The objective of the introduction of REITs in Germany is to add to the German capital market a competitive product for real estate investments. REITs are exempted from both the corporate income and trade income tax. The introduction of REITs is an im-portant step for real estate companies, investors in real estate and for companies with significant real estate holdings in Germany. The legislation is therefore expected to have a positive impact on Germany’s economy. The draft contains the following key provisions:

At least 75 per cent of the assets of the REIT have to consist of real estate. Further-more, at least 75 per cent of its gross revenue has to consist of income from renting, leasing and/or selling of real estate.

Existing residential real estate – which is predominantly (i.e. more than to 50%) serv-ing residential purposes – may not be brought into REITs if built before 1 January 2007. Real estate built before 1 January 2007 can therefore only be brought into a German REIT if it does not predominantly serve residential purposes as opposed to commercial purposes. Residential real estate which is build after 1 January 2007 is not restricted. This rule which shall protect the interests of tenants is disputed. Ex-perts argue that the rule gives an advantage to foreign markets where REITs have been implemented without a comparable restriction. On the other hand, the majority of REITs currently existing abroad is based on commercial real estate.

German REITs will have the form of the stock corporation (Aktiengesellschaft) and must have their statutory seat and place of management in Germany. At the initial listing the quote of free float of the shares shall be at least 25 per cent. There must always be a minimum free float of the shares of 15 per cent of the share capital. Shares held by investors owning less than 3 per cent of the share capital are consid-ered to be free float stocks. Furthermore, no shareholders shall directly hold more than 10 per cent of the share capital.

REITs will have to distribute 90 per cent of its profits. However, profits from the sale of a real estate can be allocated to the reserves and transferred to future acquisi-tions.

REITs will only be allowed to take out loans up to 60 per cent of their assets.

Subject to the requirements as set out above, REITs are exempted from paying corpo-rate income and trade income tax. Distributions will be taxed at the shareholder level. For non-resident shareholders there is a 25 per cent withholding tax (plus a 5.5 per cent solidarity surcharge thereon) which then is generally a final tax, subject to an applicable income tax treaty.

Real estate owners are allowed to transfer their real estate to REITs under a favour-able Exit Tax which exempts half of the profits from taxation.