• foreign institutional investors especially pension funds and collective investment funds receiving income fro REITs listed in Bursa Malaysia are currently subject to a final witholding tax rate of 20% for 5 years; and
• non-corporate investors including resident and non-resident individuals as well as other local entities receiving income from REITs listed in Bursa Malaysia are currently subject to a final witholding tax of 15% for 5 years

Good news are in, as the Budget 2009 has allows the final witholding tax rate imposed on foreign institutional as well as non-corporate investors including individual residents and non-residents reduce to 10% . This is effective from 1.1.2009 until 31.12.2011

Failure to deduct the tax and remitted to the Inland Revenu within one month  will result in:

• a penalty of 10% of the unpaid tax and
• both the tax deducted and the penalty are debts due to the Inland Revenue.
• note that prior to 2/9/2006, the penalty is imposed on gross distribution.

(b) Capital allowance

• can be offsetted against the adjusted income of rental but the excess of capital allowances in a year of assessment cannot be carried forward which will be permanently loss[s63c(4)]
• capital allowance is not restricted to the qualifying capital expenditure provided to derive rental income. It also includes any qualifying capital expenditure used in the business of REIT

REIT has as a distinctive feature since there is non-availability of setting off business loss or carrying forward business losses and capital allowances

(a) Existing Tax Incentives before Budget 2007

• Gains arising from disposal of real property to REITS are exempted
• Stamp duty on transfers of real property to REITS are exempted

(b) Further Incentives for REITS as announced in the Budget 2007

Item (I) and (II) are effective from 1 January 2007 and proposals (iv) and (v) are effective from year of assessment 2007.

(I) Non-corporate investors (example resident and non-resident individuals) and other local entities receiving distributions from REITs listed on Malaysia will be subject to a final withholding tax of 15% for five years;

(II) Foreign institutional investors (example, pension funds and collective investment funds) receiving distributions from REITs listed on Bursa Malaysia will be subjected to a final withholding tax of 20% for five years;

(III) Local corporate investors will be subjected to the existing tax treatment and tax rates;

(IV) Foreign corporate investors will be subjected to a final withholding tax at the rate of 27%;

(V) REITs will be exempted from tax on all its income provided that at least 90% of its total income is distributed to the investors; and

(VI) Where the 90% distribution is not complied with, the REITs will be subjected to income tax while all their investors are eligible to claim tax credits.

1. Is an Islamic real estate investment trust (Islamic REIT) permitted to own (purchase) real estate in which the tenant(s) operates mixed activities that are permissible and non-permissible according to the Syariah?

An Islamic REIT is permitted to own (purchase) real estate in which its tenant(s) operates mixed activities that are permissible and non-permissible, according to the Syariah. However, the Islamic REIT fund manager must perform some additional compliance assessments before acquiring real estate that has a tenant(s) who operates mixed activities.

2. What are the additional compliance assessments?

An Islamic REIT must obtain the total rental from non-permissible activities from the property that it wants to acquire, and subsequently compare the total rental from non-permissible activities to the total turnover of the Islamic REIT (latest financial year). This is to obtain the percentage of rental from non-permissible activities. The percentage amount will be referred to the 20% benchmark as determined by the Syariah Advisory Council (SAC) of the Securities Commission for the criteria on rental from non-permissible activities. In the event that the percentage exceeds the benchmark, the Syariah committee/Syariah adviser shall advise the Islamic REIT fund manager not to invest in the said real estate. For example, if the total rental from non-permissible activities is RM210,000 and the total turnover of the Islamic REIT for that financial year is RM1,000,000, then the percentage of rental from non-permissible activities is 21%, which exceeds the 20% benchmark that has been determined by the SAC. In this situation, the Syariah committee/Syariah adviser shall advise the Islamic REIT fund manager not to invest in the said real estate

3. What are non-permissible activities?

Rental activities that are classified as non-permissible as decided by the SAC are

1.financial services based on riba (interest);

2.gambling/gaming;

3.manufacture or sale of non-halal products or related products;

4. conventional insurance;

5. entertainment activities that are non-permissible according to the Syariah;

6. manufacture or sale of tobacco-based products or related products;

7. stockbroking or share trading in Syariah non-compliant securities; and

8. hotels and resorts.

Apart from the activities listed above, the Syariah committee/Syariah adviser can apply ijtihad(1) for other activities that may be deemed non-permissible to be included as a criterion in assessing the rental income for the Islamic REIT.

4. Can an Islamic REIT own real estate in which all the tenants operate non-permissible activities?

No. An Islamic REIT is not permitted to own real estate, in which all the tenants operate non-permissible activities, for example a casino building in which all the tenants are operating non-permissible activities, even if the percentage of rental from that building to the total turnover of the Islamic REIT is still below the benchmark (20%).

5. What if an Islamic REIT owns real estate that is vacant and plans to rent it out to a new tenant(s)? Is it bound by the application of the 20% benchmark as mentioned in the answer for question 2 above?

For a new tenant(s) that plans to rent the real estate of the Islamic REIT, the decision made by the Syariah committee/Syariah adviser does not need to be based on the 20% benchmark because the rental contribution from non-permissible activities is still unknown. Therefore, in this case the Syariah committee/Syariah adviser shall advise the Islamic REIT fund manager not to accept a new tenant(s) that operates activities that are fully non-permissible like a gambling operator.

6. What is the method of calculating the portion of rental of non-permissible activities from the total rental payment paid by a tenant(s) operating mixed activities. For example, say the Islamic REIT receives a rental of RM3,000 a month from a supermarket. The supermarket sells halal goods and alcoholic beverages. The question is, how do you determine the rental that is considered as non-permissible from the total rental that is paid by the supermarket (RM3,000)? 

The calculation for the rental of non-permissible activities from a tenant(s) operating mixed activities can be based on the ratio of area occupied for non-permissible activities to the total area occupied. The percentage will be used as the basis for determining the ratio of rental of non-permissible activities to total rental paid by the tenant(s).

(1) Ijtihad is the process of reasoning by Islamic jurists to obtain legal rulings from the sources of Syariah.

The following Guidelines are available at the SC website:

• Guidelines on Real Estate Investment Trusts(Date Issued:3 January 2005)
• Guidelines for Islamic Real Estate Investment Trusts(Date Issued: 21 November 2005)
• Frequently-asked Questions on Islamic REITS

Some key features of the Revised REITs Guidelines include:

1. Liberalisation of the borrowings limits for a REIT,
2. Relaxation on acquisitions of leasehold properties
3. Flexibility accorded to acquisitions of real estates that are encumbered by financial charges.
4. Further, in line with the Capital Market Masterplan’s recommendation for a uniform regulatory framework for the fund management industry, the eligibility requirements for management companies that manage REITs, including their scope of business and foreign equity participation, have been streamlined to make them consistent with the requirements for management companies that manage unit trusts.
5. Also the SC will adopt a declaratory approach in overseeing establishment of REITs, in line with the approach taken for unit trusts funds since April 2003. The responsibility to ensure compliance would therefore rest with industry participants and their directors/promoters. A declaration of compliance with regulatory laws and guidelines must be submitted to the SC.
6. The SC has also enhanced the level of disclosure and reporting required of a REIT with a view to facilitate more comprehensive and timely disclosure of information to investors
7. Additionally, submission requirements and procedures have also been revised to promote faster decision turnaround time, which would ultimately improve efficiency in fund raising exercises for a REIT.

• Be an entity that is taxable as a corporation
• Be managed by a board of directors or trustees
• Have shares that are fully transferable
• Have a minimum of 100 shareholders
• Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
• Invest at least 75 percent of its total assets in real estate assets
• Derive at least 75 percent of its gross income from rents from real estate property or interest on mortgages on real property
• Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
• Pay annually at least 90 percent of its taxable income in the form of shareholder dividends

        (Source: NAREIT’s website)

1. You need to understand whether conversion to a REIT or set up of a new REIT is the right approach or whether there are better alternatives.
2. Advising on the route to REIT status including modelling, the impact on the group and shareholders, listing advice, and advice on pre-conversion restructuring requirements
3. On-going advice for REITs including technology solutions to assist in compliance obligations and monitoring regime conditions.