Matters:
On January 29, the Ministry of Finance and the State Administration of Taxation jointly issued the announcement on the pilot tax policy of real estate investment trusts (REITs) in the field of infrastructure (hereinafter referred to as the announcement).
Ping An View:
The policy stems from the fact that public REITs have no tax preference and are not attractive to issuers. As an important tool to accelerate the construction of China’s infrastructure, reduce the leverage of the real economy and meet the needs of social capital investment, public infrastructure REITs has important development value. However, due to the fact that REITs are faced with many taxes and multiple levies, they are not attractive to the issuing institutions, which affects the issuing enthusiasm of the latter to a certain extent. For example, before the establishment of REITs, the original equity holder transfers infrastructure assets to the project company and obtains the equity of the project company accordingly. When REITs is established, the original equity holder transfers the equity of the project company to REITs, it needs to pay enterprise income tax, value-added tax, stamp tax, deed tax, etc. during the operation stage of REITs, it needs to pay enterprise income tax, real estate tax, value-added tax, etc.
During the establishment stage of REITs, corporate income tax is exempted or deferred, effectively reducing the tax burden of issuing institutions. According to the announcement, before the establishment of REITs, the original equity holders shall transfer infrastructure assets to the project company and obtain the equity of the project company accordingly. The original equity holders and the project company may not be subject to enterprise income tax; In the establishment stage of REITs, the asset appreciation realized by the original equity holder transferring the equity of the project company to REITs can be deferred until REITs completes the fund-raising and pays the equity transfer price. Among them, the appreciation corresponding to the shares held by the original equity holder according to the strategic placement requirements can be deferred to the actual transfer of corporate income tax. For example, suppose that the original value of infrastructure assets is 1 billion yuan, the original equity holder transfers the assets to the project company with an assessed value of 2 billion yuan, the original equity holder transfers the equity of the project company to REITs, and the assessed value of the assets rises to 2.5 billion yuan due to the fluctuation of the secondary market. In addition, the strategic placement proportion of the original equity holder is 70%. Before the policy is issued, The original equity holders transferred assets to the project company, which generated a value-added of 1 billion yuan (2-1 billion yuan), and Transferred Equity of the project company to REITs, which generated a value-added of 500 million yuan (2.5-2 billion yuan), and paid enterprise income tax, which was calculated as 375 million yuan at the tax rate of 25%. After the introduction of the policy, the enterprise income tax may not be levied on the asset transfer. When transferring the company’s equity, the income tax will only be levied on the asset appreciation ((25-10) * (1-70%) of the non allotment part of the original equity holder, which is calculated as 112.5 million yuan at the tax rate of 25%. Of course, the tax basis for depreciation and amortization of REITs assets will no longer be the latest assessed value of RMB 2.5 billion before the new deal, but will be reduced accordingly according to the allocation proportion of original equity holders, resulting in the reduction of depreciation and amortization amount and tax shield over the years in the operation stage. However, on the whole, after the new deal, it will effectively reduce the tax burden of original equity holders and improve their issuance enthusiasm.
The secondary market subscribes to REITs shares and follows the principle of first in first out. According to the announcement, the original equity holders subscribe (increase) the REITs share of the infrastructure through the secondary market, and determine the priority disposal of the strategic placement share according to the first in first out principle. For example, assuming that the original equity holder’s allotment proportion is 70%, REITs will first increase its holdings by 10% to 80% and then reduce its holdings by 5% to 75% through the secondary market after listing. According to the first in first out principle, it may mean that the original equity holder will pay corporate income tax on the asset appreciation generated by the reduction. Of course, it still needs to be further clarified in combination with more subsequent policies and rules.
Investment suggestion: with the launch of the pilot work of public infrastructure REITs, 11 REITs have been sought after by investors with high-quality underlying assets and considerable expected rate of return. This policy clearly stipulates that REITs will be exempted from or deferred corporate income tax at the establishment stage, effectively reduce the tax burden of original equity issuers, improve their issuance enthusiasm, and promote the development of public infrastructure REITs industry, We are optimistic about the future development of public offering REITs. We suggest to actively pay attention to relevant REITs products and enterprises with high-quality Park assets and warehousing and logistics assets, such as China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) , China Vanke Co.Ltd(000002) , Shenzhen New Nanshan Holding (Group) Co.Ltd(002314) .
Risk tips: 1) due to the economic downturn or the lack of ability of managers, the operation of basic asset projects is less than expected; 2) Relevant policy support is less than expected; 3) The subsequent release of REITs projects did not meet expectations.
