Bartjan Zoetmulder, partner at Loyens & Loeff, participated in a video interview at Nareit’s REITwise: 2018 Law, Accounting & Finance Conference in Hollywood, Florida.
Bartjan expects that overall, REITs in the United States that are investing abroad are likely to see a higher tax bill resulting from the OECD’s base erosion and profit shifting (BEPS) framework. This will come about as REITs deal with factors such as fewer interest deduction possibilities on their European tax base and more withholding taxes on payments going back to the U.S.
Zoetmulder expects that the impact of recent U.S. tax reform on how REITs structure their investments abroad will depend on how the foreign subsidiaries are qualified. There may be less of a negative impact on transparent or “look through” entities, but for investments in entities such as joint ventures or taxable REIT subsidiaries, which might be “opaque,” there may be more of an impact from the reform.
Touching on pitfalls for REIT tax directors to watch out for in the face of tax reform and BEPS, Zoetmulder said, “It will be much more difficult to have a [single] company from where you enter the [European] market. You will need real economic substance in the company that enters Europe. The idea is that you make use of European single markets, but that also means you really have to send people over to European markets to make use of it.”
Zoetmulder also sees smaller interest deductions, which is likely to have more impact considering that real estate tends to be highly leveraged, at least in a taxable environment. This could also result in more interest in European REITs. He also sees some tension as both the U.S and Europe engage in “tax war” and try to attract businesses and tax income.