The European Commission has authorised, under EU state aid rules, the introduction of "Real Estate Investment Trusts" (REITs) in Finland that will be exempted from corporate income tax in order to encourage investment in affordable rental housing. After receiving assurances on a few changes, the Commission is satisfied that the scheme does not involve state aid as any profits made by the trusts will be subject to tax at shareholders' level very much like the profits made by individual investors investing directly in the real estate market.
"The introduction of "Real Estate Investment Trusts" in Finland will encourage investment in affordable rental accommodation without unduly distorting competition," said Competition Commissioner Joaquín Almunia.
The objective of the measure is to encourage investment in the Finnish rental housing market, so as to increase the supply of affordable rental accommodation. The proposed measure is modelled on the widespread model of "Real Estate Investment Trusts". According to the scheme notified by the Finnish authorities, to benefit from corporate tax exemption REITs will be publicly-listed, no single shareholder will own, directly or indirectly, more than 9,99 %. REITs will only operate in the field of rental accommodation with at least 80 % of their gross income coming from rents. Moreover, REITs will distribute at least 90% of their annual profits to shareholders as dividends.
The Commission's investigation found that the scheme contained no state aid, because the exemption from corporate income tax is linked to the requirement of immediate distribution of annual profits to shareholders, at the hands of which taxation then takes place. Thus, this mechanism puts the tax treatment of an investment in a REIT at par with the taxation of direct investments by individuals in real estate.
However, the Commission considered that a provision allowing REITs to use up to 30% of their annual profits to create tax exempt re-investment reserves would constitute incompatible aid. Following the Commission's concerns, the Finnish authorities made the commitment not to put in force this provision.
The non-confidential version of the decision will be made available under the case number N 131/2009 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.