Real Estate Investment Trusts (REITs) have failed to gain its expected traction since introduction four years back in 2015 contrary to it being hailed as a game changer in the property market. Stanlib Fahari I-REIT is the first and the only one to be listed in the Nairobi Securities Exchange (NSE) thus far while Fusion Capital’s attempt fell short of the minimum investment required by the Capital Market Authority (CMA) to qualify for listing.
Due to this situation, the government looks to salvage this situation through the Finance Bill 2019 which proposes to amend section 20 of the Income Tax Act to exempt REITs investee companies from the obligation. This is likely to boost the REIT industry as it will ease the structuring of how REITs hold their real estate investments. Currently, the act only exempt REITs from income tax without extending the exemption to subsidiaries and investee companies wholly owned by them (REITs).
All income of a company wholly owned by a REIT is subjected to a corporation tax of 30 percent on its net profit before distribution of the profit to the REIT. This ends up negating the essence of tax exemption to income of the REIT as it wholly owns the company as its investee. This has been a major setback to investors interested in REITs as the corporation tax is against the spirit and purpose of a REIT.
The proposed amendment looks to get rid of this hurdle by making investee companies tax transparent. This is where income passes through an entity without being taxed at entity level and instead taxed upon distribution to the ultimate beneficiaries or owners. With this, income received by an investee company wholly owned by a REIT will not be taxed at the investee level but pass through to the REIT where it will further be exempt before distribution to the unit holders.
The distribution of the profits to the unit holders or the shareholders by the REIT would then only be subject to withholding tax at the rate of 5 and 10 percent for residents and non-residents respectively according to the Kenya Revenue Authority’s (KRA) interpretation of section 20 of the act.
We’ll further delve into the KRA’s interpretation of the act which is subject to dispute in the next part of this article. Stay connected to our blog for more of matters tax, accounting and audit.
