Decree-Law no. 19/2019 of January 28: Real Estate Investment Trust

published on February 20, 2019 | reading time approx. 3 minutes

Decree-Law no. 19/2019 was published on January 28, creating the so-called “Sociedades de Investimento e Gestão Imobiliária” or SIGI. SIGI are the transposition into Portuguese legal framework of Real Estate Investment Trust (REIT). The creation of a specific legal regime accompanies the trend observed in other European markets that have regulated this type of company for some years now.

The main purpose of this legal regime is to raise foreign investment, allowing the increase of investment and strengthening the competitiveness of the Portuguese economic fabric. It is expected that this measure will have a significant impact on the real estate industry, particularly in the rental market.

This legislative novelty arises as a consequence of the modification of the paradigm of the Portuguese real estate market that despite the great demand, is in a situation of lack of response and weak competitiveness.

What are SIGI?

SIGI are real estate investment and asset management companies that are set up and operate under the terms of this decree-law and the legal provisions applicable to private limited liability companies(“Sociedades Anónimas”). This companies have strict requirements as regards limits on indebtedness, composition of portfolios, minimum capital, and mandatory distribution of profits. SIGIs headquarters must be located in Portugal.

Important aspects of SIGIs legal framework

It is imperative that SIGI have a minimum share capital of 5,000.00 Euro represented by shares.
SIGIs firm must contain one of the following references “Sociedade de Investimento e Gestão Imobiliária, S.A.” or “SIGI, S.A”
Decree-law nº. 19/2019 has set a ceiling on indebtedness, which can never exceed 60 per cent of the company's total assets. If this limit is not met, the company loses the status of SIGI. This limit is appraised in accordance with the values verified in the individual account or, if SIGI has subsidiaries, in the consolidated accounts.
The main purpose of a SIGI is the acquisition of property rights as surface rights or other rights of equivalent content to be leased as well as other forms of economic exploitation of real estate.
SIGI’s can acquire interests in other companies with similar “companies' purpose” in Portugal or in companies with registered offices in other Member State of the European Union or European Economic Zone. In case of foreign companies is also required that the profits distribution and composition of portfolio are similar to SIGIs model.
SIGI’s asset composition must comply with the following cumulative limits: i) the value of rights over real estate assets and holdings shall represent 80 per cent of the total value of the total asset; and (ii) the value of rights over real estate assets subjected to lease or other forms of commercial exploitation shall represent 75 per cent of the value of total asset.
After one year of incorporation or conversion into SIGI, the shares must be admitted for trading in a regulated market (Euronext) or selected for trading in a multilateral trading facility located or operating in Portugal (Euronext Access or Euronext Growth) or in another Member State or member of the European Economic Zone.
Once the shares are admitted to trading on a regulated market, at least 20 per cent of the shares representing SIGIs capital must be dispersed by investors who hold shares corresponding to less than 2 per cent of the voting rights.
Existing Private Limited Liability Companies (“Sociedades Anónimas”) as well as Real Estate Collective Investment Vehicles (“CIVs”) with corporate form (“Organismos de Investimento Imobiliário”) may be converted into SIGIs by complying with the requirements imposed by the decree-law.
Within nine months after the end of each financial year, SIGIs shall distribute, in the form of dividends, at least (i) 90 per cent of the profits of the financial year that result from dividends on shares or income from participation units; and (ii) 75 per cent of the remaining profits will be distributable under the terms of the Portuguese Corporate Law.
At least 75 per cent of the net proceeds deriving from the sale of assets allocated to the core corporate purpose of the SIGI shall be reinvested in other assets to be allocated to the development of the latter, within 3 years from disposal.
The legal reserve of SIGIs shall not exceed 20 per cent of their share capital, and no other reserves are allowed.
The decree-law no. 19/2019 has listed a set of situations in which companies can lose their SIGI status, that consist mainly on the violation of one or more of the imperative requirements that was referred previously. The loss of the status prevents the company from reacquiring such status in the following 3 years.

Tax Regime

This new type of real estate investment companies will benefit from the tax regime already applicable to CIVs. Meaning that SIGIs are subject to the general corporate income tax regime, and to the application of the 21 per cent “CIT” rate on taxable income, being exempt from taxation: investment income, capital gains and rental income. Nevertheless, when such income derives from entities resident or domiciled in a country, territory or region subject to a noticeably more favourable tax regime as listed in the Ministerial Order approved by the Government, such exemption is not applicable.

Concerning investor taxation

Distributions to resident investors are subject to a withholding tax of 28 per cent (individuals) and 25 per cent (companies). In what relates to non-resident investors, a 10 per cent withholding tax applies.

Final considerations

SIGIs are a transparent investment mechanism adapted to the needs of economic agents, capable of boosting the Portuguese capital market by administering a new market instrument. The decree-law 19/2019 of 28 January came into force on 1st of February.