Transformation of an EDAV into a SOCIMI: The New Trend in BTR

In the dynamic world of real estate investments, the Spanish “Entidades Dedicadas al Arrendamiento de Vivienda” (EDAV) and the “Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario” (SOCIMI - Requisitos) occupy prominent positions in Spain.

While EDAVs focus on residential leasing and are tax efficient when acquiring BTR assets as they benefit from a 4% VAT rate, SOCIMIs are investment vehicles aimed at maximising the return on real estate investments through broader tax incentives and a long-term profitability structure, taxed at 0% corporate income tax.

The transformation of an EDAV into a SOCIMI to pay 0% corporate income tax on BTR returns is an attractive strategy to optimise the management and profitability of real estate assets, once the first year has elapsed after the purchase of the asset.

In this article, we explain the feasibility and process of this transformation.

What is an EDAV?

An EDAV is an entity whose main purpose is the rental of residential units. In order to be able to apply the special tax regime for EDAVs, these entities must comply with the requirements regulated in Article 48.2 of the Spanish Corporate Income Tax Law, the main ones being the following:

• Number of units: The entity must have at least eight units leased or offered for lease in each tax period.
• Duration of the Lease: The units must remain leased or offered for lease for at least three years.
• Units' ownership: The units must be owned by the entity, and cannot include those that are available by virtue of other legal titles such as usufruct or temporary right of exploitation.
• Income and Assets: At least 55% of the income for the tax period must come from the rental of units, or at least 55% of the value of the asset must be capable of generating tax-relieved income.

The main tax benefits of EDAVs are as follows

• Income tax relief: Income derived from the rental of units benefit from a tax relief of 40% (compared to the 85% that applied prior to 1 January 2022). The taxable rent is calculated by subtracting the tax-deductible expenses from the full income obtained from the rental.
• VAT taxation: EDAVs apply a super reduced rate of 4% Value Added Tax (VAT).
• Dividend distribution: The exemption for the avoidance of double taxation of dividends applies to 50% of the amount of dividends distributed out of income subject to the corporate income tax relief.
• Sale of Shares: The income obtained from the transfer of shares in entities subject by the EDAV special tax regime is calculated by applying the general rules of corporate income tax, with a 50% exemption for the part of the income corresponding to reserves arising from undistributed tax-relieved profits.

EDAVs are very popular as a tax regime for the initial acquisition of land or housing subject to VAT taxation, e.g. in "build-to-rent" models.

What is a SOCIMI (REIT)?

SOCIMIs are public limited companies subject to a special tax regime, the main purpose of which is the acquisition, development and refurbishment of real estate assets for rental purposes. SOCIMIs enjoy an advantageous tax regime (amongst others, 0% Corporate Tax), provided they comply with certain requirements, such as distributing most of their profits in the form of dividends and maintaining a significant percentage of their portfolio in rental properties.

As a requirement, SOCIMIs must be listed on a stock exchange, with Portfolio Stock Exchange currently being the best alternative. SOCIMIs being listed on Portfolio Stock Exchange are not subject to free float requirements.

Is it possible to transform an EDAV into a SOCIMI?

The transformation of an EDAV into a SOCIMI is possible and the decision to implement the change after the first financial year following the acquisition of the assets will be determined by the outcome of the analysis of the taxation of the structure.

IMPORTANT: the EDAV can be transformed into a SOCIMI without losing the VAT tax advantages applied at the time of the acquisition of the assets for BTR.

Steps to transformation

1. Legal and tax review: It is essential to conduct an analysis of the legal and tax situation of the EDAV. This includes reviewing the lease agreements, ownership structure and current tax obligations.
2. Adaptation of the company to the SOCIMI regime: Transform the limited liability company into a public limited company with the appropriate articles of association for a SOCIMI, and for its subsequent admission to trading on the Portfolio Stock Exchange.

In order for the tax benefits of the SOCIMI regime to apply retroactively for the whole of the current year, the application for the regime must be made before the 30th September.

Benefits of Transformation

• Exemption from corporate income tax: SOCIMIs are exempt from corporate income tax (0%).
• Mandatory dividend distribution: SOCIMIs must distribute at least 80% of the income obtained from their properties and 50% of the capital gains generated by the sale of properties, resulting in an attractive return for investors.
• Exemption from Transfer Tax and Stamp Duty: the purchases of residential assets made by SOCIMIs are exempt from Transfer Tax (ITP) and Stamp Duty (AJD).
• Liquidity and Financing: Listing on a stock exchange can improve liquidity (if wanted by the shareholders) and improve access to bank financing for the SOCIMI and its shareholders.

Conclusion

With the advent of the Portfolio Stock Exchange, which removes the usual obstacles to the establishment of a SOCIMI (high stock exchange-related costs, high bureaucracy associated with listing and lengthy processes), it is worthwhile for investors who used an EDAV to acquire the real estate assets to benefit from the super reduced VAT of 4% on the acquisition of the BTR assets, to evaluate with their tax advisor the possibility of transforming the vehicle into a SOCIMI, in order to benefit from the 0% corporate tax rate, without losing the VAT tax benefits enjoyed in the previous year for the acquisition.

If you are considering this option, please do not hesitate to contact Portfolio Stock Exchange for a detailed quotation of the total costs of admission to trading of the SOCIMI and a list of advantages vs other traditional stock markets.