The obligation of Spanish REITs (SOCIMIs) to be listed (2020)

1. Introduction
2. Stock Exchange (Regulated Market) or MAB (MTF)?
3. Requirements for trading on a Regulated Market
4. Requirements for listing at the MAB

• • Main requirements
  • Additional requirements

5. Euronext Specialties
6. Tax regime of the SOCIMIS
7. Conclusions

1. Introduction

It is necessary to know the obligation of the SOCIMIs (Spanish REITs) to be listed. These companies are a way of channeling investment into tertiary properties. Those destined, for example, to commercial establishments. The curious thing about these is that in Spain there are hardly any minority shareholders. This means that these small investors are being deprived of investing in these tertiary properties. However, in the rest of the world, the tax advantages for SOCIMIs are conditioned to the presence of these investors.

In addition, the association of Spanish SOCIMIs has asked the Government to interrupt the two-year period for their listing. However, until the Government states otherwise, this period will remain in force.

2. Stock Exchange (Regulated Market) or MAB (MTF)?

All those SOCIMIs that want to opt for a special tax regime must comply with the conditions of their regulations. This regime is set out in the first transitory provision of Law 11/2009, modified by Law 16/2012. It is established that they will have two years to comply with the requirements, the main one is being listed. Thus, in 2020 the deadline is met for all SOCIMIS that opt for this regime in 2018. Otherwise the SOCIMI will have to regularize its taxation of the previous 2 years.

They must allow their shares to be traded on a regulated market or an MTF. Both are trading platforms, although they have differences. An MTF is a Multilateral Trading Facility. In Spain, the MTF for equity trading is called MAB (Alternative Equity Market). The main advantage of the MAB over the regulated market, the Stock Exchange, is that it has fewer requirements for issuers. This trading platform is used for smaller companies and offers them a lower listing cost. One of the main MAB players at present are SOCIMIS. In fact, as of July 23^rd 2020, there are 77 SOCIMIs listed on the MAB. If the SOCIMI chooses the MAB, the regulations regarding listed companies will not apply to them. Due to the fact that this regulation was designed for companies in regulated markets.

It should be mentioned that it can also be listed on European platforms. Such as Euronext. Just as the MAB had advantages over the Stock Exchange, Euronext has advantages over the MAB. This is because, among other things, there are no liquidity providers or minority investors.

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3. Requirements for trading on the Regulated Market

In Spain, the best known SOCIMI, Merlin Properties, is listed on a regulated market, the Spanish Stock Exchange. The point is that listing on this official secondary market has a very high cost.

In order to be listed, it must comply with the provisions of the Securities Market Law (SML). Specifically, with articles such as article 34 or 76. The most important thing is the publication of a prospectus approved by the CNMV, the Spanish regulatory body. In addition, they must comply with Royal Decree 1310/2005 and Circular 2/2016 on admission to trading. The whole process is developed by the Guide to Stock Market Listing published by the Madrid Stock Exchange. The most essential elements for this listing are:

• The approval of the prospectus
• To have the following documentation requirements: corporate agreements of issue, adaptation of the bylaws, auditing of the accounts.
• To be a public limited company with a minimum capital of 1,202,025 euros. To be distributed among 100 shareholders, without exceeding 25% of the share capital each.
• That the capital is fully paid up and recorded by book entries.
• To have made a profit in the last two years so that they had distributed dividends of at least 6%.
• To provide a report on the company, including its history, as well as its expansion plan.
• The shares to be issued must be valued at a total of at least 6,000,000 euros.
• Comply with corporate governance obligations.
• Have a corporate website.
• Subsequently make a placement through a financial institution

The process for listing on the official secondary market will usually take between 4 and 6 months. Due to the requirements and extension of this process, most of the SOCIMIs go to the MAB.

4. Requirements for listing at the MAB

The MAB, being an MTF, is allowed to self-regulate. Thus, in 2013, it issued Circular 2/2013 of February 15^th on the regime applicable to the SOCIMI. This regime has been modified by subsequent circulars.

• Main requirements

The main requirements for SOCIMIs to be listed on the MAB are:

1. The share capital must be fully paid up and its shares must be registered by book entries. No limits can be established on the free transfer of these.
2. Limit of 500 million euros of capitalization. However, SOCIMIs that exceed this threshold are currently allowed to remain in the MAB. As long as they do not wish to switch to the official secondary market.
3. Multiple shareholders are required since Circular 1/2017. A number of investors between 20 and 25. In addition, the entry of minority investors with shares worth 2 million euros is required. Or for 25% of the company’s shares if it has less than 8 million capitalization. These shares are required to be distributed among several minority shareholders holding less than 5% of the share capital each.
4. They must present forecasts for the current financial year when they are listed
5. Its accounting and financial reporting regime must be prepared in accordance with International Financial Reporting Standards (IFRS) or national standards.
6. Major shareholders and senior management may not sell shares or engage in equivalent transactions in the subsequent financial year.
7. Four clauses must be included in the bylaws. The communication of significant holdings (5% of the share capital). Publicity of shareholders’ agreements. When they withdraw from the MAB they must offer their shares to shareholders who do not vote in favor of such exclusion. And the change of control of the company.
8. In addition, to comply with liquidity and transparency requirements, they must have a Registered Advisor and a liquidity provider. As well as having their valuation carried out by an independent expert.

• Additional requirements

For its listing, documentary or informational requirements are required. This is reflected in the documents that must accompany the letter of application for admission to the MAB.

1. A business plan that includes the company’s history, organization chart, the service they offer and a market analysis. As well as an expansion plan with annual accounts forecasts for the next 5 years. Counting the material or non-material investments required for this purpose.
2. In compliance with the principles of good governance, they must have two internal regulations. One for the General Meeting and another for the Board of Directors.

In order to maintain this listing, they must comply with the periodic reporting obligations. Information regarding the company, the shares, other information of interest, as well as its public registry.

All these requirements are laxer than those of the Stock Exchange, which is why this trading platform is preferred. And this, in turn, is the reason why in recent years Spanish SOCIMIs have also been listed on Euronext.

5. Euronext Specialties

Marketing on Euronext Access allows SOCIMIs to benefit from certain advantages of this international MTF:

• The main advantage is that it allows one-person SOCIMIs. In other words, it does not require minority investors. As mentioned above, the latter has been required by the MAB since its Circular 1/2017.
• It allows them to be more accessible for international investors.
• Their SOCIMIs are not required to make semi-annual reports of their accounts or report all the transactions they make.
• They have less documentation requirements to provide in terms of capital increases
• No need for a liquidity provider

6. Tax regime of the SOCIMIs

The main fiscal advantage of the SOCIMIs is represented by the Corporate Tax. After the modification made by the Law 16/2012 they pay 0% in this tax. However, there will be a case in which they will be taxed at 19%. This tax will be on the dividends distributed to its partners. This applies when the partners hold a participation in its capital equal or superior to 5%. And provided that those dividends are exempt for the partner or taxed at less than 10%.

In addition, it has two other advantages. Thus, they will be exempt from taxation due to the constitution of the SOCIMI or their contributions. That is to say, of the documented legal acts (DLA) corresponding to such activities. And in the case of residential acquisitions it will be subsidized both in the part of capital transfers and DLA at 95%.

For the taxation of the dividends of its investors, a distinction must be made between individuals and legal entities. Thus, the individual will be taxed at a rate between 20 and 24% for the personal income tax. Whereas the legal entity will be taxed at 25% for that tax.

      7. Conclusions

The SOCIMIs must comply with the obligation to be listed on a regulated market or a Spanish or European MTF. If they do not comply with it, they will lose the main advantage of being taxed at 0% for Corporate Tax. Since none of them want to lose this advantage, they look for the easiest trading venue for their listing. Usually they have always preferred the MAB to the Stock Exchange because of its lower requirements and costs. However, recently Euronext is diverting new SOCIMIs from the MAB for the same reasons. Thus, the SOCIMIs must be aware of the advantages of each system and take advantage of the one that best suits them.

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