1. NEXIA International Tax Conference Geneva 2006 Member of Real Estate Investment Trusts („REITs“) – general overview and the development in Germany Norbert Neu German CPA Certified Tax Adviser Norbert.Neu@dhpg.de Partner of DHPG Dr. Harzem & Partner KG, Bonn Member of Nexia Deutschland GmbH

2. Folie 2 WP/StB Dr. Norbert Neu 2006 I.What is a REIT? II.REITs - the global perspective III.REITs - the German approach (“G-REIT”) 1.Current state of discussion 2.Regulatory conditions 3.Tax issues IV.Sum up and the Nexia perspective Structure

3. Folie 3 WP/StB Dr. Norbert Neu 2006 I. What is a REIT? - characteristics - Legal Structures  Corporation or Trust  usually public, but private as well Allowed types of assets  Investments in real estate and/or loans to finance real estate (Equity REITs, Mortgage REITs, Hybrid REITs)  other assets allowed (normally 25 % max.) Allowed types of earnings  From property activities (lending, possibly development, services, trading);  other earnings allowed (normally 25 % max.) Allowed application of profits  Distribution to shareholders  retention of profits allowed (normally 5-10 % max.) Tax treatment  Dividend payments as deductible expenses  tax exemption of company

4. Folie 4 WP/StB Dr. Norbert Neu 2006 I. What is a REIT? - alternatives and distinctive features - Alternatives  Direct investment  Partnerships  Listed real estate companies  Open-end funds Distinctive features  Nature of business  Legal form  Regulatory background  Corporate governance  Taxation

5. Folie 5 WP/StB Dr. Norbert Neu 2006 I.What is a REIT? II.REITs - the global perspective III.REITs - the German approach (“G-REIT”) 1.Current state of discussion 2.Regulatory conditions 3.Tax issues IV.Sum up and the Nexia perspective Structure

6. Folie 6 WP/StB Dr. Norbert Neu 2006 II. REITs – the global perspective - development - Introduced in the USA in the late 1960’s Also established in Canada, South-America, Asia and Australia Increasing acceptance in Europe  Belgium, Netherlands, Italy, Luxembourg, Spain  Introduction in France in 2003  Introduction expected in the UK in the near future  Discussions in Germany

7. Folie 7 WP/StB Dr. Norbert Neu 2006 II. REITs – the global perspective - geographical extension -

8. Folie 8 WP/StB Dr. Norbert Neu 2006 II. REITs – the global perspective - experiences in the United States - Nearly 200 publicly traded US-REITs 2/3 of US-REITs traded on national stock exchanges 2/3 institutional investors, 1/3 private investors Assets ~ 500 billion US-$

9. Folie 9 WP/StB Dr. Norbert Neu 2006 II. REITs – the global perspective - characteristics for investors - Low volatility of market prices Constant cash flow Quick and easy exit Conservative investment

10. Folie 10 WP/StB Dr. Norbert Neu 2006 I.What is a REIT? II.REITs - the global perspective III.REITs - the German approach (“G-REIT”) 1.Current state of discussion 2.Regulatory conditions 3.Tax issues IV.Sum up and the Nexia perspective Structure

11. Folie 11 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach (‘”G-REIT”) 1. Current state of discussion Private initiative of banks, insurance companies and the Federal Ministry of Finance  Strengthening of competitiveness of Germany as financial center  Creating a new kind of investment for domestic and foreign investors  Transfer of publicly owned properties (residential use) to the market (€ 100 billion)  Germany as biggest market of commercial property in Europe (€ 1,500 billion) Ongoing discussion  Different views in new government  Tax issues as potential deal breaker (?)

12. Folie 12 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 2. Regulatory conditions a)Business activities b)Legal form and accounting c)Profit distribution d)Capital structure e)Structure of shareholders

13. Folie 13 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 2. Regulatory conditions a) Business activities Core business (ring fenced)  Purchase, construction, sale, rent and lease of real estate  > 75% of assets consist of real estate; > 75 % of earnings derive from main business activities; restrictions for sales Ancillary activities with G-REIT status (ring fenced)  Support of main business activities (administration etc.)  Conservative investment of liquid funds Other activities (non-ring fenced)  Conducted by subsidiaries  Activities restricted

14. Folie 14 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 2. Regulatory conditions b) Legal form and accounting German corporation (“Aktiengesellschaft” [“AG”]) with both registered seat and place of management and control in Germany Listed at German stock exchange Financial statements in accordance with IFRS

15. Folie 15 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 2. Regulatory conditions c) Profit distribution Principle  at least 90 % of profit to be distributed to shareholders  Distribution quota measured according to IFRS Exceptions  Capital gains: Reinvestment possible  Valuation gains: Excluded

16. Folie 16 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 2. Regulatory conditions d) Capital structure Authorized capital > € 5 million Overall capitalization > € 50 million No legal restriction for debt-equity-ratio But factual restriction because of high distribution quota

17. Folie 17 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 2. Regulatory conditions e) Structure of shareholders Min. 25 % free float Maximum holding requirement in discussion  < 10 %  tax reasons (see below)

18. Folie 18 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 3. Tax issues a)One-time taxation on foundation b)Ongoing taxation of G-REIT c)Ongoing taxation of German shareholders d)Ongoing taxation of foreign shareholders

19. Folie 19 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 3. Tax issues a) One-time taxation on foundation Taxes on income  Realization of hidden reserves in real estate, even if no transfer of property, but only qualification of existing listed company as G-REIT  Tax advantages –Only 50 % of the difference between market value and book value taxable –Tax deferral (tax payment over a 4-years-period, no interest) –Only applicable for a restricted time after introduction of REIT-legislation Real estate transfer tax  If actual transfer of property to another entity  Tax rate = 3.5 %

20. Folie 20 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 3. Tax issues b) Ongoing taxation of G-REIT Principle  G-REIT not subject to tax  Rents deriving from foreign property (direct investments or investments in foreign property companies) taxable abroad  standard tax regime for subsidiaries with auxiliary activities Breakdown of profits  Basket 1: Tax-free  Basket 2: Taxed abroad  Basket 3: Taxed on the level of subsidiaries

21. Folie 21 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 3. Tax issues c) Ongoing taxation of German shareholders Basket 1 (tax-free)  Dividend fully taxable  No half-income system for individuals, no tax-exemption for corporations Basket 2 (taxed abroad)  Direct investments –Imputation of foreign tax (no treaty or treaty with imputation system): dividend fully taxable, foreign tax credit –Exemption of foreign income (treaty with exemption method): dividend tax exempt  Investments in foreign Real Property Companies: Half-income system for individual, tax-exemption for corporate shareholders Basket 3 (taxed on the level of domestic subsidiaries)  Half-income system for individual, tax-exemption for corporate shareholders of G-REIT  Imputation of tax withheld by subsidiaries

22. Folie 22 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 3. Tax issues c) Ongoing taxation of German shareholders 100 % taxable (foreign tax credit) 95 % tax-free (corporate) or 50 % tax-free (individual) 100 % tax exempt 100 % taxable (foreign tax credit) G-REIT Domestic REIT Income (ring fenced business) Domestic Non- REIT Income (non-ring fenced business) Foreign income, tax exempt in Germany Foreign income, taxable in Germany

23. Folie 23 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 3. Tax issues d) Ongoing taxation of foreign shareholders Parent Subsidiary Directive: Not applicable because of tax exemption of G-REIT Tax treaties: Applicable because of treaty entitlement of G-REIT  Taxation right for state of residence of the shareholder  Limited withholding tax on dividends for Germany –Individual shareholders: usually 15 % –Corporate shareholders: usually 5 %

24. Folie 24 WP/StB Dr. Norbert Neu 2006 III. REITs – the German approach 3. Tax issues d) Ongoing taxation of foreign shareholders Problem  No tax on income of G-REIT in Germany  Only low withholding tax on dividends, if any  Tax leakage Possible Solutions  Revisions of double tax treaties –No reduction or only limited deduction of withholding taxes in case of REITs (example: Art. 10 of the tax treaty between Germany and the United States) –Difficult and time consuming, results doubtful  Qualification of dividends as rental income (different models)  Maximum holding requirement (< 10 %)  EURO-REIT-Directive Ongoing discussions

25. Folie 25 WP/StB Dr. Norbert Neu 2006 I.What is a REIT? II.REITs - the global perspective III.REITs - the German approach (“G-REIT”) 1.Current state of discussion 2.Regulatory conditions 3.Tax issues IV.Sum up and the Nexia perspective Structure

26. Folie 26 WP/StB Dr. Norbert Neu 2006 IV. Sum up and the Nexia perspective Sum up  Trend to REITs  Taxation of foreign shareholders as potential deal breaker in Germany The Nexia perspective  Information of clients about developments (UK, Germany)  Cross-border consulting of clients regarding investments in REITs  Assisting companies to found REITs  REITs as clients