IRAS issues a circular on the tax treatment of an approved sub-trust of a real estate investment trust

May 2008

The Inland Revenue Authority of Singapore (IRAS) issued a circular on 14 May 2008 on amendments to the Income Tax Act enacted in late 2007 to enhance the tax transparency treatment for distributions of real estate investment trusts (REITs) made out of the distributions received from approved sub-trusts with effect from the Year of Assessment 2008.

The circular mainly details the qualifying conditions for approved sub-trust status and clarifies the timing of taxation when the sub-trust, REIT and/or unitholder have different financial year-ends. The salient points of the circular are summarised below.

Qualifying conditions for tax transparency
  • Tax transparency treatment will be accorded to REIT distributions made out of distributions received from a sub-trust where:
    • The sub-trust was an approved sub-trust during the period the qualifying income (out of which the distribution is made) was derived and at the point of distribution to the REIT.
    • Distributions are made out of qualifying income of the approved sub-trust. Qualifying income for approved sub-trusts generally mirrors that for REITs. With the enhancements enacted in 2007, these are rental income or income from, or ancillary to, the management or holding of immovable property. Gains from the disposal of immovable property and Singapore franked dividends are excluded.
    • The sub-trust made the distribution in the same year the income was derived.
  • Income of the sub-trust that does not qualify for tax transparency treatment is taxable at the level of the trustee of the sub-trust, and distributions made therefrom are capital and not subject to further tax in the hands of the REIT and/or its unitholders or the sub-trust's other beneficiaries.
Qualifying conditions for approved sub-trust status
  • The sub-trust must be an unlisted special purpose vehicle constituted to hold/own real estate.
  • The REIT has acquired interest in the sub-trust and is free to dispose of it.
  • The constitutive documents of the sub-trust should provide for, inter alia:
    1. a specified minimum percentage of distributable profits that will be distributed to beneficiaries;
    2. veto rights of the REIT over key operational issues; and
    3. a mode for the resolution of disputes between the property fund and joint venture partners.
  • The sub-trust must be able to properly track and differentiate distributions to REITs and other beneficiaries.
Timing Qualifying distributions will be taxable to the REIT or its unitholders in the year of assessment relating to the basis period of the sub-trust in which the income was derived when the sub-trust, REIT and/or its unitholders have different accounting year ends.
Application Applications for approved sub-trust status should be made to the Corporate Tax – Large Corporations branch of IRAS, together with a duly completed declaration and undertaking form.

For further details, please call your usual PricewaterhouseCoopers contact.