Brussels, May 08, 2012 – The Spanish government’s introduction of new legislation to restrict interest deductions for taxation purposes could further reduce the flow of international capital into domestic commercial property, exactly at a time when the depressed local market is an important factor weighing on Spain’s recession-hit economy, the European Public Real Estate Association (EPRA) said.

EPRA Finance Director Gareth Lewis said: “Three years ago Spain missed the opportunity to introduce a ‘best-in-class’ REIT regime for its listed property companies in line with other major European economies such as France and the UK. REITs are effective at attracting long-term capital into commercial and residential real estate and provide a steady and reliable source of revenue for governments from withholding taxes on dividends, as well as significant once-off tax windfalls from conversion charges levied when firms adopt the REIT structure. With this latest tax move we are concerned that Spain is moving even further away from an efficient and attractive real estate market for investors at a point when the economy needs it most.”

The Spanish government introduced the new legislation to replace the existing ‘thin-cap’ rules covering tax deductions for interest, as part of Madrid’s policy to achieve broader deficit reduction targets. The move is a reaction against a general erosion of the taxable bases of Spanish companies through debt transactions with related companies. In this sense, the new provisions follow a general trend in Europe to cut abusive financial schemes through objective limitations of the tax deduction of financial expenses.

Spain introduced a new regime for property investment (SOCIMI) in 2009, but EPRA criticised the structure at the time and said the legislation did not justify having a REIT label attached to it, as it departed too far from the standard European model. The SOCIMI regime implemented an 18% flat rate for qualifying net income, payable by the property entity itself, rather than external investors through dividends.

EPRA Chief Executive Philip Charls said: “The reason REITs have been so successful in more mature property markets such as the US, France, and the UK, is down to their ability to access a global pool of investment that comes from being part of a widely understood, transparent and well managed corporate model. If Spain wishes to be successful in the fiercely competitive market for attracting international capital into the vitally important real estate sector, then the government needs to understand how other countries have achieved this goal with a dynamic and efficient REIT structure.”