What Recent ELTIF Developments Mean for the Real Estate Market | Allen & Overy LLP
What is an ELTIF?
The ELTIF is a closed fund which can however be listed. It offers a unique opportunity for institutional and retail investors to invest in a wide range of different asset types, including real estate assets, infrastructure projects, private equity and listed companies whose market capitalization does not exceed not 500 million euros. In addition, the ELTIF benefits from a marketing passport enabling the distribution of fund units in all the countries of the European Economic Area.
It is not a new vehicle. Regulation (EU) 2015/760 of 29 April 2015 on European long-term investment funds (the ELTIF Regulation) already entered into force at the end of 2015, but has so far seen only limited adoption. Based on the register maintained by ESMA, only 67 ELTIFs have been registered, most of them having Luxembourg as their home Member State. For the moment, there is no Belgian ELTIF.
However, recent developments are likely to increase interest in these vehicles, especially in Belgium. The European Commission has just made a proposal to make the ELTIF more attractive for sponsors, managers and investors (proposal published on November 5, 2021). At the Belgian level, the recent adoption of a specific tax regime for ELTIFs should further increase interest in this type of fund for sustainable projects and real estate investments.
What is its use in a real estate context?
ELTIFs can invest in specific types of assets, including real estate. In the context of the EU, a real asset is any asset that has value because of its substance and properties and that can generate returns. Real assets include infrastructure assets and other assets that give rise to economic or social benefits (including education or research and development). Investments in commercial property or residential projects are also allowed, provided they are part of a long-term investment project that contributes to the EU objective of smart, sustainable and sustainable growth. inclusive. In this regard, the new regulation proposed by the EU is expected to broaden the scope of real asset investment strategies that ELTIF managers can pursue.
It should be noted in particular in the context of real estate investments (i) that real estate assets are only eligible for investment by an ELTIF (directly or indirectly through a holding company) only when the real estate asset individual has a value of at least EUR 10,000,000 (it being understood that the European Commission has now proposed to reduce this threshold to EUR 1,000,000) and (ii) the diversification requirement. In accordance with this diversification requirement, ELTIFs may in particular not invest more than 10% of their capital directly or indirectly in a single real asset. This limit may be increased to 20%, provided that the aggregate value of the assets held by the ELTIF in individual real estate assets in which it invests more than 10% of its capital does not exceed 40% of the value of the capital of the ELTIF. However, the proposed new regulation is expected to ease these restrictions for ELTIFs marketed only to professional investors.
ELTIFs are an interesting alternative to the vehicles of Belgian specialized real estate investment funds (FIIS/GVBF) commonly used on the Belgian real estate market, in particular for the following reasons:
- ELTIFs are not subject to the 10-year investment ceiling set for Belgian specialized real estate investment funds;
- ELTIFs benefit from a harmonized European label for financial products, which allows for EU-wide distribution to professional and retail investors; and
- The distribution rules applicable to ELTIFs are more flexible than those of other Belgian real estate investment funds; in particular, ELTIFs are not subject to the obligation to distribute 80% of their income.
We note, however, that ELTIFs may only be managed by EU alternative investment fund managers authorized under the AIFM Directive and specifically authorized by the competent authority to manage the relevant ELTIF. The status of specialized real estate investment fund is also open to certain types of entities which are not as such qualified as alternative investment funds within the meaning of the Belgian AIFM regulations (for example joint ventures or single-shareholder investment fund). In this case, the specialized real estate investment fund does not necessarily have to be managed by an approved alternative investment fund manager.
What is the tax treatment of an ELTIF?
Legislation creating a new tax regime for ELTIFs was published in the Official Gazette on January 28, 2022. It contains the following key features.
The treatment of income from ELITF companies will be organized in accordance with article 185bis of the Belgian Income Tax Code. In other words, corporation tax will only be applicable on a very limited tax base made up of abnormal or benevolent advantages received and certain disallowed expenses. In most cases, this will effectively lead to corporate tax neutrality.
Dividend distributions are also treated favorably. In particular, while dividends received by a Belgian investment company are in principle taxable at the normal corporate tax rate of 25%, ELTIFs can offer their Belgian corporate investors the benefit of the DRD regime, effectively preventing taxation at the level of the investor for the corresponding income if several conditions are met. It should be noted that the benefit of the DRD regime is not subject to the requirement that the vehicle’s articles of association provide for an annual distribution of 80% (as is the case for FIIS/GVBF and SIR/GVV).
For non-Belgian corporate investors, the ELTIF tax regime provides for an exemption from Belgian withholding tax on distributions made by ELTIFs from dividends and capital gains on shares if certain conditions are met. It is important to note that ELTIFs could also be eligible for reductions or exemptions from withholding tax under the Belgian network of tax treaties, subject however to the opinion to be adopted by the other State concerned.
We further note that investment vehicles regulated by the Belgian Financial Services and Markets Authority, including ELTIFs, are subject to an annual subscription tax in Belgium at the rate of 0.0925% on net assets placed in Belgium, or at a reduced rate of 0.01% for shares dedicated to qualified non-retail investors.
More information ?
See our general eAlert on ELTIFs: link. We are further available to discuss the above and the opportunities it creates for your business and your business.