

Source: Eurostat; Pricew aterhouseCoopers forecasts (f) Source: Eurostat; Pricew aterhouseCoopers forecasts (f)

Euroland latest GDP forecasts

2006 2007 2008 Share of 2008 world total

Population (millions) 322 324 325 4.94%

GDP, market rates (US$ billions) 10,735 12,306 14,203 22.86%

GDP, PPP rates (US$ billions) 9,976 10,524 10,873 15.67%

GDP per capita, market rates (US$) 33,379 38,023 43,657

GDP per capita, PPP rates (US$) 31,018 32,516 33,423 Key metrics updated regularly at Source: International Monetary Fund economics.pwc.com 5 Benelux real estate insights Print Quit Home

The day after tomorrow – a short perspective on the financial crisis

Whereas the unprecedented Many businesses are still in survival financial crisis of late 2008 mode and will examine ways of further revealed clear flaws in the reducing costs in the short­term to maintain profitability or contain losses. banking system, the asset But they will also need to evaluate management sector showed itself exactly what sustainable cost to be considerably more robust. management means to them. Making Assets under management did indiscriminate cuts, cutting too deeply or shrink, of course, and individual not enough will be detrimental to the business model. Each firm will need to cases of malpractice arose, but develop its own view and methods of the reputation of many firms did implementing its view – unfortunately not suffer unduly. Nevertheless, there is not a template for this in the the impact of the crisis on the current environment. sector is likely to be felt at a At the same time, those firms that are profound level and for a long time. able to invest in key areas such as Changes in regulations, investor compliance, risk management and preferences and changes within reporting infrastructure to cope with new, possibly draconian regulation, will derive the industry itself will provide a a direct benefit. So investment, where range of opportunities as well as possible, must be reallocated in a highly threats that no asset management targeted way. firm can afford to ignore. In some cases, real estate investors will postpone entry into new product areas PricewaterhouseCoopers’ point of view Business models are under stress and/or overseas markets. Although these “The day after tomorrow” focuses on the markets may bring the possibility of the nine key issues and imperatives for Real estate firms are accustomed to largest medium and long­term growth, a new world in asset management, economic cycles. But rarely has a survival will inevitably come before and provides a clear articulation of our downturn hit so suddenly and with such expansion. view on what asset management force as in the second half of 2008. businesses should consider given the A combination of sharply falling markets A key variable cost – human resources – unprecedented market conditions. and investor redemptions in the space of will remain a focus for some time to In this article, we discuss three of those just a few months produced a reduction come and firms must decide which issues that are relevant for the real in assets managed. estate market. Continued 6 Benelux real estate insights Print Quit Home

The day after tomorrow – a short perspective on the financial crisis sections of their staff contribute directly Institutional investors will increase their to the bottom line and which do not. due diligence efforts and asset managers Where reduction of labour is challenging, will need to better articulate risk and reallocation of resources should, at the reward to investors. Larger real estate very least, be considered. Spending on funds may be better equipped to meet marketing and sales, administration, demands on requests for information, advisers and consultants will be pared to transparency and risk management the bare minimum and may only rise reporting than smaller competitors. slowly over a period of several years. All firms will need to bear in mind that less can be more. There is an inverse The effect of lower revenues and relationship between the quantum of pressure on profitability levels may lead data and its ability to be understood, and some firms to look at the disposal of investors are increasingly aware of this. non­core funds or businesses, or change their focus from direct to indirect There will be particular attention paid to investments. As they have been less counterparty and liquidity risk. Ensuring impacted by the crisis, independent that assets are segregated on the fund managers and insurance balance sheet of the counterpart will be companies could leverage these critical and asset managers should be disposals to grow their asset base and aware of the sensitivities. At the same enhance their skill sets. time, investors have suffered from limited liquidity in some of their investments. This will make them think twice about How will investors react in the which asset classes and which asset post­crisis environment? managers to select. or did not prepare for an extreme range increasingly employ third­party Institutional investors have great cause Investors will also want to see more of market conditions. Investors will now assurance to introduce an for grievance in the wake of the credit evidence of enhanced management of ask how well managers understand their independent view. crisis, as many suffered sharp losses risk, in its broadest sense. The ability own strategies, and asset management from banking products that were to explain how risk is managed and firms will need to be more persuasive Allocations to equity investments are poorly understood by buyer and seller. controlled is now as important to than they have been in the past on this likely to increase as investors seek to Institutions are likely to seek safe sceptical investors as information about point if they are to attract and retain rebalance their portfolios after a period havens in well­capitalised and well­run specific risk measures relating to asset assets. Where investor scepticism of declining values in their equity companies. Smaller investment classes and portfolio construction. In the remains – such as in illiquid or complex allocations. However, the investment managers, with insufficient infrastructure, latter half of 2008, it became evident that strategies where full transparency is are likely to struggle to attract significant scenario planning by some managers difficult to provide – managers will assets from large institutions. had failed; they either did not anticipate Continued 7 Benelux real estate insights Print Quit Home

The day after tomorrow – a short perspective on the financial crisis strategies followed by many alternative The weight of redemption requests has products like real estate will be Asset Management put pressure on some firms to raise the examined given their relatively poor necessary cash to repay banks or performance during the crisis. Many investors. Investors may in the future alternative products were found to be only be willing to commit funds to correlated to other asset classes – The day after tomorrow vehicles with solid financial backing and particularly equities – bringing into Continuing the PricewaterhouseCoopers perspective series on the global financial crisis access to ready cash. This could lead to question the rationale for investing in a speeding up of the domination of the some of them. alternative investment funds sector – including private equity and real estate funds – by large, stable institutions. Deleveraging in the banking system will affect asset For the complete report please visit management pwc.com/dayaftertomorrow

Banks have expanded their balance Jeroen Elink Schuurman sheets rapidly in recent years without a Real Estate Tax Leader simultaneous rise in core capital. They PricewaterhouseCoopers (Netherlands) are now being compelled to redress this Kees Hage imbalance. As banks seek to rebuild their Global Real Estate Leader balance sheets they are likely to be PricewaterhouseCoopers (Luxembourg) ruthless in enforcing penalties on covenant breaches by companies they lend to.

This has a particular impact on asset The biggest impact of deleveraging is on Since one of their unique selling points managers. Although they are not highly those funds which depend on debt to is access to plentiful debt and the extra leveraged at company level, they have a gain access to transactions and magnify levels of return this implies, their value high natural gearing to markets, so in a successful investment strategies. to investors may decline. As a reflection, downturn their earnings tend to be hit Without access to affordable leverage fee levels are already moderating and disproportionately. This leaves them with reasonable levels of collateral, this trend may accelerate. exposed to potential breaches of their business models may struggle. covenant and other cash flow and balance sheet difficulties.

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Belgian and Dutch REIT going cross­border in the light of the European fundamental freedoms

Both the Dutch FBI (Fiscale REIT vehicles are typically subject to a number of restrictions in terms of permitted activities, gearing restrictions, shareholders Beleggingsinstelling) and the and distribution requirements. In the enclosed table, you will find an overview of the main restrictions for the FBI and SICAFI Belgian SICAFI (Société respectively. You will see that these restrictions are comparable. d’investissement Immobilière

à Capital Fixe) are regulated real Restrictions FBI SICAFI estate investment vehicles with Permitted activities Passive investments (no third party property development) Real estate investments (no third party property development) special tax status. The FBI was Risk diversification No Max 20% in same project (with exceptions) introduced in 1969 and was the Gearing restrictions Loan to value of 60% Loan to value of 65% (max 40% mortgaged loans) first REIT look­alike regime in Interest cover ratio: 125%

Europe; the introduction of the Shareholder restrictions Yes No

Belgian REIT dates back from Listing requirements No Yes (30% initial free float)

1995. Over the years, each Distribution requirements 100% of its taxable profits (excluding capital gains to the extent that Minimum 80% of its net earnings (after net debt reduction) and regime has experienced a these are contributed to a reinvestment reserve)] excluding capital gains (provided reinvestment within 4 years) number of changes.

The Belgian SICAFI regime is only albeit only on a notional tax basis subsidiaries once some adjustments to available to listed vehicles and in (consisting of the disallowed expenses the Royal Decree of 1995 providing for principle also to unlisted subsidiaries of and the so­called abnormal or the regulatory framework will become listed SICAFI, whereas in the benevolent advantages received). As a effective. Netherlands there are public and private consequence, there is virtually no FBI’s, albeit subject to (different) income tax due on the rental income and The dividend distributions by the FBI/ shareholder restrictions. dividend income received by the REIT SICAFI to their shareholders trigger a vehicle. Due to the fiscal unity rules in withholding tax of 15%. Withholding Like most of the REIT regimes, taxes on the Netherlands, profits generated taxes are reduced to zero in the event of the income generated via the FBI/ through subsidiaries of the FBI are in distributions by a residential SICAFI and SICAFI are levied at shareholder level practice also exempt from tax. Belgium in case of distributions by the FBI to the and not at the level of the REIT vehicle does not have tax grouping rules, but extent of distributions out of its itself. Whereas a Dutch FBI is subject to due to recent changes to the Belgian reinvestment reserve. a corporate income tax rate of 0%, the Income Tax Code, the special tax regime Belgian SICAFI is subject to the standard will become available to SICAFI corporate income tax rate of 33.99%, Continued 9 Benelux real estate insights Print Quit Home

Belgian and Dutch REIT going cross­border in the light of the European fundamental freedoms

There are no specific restrictions investing in Belgian real estate will not applicable to foreign shareholders. In the be eligible for the benefits of the Belgian event of foreign shareholders being SICAFI regime. The Belgian legal form resident in a treaty country and entitled requirement can certainly be challenged to the treaty benefits, the 15% domestic under EU law and a foreign REIT whose withholding tax rate can possibly be shares are offered on the Belgian market further reduced. As the Belgian SICAFI is should not be refused to be recognised subject to Belgian corporate income tax, as a SICAFI, assuming all other albeit on a limited taxable basis, it can regulatory conditions are met. So far, be defended that the taxation condition Dutch FBI’s who have invested in in the Parent Subsidiary Directive is met Belgian real estate in the past have done and that subject to the company form so without applying for the SICAFI and minimum shareholding requirements advantages or have set up a full scope being met as well, the withholding tax in Belgian SICAFI controlled by the REIT the hands of EU corporate investors can (and listed on Euronext Brussels). be reduced to zero. The Dutch FBI regime has been There are no specific regulatory modernised with effect from 1 August restrictions to the SICAFI/FBI to invest 2007. Since then, besides Dutch public in foreign real estate assets. The companies, limited liability companies question whether foreign REITS investing and mutual funds, the FBI regime is also in Belgian/Dutch real estate are eligible open to certain non­Dutch entities for the special tax status is more including entities from EU Member problematic. States, provided that the entity has similar characteristics as a Dutch public The Belgian SICAFI regime is subject The Belgian SICAFI is not subject to its profits may, together with related company, limited liability company or to regulatory approval by the Belgian any shareholder restrictions. In the entities, own 45% or more of the shares mutual fund. Therefore, a SICAFI could Banking, Finance and Assurance Netherlands, different shareholder in a public FBI and no individual may in principle benefit from the zero Commission and this regulatory approval restrictions apply to public and private hold an interest of 25% or more. With corporate income tax on the real estate is only available to public limited liability FBI’s. FBI’s whose shares are officially respect to a private FBI, 75% or more income generated in the Netherlands, companies and partnerships limited by quoted on a stock exchange and FBI’s of the total shares must be held by provided that it can be considered as shares established under the laws of holding a permit to issue shares to the individuals, entities not subject to having similar characteristics. Belgium. Therefore, based on the current public are considered to be a public FBI. taxation on their profits and FBI’s. status of the legislation, a Dutch FBI No single entity who is subject to tax on Continued 10 Benelux real estate insights Print Quit Home

Belgian and Dutch REIT going cross­border in the light of the European fundamental freedoms

So far, the Dutch tax authorities have jurisdictions. The question is whether been very reluctant to grant the FBI this situation can be upheld in the light status to foreign REIT companies, of articles 43 and 56 of the EC Treaty. applying this comparability test indeed In any case, the Dutch FBI/Belgian very restrictively. Based on the wording SICAFI holding or considering real estate of the law Belgian SICAFI having direct investments in Belgium/the Netherlands real investments in the Netherlands have every reason to call upon recent should be able to apply the Dutch FBI case law of the European Court of regime provided that the SICAFI abides Justice to secure their tax status, where by the strictest regulatory restrictions needed, through protective tax filings/ applicable both in the Netherlands and claims. Surely, the recent Aberdeen case Belgium. When comparing each of the sheds light on the question whether the criteria, one should take into account Dutch and Belgian regimes are in that the tax and accounting rules practise EU­proof. Also the complaints applicable to the FBI and SICAFI are not lodged by the European Commission the same and therefore the calculation against Italy for non compliance of its bases for these criteria differ (e.g. loan to REIT­regime (SIIQ) and Estonia in respect value calculations). Furthermore and of the real estate income received by the notwithstanding the above, it remains foreign funds are worth watching closely. to be seen whether such a strict view adopted by the tax authorities can be Maarten Tas upheld in the light of recent European Tax Director jurisprudence, especially if it is clear PricewaterhouseCoopers (Belgium) that the investors of the SICAFI will be Jeroen Elink Shuurman effectively taxed on the distribution Real Estate Tax Leader of the Dutch real estate income. case if SICAFI fulfils the conditions to and such withholding tax is not PricewaterhouseCoopers (Netherlands) qualify as an FBI. The dividends paid creditable (refundable) in the hands of A Belgian SICAFI can also invest in by the Dutch FBI to the Belgian SICAFI the Belgian SICAFI. Dutch real estate indirectly through a will however trigger 15% dividend Dutch vehicle qualifying as a FBI. In that withholding tax in the Netherlands Considering the above it can be said that case it is of great importance that SICAFI (5% WHT in case of minimum 10% – based on tax laws and policies – there is a qualifying shareholder of FBI under participation in accordance with the is still a fence around the existing REIT the Dutch shareholder tests. This is the Belgian­Dutch double taxation treaty) regimes forming a barrier for non­ resident funds to invest in multiple 11 Benelux real estate insights Print Quit Home

European Alternative Investment Fund Manager’s (AIFM) Directive

The European Commission’s draft Who falls under the scope of Alternative Investment Funds the Directive? Management Directive (Directive) The Directive catches the managers of that was released on 29 April real estate funds as well as REITs, listed 2009 has caused waves of investment trusts and other forms of consternation across the industry collective investment vehicle which have in Europe and further afield. previously been outside the scope of Clearly, this autumn will determine financial services regulation. However, some Alternative Investment Fund the shape of the legislation that Managers (AIFM) are excluded from the eventually comes into force. scope of the Directive because either What this will be is, as yet, far they have limited assets under from clear. But what is clear is management or they are divisions of that some form of legislation – regulated institutions like banks, pension funds and insurance companies. impacting the alternative investment industry very Fund managers established outside the broadly – will be introduced. EU will, after a transition period of three years, need to seek authorisation from a Member State in order to market shares or units in any alternative investment fund in the EU, subject to meeting certain stringent conditions which have been approved by the EU Commission. If enacted in its current form, the Below we give a quick introduction These conditions relate to prudential Directive will impose a comprehensive to some of the main aspects of the regulatory capital, systems and controls, regulatory regime on the managers of all expected directive as well as our view risk management and reporting collective investment vehicles which are on the potential impact for the real requirements. not qualifying UCITs, whether open or estate industry. closed ended and whether or not listed, subject to a few minor exclusions. This could significantly increase the costs faced by real estate fund managers.

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European Alternative Investment Fund Manager’s (AIFM) Directive

What are the core requirements of What might the impact be on the As it is highly unlikely that the political Presidency’s transparent approach, the expected Directive? real estate industry? approval of the Commission’s proposals in making this document public, is reached before the end of 2009, the demonstrates its desire to keep the wide Regulation: AIFMs require authorisation Currently the real estate fund regulatory Directive will probably not come into group of stakeholders informed (as there from the home Member State regulator. regime around Europe is broadly divided force before 2012. However, if the can be no formal consultation with AIFMs will be subject to operating between relatively lightly regulated draft Directive is implemented even stakeholder groups at this stage in the conditions. They should amongst others partnership regimes (e.g. the UK) and substantially in the current form, then legislative process). display their operational activities, like more heavily regulated regimes e.g. in all funds and their managers that are affected by the Directive will need to arrangement for governance, risk Germany, Luxemburg and France. What is your contribution? management, liquidity management. Investors have a choice as to what is recognise that the new regime will have most appropriate for them. The new a major effect on how they operate, The co­decision makers – the Council Disclosure: Report “regularly and regime will result in all AIFMs being and on their cost base. and the European Parliament – are keen periodically” to regulator and investors heavily regulated with significant to engage with industry to develop on various matters. From discussions with stakeholders, increased costs (authorisation, workable solutions. As the first exchange transparency, reporting requirements). it is clear that there is a strong Capital: Minimal capital requirements commitment by many in Brussels and of views in Parliament shows, there is a recognition that this legislation cannot will apply for AIFMs. The Directive could accelerate a elsewhere to ‘get this right’ and to be allowed to jeopardise European consolidation in the European fund ensure the European alternative Valuation: (Independent) Regular investors’ access to global capital management industry with the burden investment industry is made safer but valuation requirements for all AIFMs. markets. It is still important for all parts of regulation making the cost/benefits that the interests of European investors of the industry to engage in the debate of managing smaller funds uneconomic. are not damaged in the process. Depository: AIFM must ensure that each directly or through industry associations. alternative investment fund appoints a EU registered banks, pension funds And not just market participants depositary for its assets. The exact and insurance companies are potentially Process themselves, the voice of institutional restrictions and role of the depository are excluded from the Directive which could investors – such as the Association of a major topic of discussion. Recently, Sweden, which holds the EU give them an advantage over private British Insurers and a combination of Presidency until December 2009, equity real estate fund managers. Dutch pension funds and institutional Leverage: Disclosure of systematic use released an issue note that focuses on of high degree of leverage. investors which have spoken out recently A migration of Non EU AIFMs (offshore) key areas for further study and debate in – has a strong weight in the debate. to EU Jurisdictions (onshore) can be the Council. Adhering to its facilitator expected in the years following role, the Swedish note puts forward Serge de Lange implementation. Jurisdictions which various options for consideration without Senior Manager, Tax already have a good fund manager (often) stating its own preference. PricewaterhouseCoopers (Netherlands) infrastructure in place, like Luxembourg, Although it is not clear what the outcome Jean­Baptiste Garcia Ireland, the Netherlands or Switzerland, of the discussions in Council will be at Assistant Manager, Tax are expected to be most attractive. this stage, it does appear that some of the more contentious issues will be PricewaterhouseCoopers (Netherlands) considered fully. The Swedish 13 Benelux real estate insights Print Quit Home

Fraud within Real Estate companies – lessons (to be) learned

The real estate sector in the (i) leadership (ii) people (iii) policies & Netherlands has been stirred up strategy (iv) partnerships and resources 1 by several fraud cases over the and (v) processes . last few years. Even though In this article, we will provide an insight this is not something completely into risks of fraud frequently seen and new within the real estate sector, recommendations relating to internal control. Perhaps these guidelines may it is notable that even large be of use for your company too. and well­known real estate companies have recently become Have you implemented proper internal subject to fraud. controls to cover the risks of fraud?

Leadership

Limited access to top management, procedures that are sometimes ignored by them and inappropriate use of power of attorney by (top) management encourage improper behaviour within all functional levels in an organisation. One of the most important preconditions to minimise fraud is the tone at the top of the company, including the company’s culture on improper behaviour. Because of its specific characteristics, estate sector an attractive target Top management must show that the real estate market is more sensitive for fraud. integrity is of utmost importance and to fraud. The real estate market is act accordingly. This can be supported characterised as an inefficient and Have you ever considered the by a code of conduct, corporate imperfect market making it non­ possibility that your own company governance code and provisions for transparent. real estate is heterogeneous may be subject to fraud? reporting alleged irregularities. and therefore comparing transaction Motives for fraud, such as opportunity prices is difficult. Combined with the fact and pressure, together with a lack of that market evidence is not always internal control make companies extra available and individual properties have vulnerable. Main causes of fraud lie in high unit prices, this makes the real 1 EFQM Excellence Model. Continued 14 Benelux real estate insights Print Quit Home

Fraud within Real Estate companies – lessons (to be) learned

People Policies & strategy Partnerships and resources It is recommended to contractually only agree on additional work that has been In the real estate sector, it regularly Have you ever checked what When properties are bought or approved on the basis of the four­eye occurs that employees have their own happened to the real estate in the companies work on a development principle and after checking the (advisory) companies that provide period prior to your own purchase project they often contract several appropriateness of that additional work real estate services, alongside their as well as a few months after you subcontractors, such as a real estate in the light of the contract. Overruns of regular terms of employment. They can have sold it? brokers, developers, architects and the development projects must be also hold a substantial interest in (e.g. construction companies. Potential risks analysed in detail by an independent shares) or have strong connections When real estate you once owned has in this area are non­transparent (project) employee within the organisation who (e.g. relatives) with a company within the been sold again by the buyer to a third administrations, charge fees for unclear also needs to focus on checking the real estate sector. A risk for conflict of party within a short timeframe or even or non­performed work, and favouritism, appropriateness and completeness of interests may occur when employees several times afterwards, the increase in which can result in damage to the the initial cost calculation (calculation, execute their duties for your company. price can be remarkable in this (limited) company’s reputation. methodology, assumptions, etc.) period of time. The company faces the It is recommended to screen personnel risk that the transaction price was too It is recommended to screen suppliers to In this article, we have described some on commencement of employment, low compared to the actual market value determine the ultimate beneficial owner situations frequently seen in the real when they switch within the organisation at that time. and the reputation of the counterparty. estate sector that might increase the risk or get promoted to a next functional When using subcontractors it is of fraud within an organisation. The main level. Screening should at least be It is recommended to track the recommended to agree with them to conclusion is that proper internal performed through all publicly known transactions of the real estate sold have the right to access their (project) controls with sufficient checks and sources and can additionally comprise during a certain period of time (e.g. one administration. balances are needed to minimise the obtaining references from third parties. year) and investigate if the price has risks on each of the five causes of fraud As this research is complicated and increased. If you notice that a Do you know to whom and which (i) leadership (ii) people (iii) policies & confidential and often requires access to transaction occurred for a substantially payments your subcontractor makes? strategy (iv) partnerships and resources expensive databases, you may consider higher amount, you should investigate and (v) processes. the reason for this and determine if there using a professional company to carry Processes out this work for you. Furthermore, it is is a risk that your company perhaps sold Sidney Herwig recommended to have employees the property for an amount below the Within project development, it often Senior Manager, Assurance register the interest they hold in actual market value on the date of the occurs that additional work is invoiced PricewaterhouseCoopers (Netherlands) companies and let them confirm their transaction. by the counterparty that was not Wendy Verschoor independence. foreseen and/or approved, or that work Principal Manager, Advisory in progress is written off without proper PricewaterhouseCoopers (Netherlands) investigation and reporting. The company faces the risk that it agreed on illegitimate deals that are beneficial to employees in the organisation or to a counterparty. 15 Benelux real estate insights Print Quit Home

Tax update – Luxembourg

A recent and positive development for Specific developments in the tax • The removal with effect from 1 Luxembourg has been the government’s system that are likely to be of special January 2009 of the withholding response to the discussions at the G20 significance for the Real Estate industry tax levied on dividends distributed summit in early April 2009, concerning include: to companies holding a significant tax havens and black lists. Luxembourg participation (as defined under has reacted promptly to ensure that its • The abolition with effect from Luxembourg’s broad­ranging standing in the international community 1 January 2009 of the 0.5% capital participation exemption) in a is not damaged by incorrect and harmful duty (previously computed on any Luxembourg company, and which perceptions. At the end of April 2009, the increase in the equity of a company) are resident and fully taxable in any Luxembourg government announced and its replacement by a fixed duty country with which Luxembourg that it had already completed of EUR 75; has a double tax treaty. renegotiation of the “exchange of • For 2009, a reduction of the aggregate information” clause in its tax treaty with An evolution in the fund structuring corporate income tax rate to 28.59% the USA, in order to give (or be given) environment has been the growing use (it was 29.63% for the year 2008), rights of access to information for tax of the SICAR (Société d’Investissement assessed on the commercial (and authorities investigating fiscal à Capital Risque) form as a fund vehicle. worldwide) income of a Luxembourg irregularities which are fully consistent In the past, questions have been raised company unless a specific exemption After two years of strong with OECD norms. This will mean that as to whether the SICAR’s tax attributes is applicable (e.g. participation economic growth in 2006 and Luxembourg will no longer appear on the (which offer a broad exemption from exemption or by virtue of a tax treaty); income derived from risk investment, 2007, disturbance in the financial “black list” of territories referred to in including debt) was at risk of being draft US tax legislation targeting tax • The recent entry into force of the markets slowed Luxembourg’s regarded as state aid under EU law. haven abuse. Luxembourg is also Luxembourg/ Hong Kong tax treaty economy in 2008. However, the Whilst it is understood that the EU energetically working on other tax treaty (applicable retrospectively from Commission may have carried out Luxembourg government has renegotiations, in order to meet 1 January 2008 in Luxembourg), some form of review, there is now continued to take steps to retain commitments to have sufficient tax and the signatures of both the little indication that any unfavourable and improve Luxembourg’s treaties in force that meet the OECD Luxembourg/India tax treaty and the conclusions will ever emerge. attractiveness as a jurisdiction for norms in this area of “exchange of Luxembourg/ UAE tax treaty (date of information”, and hence to be removed pending ratification); and David Roach international business, and this is from the OECD “grey list” published Partner likely to be beneficial both to following the G20 summit. PricewaterhouseCoopers (Luxembourg) investors owning real estate in Luxembourg and to investors using Luxembourg as a holding and financing location for real estate in other European or Asian territories. 16 Benelux real estate insights Print Quit Home

Tax update – Belgium

The main Belgian tax features of the ruling commission has currently (assessment year 2010) can, subject to relevance for real estate investments revised slightly the conditions certain formalities, result in a one­off can be outlined as follows: imposed on the so­called split sale investment deduction amounting to structures. By transferring real estate 15.5% of the invested amount. • nominal corporate income tax rate of through those structures, the effective 33.99%, whilst the average effective mixed transfer tax can be reduced Belgium has implemented the EU tax rate in Belgium approximately to approximately 1% (instead of Merger Directive with effective date as amounts to 26% due to the so­called 12.5% or 10% in case of sale of full of 12 January 2009. The new regulations notional interest deduction. Indeed, as ownership of the property); will lower most of the tax obstacles you may know, this tax incentive (also standing in the way of cross­border known as “NID”) provides that Belgian • no withholding tax on dividends reorganisations involving Belgian companies and Belgian permanent distributed to parent companies companies. In the current economic establishments (e.g. holding real (i.e. 10% holding) located in EU and climate, this may constitute a basis for estate) are allowed to deduct an Treaty Countries; real estate groups that aim to optimise amount of notional interest based on their real estate operations, for instance their adjusted net equity at a rate fixed • VAT is a cost on most real estate by taking advantage of the cross­border by reference to the 10­year linear investments, as the letting and the use of tax deductions or simplifying Over recent years, there have Belgian government bond. The rate for transfer of real estate property are their organisational charts. generally VAT­exempt with no input been no significant changes to assessment year 2010 (financial years ending from 31 December 2009 to 30 VAT deduction. However, several In order to assure the going­concern of Belgian tax law. The Belgian December 2010) is 4.473% (compared alternatives exist to mitigate this distressed companies, in January 2009 tax climate for real estate has to 4.307% for assessment year 2009) potential VAT cost, such as VAT Parliament adopted a law that provides remained stable which is of major In the framework of the Belgian draft leasing, VAT grouping scheme, for an exemption of profits stemming importance to investors. Its budget for 2010­2011, the Prime business centre scheme, etc. from a waiver of debt in the hands of Minister and the Government VAT is therefore a key point of the latter companies, provided an attractiveness lies in low effective attention when investing in Belgium; agreement is obtained between the tax rates and an efficient ruling proposed to cap he rate for the assessment years 2011 and 2012 at distressed company and its creditor(s) • no general thin capitalisation practice. 3,8%.; that is approved by a Court of Justice. restrictions and generous tax • concurrent with the introduction of depreciation rules. Laurens Narraina NID, Belgium abolished the 0.5% Head of Real Estate The Belgian real estate tax environment proportional capital duty on PricewaterhouseCoopers (Belgium) has started turning green. Indeed, in the contributions to share capital; second half of 2008, the Flemish Maarten Tas • possibility to receive advance certainty Government introduced a new tax Real Estate Director (ruling) on tax treatment of a specific measure for energy­efficient buildings PricewaterhouseCoopers (Belgium) transaction. In this respect, note that located in the Flemish Region. Also, energy­saving investments made in 2009 17 Benelux real estate insights Print Quit Home

Tax update – Netherlands

Relaxation of the participation • For participations of at least 5% in Introduction of compulsory group exemption regime portfolio investment companies the interest box participation exemption is applicable if As part of the Consultative Document a As part of the 2010 tax bill, on 15 the assets of the subsidiary consist compulsory group interest box will likely September 2009 a legislative proposal for 50% or more of “good assets”. be introduced. This means that interest was published that relates to a relaxation Real estate is considered a “good received from group companies will be of the Dutch participation exemption. asset” for this test. taxed at an effective tax rate of 5% and It is expected that, if approved by group interest expenses would likewise Parliament, the new rules for the • Finally, the participation exemption be deductible at an effective tax rate of participation exemption enter into force is applicable to holdings of 5% or 5%. Whether this new regime is positive as from 1 January 2010. more in entities that are subject to depends on the specific position of the a profit tax at an effective rate of at tax payer. Dutch tax payers with net • It is proposed to partly return to the least 10%. group­interest receivable may clearly pre­2007 rules, meaning that the benefit from this new regime. Net group­ The proposed rules form a clear participation exemption is applicable interest payers may be focussed with an improvement for Dutch based property as long as the participation (of at least increase of effective tax rate. 5%) is not held as a portfolio investment groups and Dutch Below we have summarised the investment. The participation (intermediary) holdings of real estate Measures to limit the interest investment companies. Under the main developments in the Dutch exemption is applicable if the active deductibility current rules these taxpayers had to rely Also measures to limit the deductibility tax system that are of importance business activities of the Dutch parent are in line with the active business on the 90% asset test for “real estate of interest on both internal and external for the real estate industry. The activities of the subsidiary company. subsidiaries”, while under the proposed debt are proposed. The first alternative developments are mainly driven This also applies to Dutch rules this threshold is effectively replaced measure limits the deductibility of by the need to be competitive and intermediary holding companies if by a 50% test. interest in relation to the financing of to improve the Dutch tax climate. the business activities of the direct or shares in subsidiaries. If an amount of indirect shareholder are in line with Overhaul of Dutch CIT Act 1969 cash invested by a Dutch parent the active business activities of the company in its subsidiary companies as subsidiary. Dutch (top)holding The Dutch Ministry of Finance issued a equity, exceeds its own average equity, companies can rely on the Consultative Document on 15 June 2009 then the excess will be deemed to be participation exemption if its containing several proposals to change funded with debt on which the interest is management is involved in the active the Dutch Corporate Income Tax Act. not deductible. This irrespective of business strategies of the active The proposals may enter into force as whether there is a direct relationship subsidiary company. from 1 January 2011. between the debt and the investment in shares of subsidiary companies.

Continued 18 Benelux real estate insights Print Quit Home

Tax update – Netherlands

loaned to subsidiary companies, the VAT­free transfer going concern could amount of borrowed funds loaned to also be applied to leased real estate. the subsidiary, and the note receivable As a result of the transfer of going from the subsidiary are disregarded concern, the transfer is outside the for the calculation of the leverage scope for VAT purposes and the buyer restrictions; takes over the VAT position of the property from the seller as of the date of • The leverage restrictions on REIT transfer. In many cases, the transfer of investments in subsidiary companies leased real estate as “going concern” were alleviated. REITs are now allowed reduces the amount of non­deductible to finance up to 60% of both the value VAT on VAT­exempt leases. of directly held real estate investments and indirectly held real estate (shares Tax treaties in subsidiary companies). The United Arab Emirates and the • REITs are explicitly allowed to provide Netherlands have signed a first­time guarantees to third parties – like tax treaty. The tax treaty will enter into financial institutions – to secure force when ratified by both countries. obligations of subsidiary companies. The UK and the Netherlands have signed The changes were inspired by the a new tax treaty. Once in force, the new increasing trend that REITs tend to invest treaty will replace the UK­Netherlands tax treaty of 7 November 1980. The tax indirectly in real estate assets via treaty and protocol are ratified by the separate subsidiary companies and UK and must still be ratified by the become more and more holding Netherlands. Also a new tax treaty companies rather than companies between Mexico and the Netherlands The second alternative is an anti­ Further relaxation of existing investing in real estate investments will enter into force when ratified earnings stripping measure limiting the REIT regime directly. amount of deductible interest to 30% by both countries, replacing the current tax treaty. of EBITDA. The amount of interest As of 1 January 2009, legislation was Transfer of going concern expenses that is disallowed in one year introduced to provide relief from gearing Serge de Lange can be carried forward to a future year in restrictions. without VAT Senior Manager, Tax which the interest expense incurred is PricewaterhouseCoopers (Netherlands) less than 30% of EBITDA. • Back­to­back finance is now explicitly The Dutch VAT Act provides for the allowed under the permitted activities possibility of a VAT­free transfer of ‘going Meta Beemer of REITs. In back­to­back finance concern’ of a business or independent Tax Manager situations, where the REIT attracts part of that business. Based on a PricewaterhouseCoopers (Netherlands) Supreme Court ruling, the facility of a third party borrowing that is then 19 Benelux real estate insights Print Quit Home

Recent publications

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If you would like further information about these publications, please email [email protected] Emerging Trends in Real Estate® Emerging Trends in Real Estate® Emerging Trends in Real Estate® The draft AIFM Directive Europe in conjunction with the USA in conjunction with the Asia in conjunction with the Urban Land Institute Urban Land Institute Urban Land Institute

Asset Management News Worldwide REIT Regimes Are you keeping up with the pace? Country Summaries IFRS Real Estate Survey Continued 20 Benelux real estate insights Print Quit Home

Recent publications

00 Introduction Asset Management 03 The UK economy UK real estate insights 08Financialservices sector 10 UK hotels: Not out of the woods yet Issue 14 – November 2009 13 Do ‘property wrapper’ debt structures really work?

Contents 16 Opportunities knock for tenants 17 Landlords: The conscripted creditors? The day after tomorrow 19 The end of UK GAAP? 21 The hedging of finance costs: Continuing the PricewaterhouseCoopers perspective series on the global financial crisis a suitable strategy? 23VATopportunity for landlords and tenants: Revoking the option to tax 26 Largest city economies in the world in 2008 and 2025 28 Events Print Quit

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00 Introduction 03 The UK economy UK real estate insights 08 Financial services sector 10 UK hotels: Not out of the woods yet Issue 14 – November 2009 13 Do ‘property wrapper’ debt structures really work?

Contents 16 Opportunities knock for tenants 17 Landlords: The conscripted creditors? 19 The end of UK GAAP? 21 The hedging of finance costs: a suitable strategy? 23 VAT opportunity for landlords and tenants: Revoking the option to tax 26 Largest city economies in the world in 2008 and 2025 28 Events Print Quit

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PricewaterhouseCoopers provides industry­focused assurance, tax, and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. This report is produced by experts in their particular field at PricewaterhouseCoopers, to review important issues affecting the financial services industry. It has been prepared for general guidance on matters of interest only, and is not intended to provide specific advice on any matter, nor is it intended to be comprehensive. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers firms do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. If specific advice is required, or if you wish to receive further information on any matters referred to in this paper, please speak with your usual contact at PricewaterhouseCoopers or those listed in this publication. © 2009 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.