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Key regulatory requirements
Sources of income
What are the basic source-of-income requirements for a REIT?
Under the rules set forth in the Mexican Income Tax Law (MITL), Fideicomisos de Inversión en Bienes Raíces (FIBRAs) are limited as to the assets they may hold, which must only consist of real estate assets for lease or lodging, rights to receive income from the leasing of real estate assets and accounts receivable from loans for the development or acquisition of real estate assets, secured by a mortgage, as well as securities issued by the Mexican federal government or shares of debt investment funds; therefore, the items of income that a FIBRA may receive would derive precisely from allowable investments, and thus will usually be represented by leasing income, interest income and capital gains derived from investments in permitted securities or shares held by the relevant FIBRA.
In addition to the above, FIBRAs may also derive income from lodging to the extent that these do not include income derived from the sale of food and beverages, phone and internet services, among others, and provided that specific requirements are met.
Asset composition
What are the basic asset composition requirements for a REIT?
FIBRAs must primarily invest and hold income-generating real estate assets. Per legal requirement, at least 70 per cent of a FIBRA’s portfolio must be invested in:
real estate assets intended for lease or lodging;the acquisition of the rights to receive income from the leasing of real estate assets; orgranting loans for the development or acquisition of properties intended to be leased.
The remainder can be invested in securities issued by the Mexican federal government, and registered in the National Registry of Securities (RNV), and shares of debt investment funds.
Distributions
What are the basic distribution requirements for a REIT?
Through the trustee, FIBRAs are required to distribute to the CBFI holders, at least once a year, no later than 15 March, at least 95 per cent of the taxable income of the immediately prior fiscal year derived from real estate assets that make up the FIBRAs’ trust estate.
The trustee must withhold income tax on the taxable income distributed to the CBFI holders by applying the corporate tax rate established in the MITL (currently 30 per cent) to the distributed amount of the taxable income, unless the recipients are exempt from paying income tax on such amount.
When the CBFIs are publicly traded, the custodian who holds the certificates will be responsible for withholding the tax referred to previously.
Unless they are exempt from paying income tax, CBFI holders who are Mexican residents or foreign residents with a permanent establishment in the country, must include as part of their gross income the taxable income distributed to them by the trustee or the custodian derived from the FIBRAs’ assets, without deducting the corresponding income tax withholding, as well as the gains derived from the sale of the CBFIs, and will be able to credit income tax withholdings from these distributions or gains.
When the FIBRA’s taxable income for the fiscal year exceeds the amount distributed to the CBFI holders, the trustee must pay income tax on the surplus. The tax paid by the trustee may be credited by the CBFI holders who subsequently receive the income derived from the surplus, provided that the income is included in their gross income. Income tax is not to be withheld upon distribution of the surplus.
When a trustee distributes to CBFI holders an amount greater than the FIBRA’s taxable income for the year, the amount in excess will be considered as a capital reimbursement and reduced from the tax basis of the CBFIs belonging to the holders who receive reimbursement.
Consequences of non-compliance
What happens if a REIT fails to meet the basic regulatory requirements? Is relief available if a company fails to meet any of these requirements?
Mexican regulations state that the Mexican Stock Exchange must adopt minimum requirements for issuers to list their securities in Mexico, including FIBRAs. These requirements relate to matters such as operating history, financial and capital structure, minimum trading volumes and minimum public floats, among others. The Mexican Stock Exchange is required to implement minimum requirements for issuers to maintain their listing in Mexico. These requirements relate to matters such as financial condition, trading minimums, capital structure and minimum public floats, among others.
The Mexican Stock Exchange will review compliance with the foregoing requirements and other requirements on an annual, semi-annual and quarterly basis. It may also do so at any other time.
The Mexican Stock Exchange must inform the National Banking and Securities Commission (CNBV) of the results of its review and this information must, in turn, be disclosed to investors. If an issuer fails to comply with any of the foregoing requirements, the Mexican Stock Exchange will request that the issuer propose a plan to cure the violation. If the issuer fails to propose a plan, if the plan is not satisfactory to the Mexican Stock Exchange or if an issuer does not make substantial progress with respect to the corrective measures, the trading of the relevant series of shares on the Mexican Stock Exchange will be temporarily suspended. In addition, if an issuer fails to propose a plan or ceases to follow the plan once proposed, the CNBV may cancel the registration of the securities, in which case the majority shareholder or any controlling group may offer to acquire 100 per cent of the outstanding shares of the issuer through a tender offer.
In addition, the Mexican Stock Exchange, pursuant to its internal regulations and in accordance with regulations issued by the CNBV, may suspend trading in an issuer’s securities if the issuer does not disclose a material event or if the disclosed information is not sufficiently clear; or upon price or volume volatility or changes in the offer or demand in respect of the relevant securities that are not consistent with the historic performance of the securities and cannot be explained solely through information made publicly available pursuant to the CNBV’s regulations.
In addition to regulatory requirements, it is important that FIBRAs comply diligently with tax regulations to avoid losing the corresponding benefits and potentially incurring other fines or penalties.
Compliance best practices
What best practices should be considered to ensure compliance with the key regulatory requirements for REITs in your jurisdiction?
FIBRAs are required by law to have at least a technical committee formed by a maximum of 21 members, of which at least 25 per cent should be independent members. Many FIBRAs have adopted additional measures to enhance or improve their corporate governance, including the creation of auxiliary committees, such as audit committees formed by independent members and tasked with oversight of financial reporting and internal controls and highly specialised areas in strategic matters, such as risk management and compliance, ethics and anti-corruption, among others. Investor communication is also becoming a relevant factor upon which FIBRAs have been improving communication with investors and other stakeholders by holding regular meetings, providing comprehensive reports and offering greater access to senior management.
Public REITs – regulatory treatment
Are the requirements for a publicly traded REIT raising capital different from those imposed on private REITs or public non-REIT companies?
Currently, the Mexican legal framework only allows for publicly traded FIBRAs.
Public REITs – ongoing requirements
What are the ongoing securities and disclosure requirements for publicly traded REITs?
FIBRAs are subject to certain rules that must be satisfied to obtain and maintain the registration of CBFIs in the Mexican Stock Exchange, among others, the following:
at least 15 per cent of the aggregate number of listed CBFIs must be held by the general investment public after listing of the CBFIs. Thereafter, maintenance of the listing requires that at least 12 per cent of the aggregate number of listed CBFIs are held by the general investing public;after the initial public offering, CBFIs must be held by least 100 investors that are unrelated among themselves and unrelated to the persons contributing real estate assets to the FIBRA; andthe FIBRA trust agreement must comply with certain requirements including, without limitation, that the FIBRA has a board of directors comprised of at least 25 per cent independent members and that any holder of CBFIs representing 10 per cent of the outstanding CBFIs has the right to appoint a member of board of directors.
Issuers of listed securities, including FIBRAs, are required to file unaudited quarterly financial statements and audited annual financial statements, as well as various periodic reports with the CNBV and the Mexican Stock Exchange, including:
an annual report prepared in accordance with the CNBV general regulations by no later than 30 April of each year;quarterly reports, within 20 business days following the end of each of the first three quarters and 40 days following the end of the fourth quarter;reports disclosing material events promptly upon their occurrence;reports and disclosure memoranda revealing corporate restructurings such as mergers, spin-offs or acquisitions or sale of assets, approved or to be approved by a shareholders’ meeting or the board of directors; andreports containing information regarding the FIBRA’s indebtedness and liquidity levels with the CNBV, the Mexican Stock Exchange and the investing public.
Public REITs – listing rules
Do the stock exchanges in your jurisdiction have any special rules that do not apply to unlisted or private REITs?
All FIBRAs are required to have their CBFIs registered before the RNV and listed.
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This article was originally published by a www.lexology.com . Read the Original article here. .