What ELTIFs’ recent developments mean for the real estate market | Allen & Overy LLP

What is an ELTIF?

The ELTIF is a closed-end fund that can however be listed. It offers a unique opportunity for both institutional and retail investors to invest in a wide range of different asset types, including real assets, infrastructure projects, private equity and listed companies with a market capitalisation of not more than EUR 500 million. Furthermore, the ELTIF has the benefit of a marketing passport, allowing for the distribution of the fund units in all countries of the European Economic Area.

This is not a new vehicle. Regulation (EU) 2015/760 of 29 April 2015 on European long-term investment funds (the ELTIF Regulation) took effect already at the end of 2015 but has only known a limited uptake so far. Based on the register held by ESMA, only 67 ELTIFs have been registered, most of them having Luxembourg as their home Member State. For the time being, there are no Belgian ELTIFs.

However, recent developments are likely to increase the interest for such vehicles, notably in Belgium. The European Commission has now made a proposal to make the ELTIF more attractive for sponsors, managers and investors (proposal issued on 5 November 2021). At the Belgian level, the recent adoption of a specific tax regime for ELTIFs is expected to further increase the interest in this type of funds 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. Under the EU framework, a real asset is any asset that has value due to its substance and properties and that may provide returns. Real assets include infrastructure assets and other assets that give rise to economic or social benefits (including education or research and development). Investment in commercial property or residential projects is also permitted, provided they are part of a long-term investment project that contributes to the EU objective of smart, sustainable, and inclusive growth. In that respect, it is expected at the new EU proposed regulation will broaden the scope of real asset investment strategies that ELTIF managers may pursue.

Specifically noteworthy in the context of real estate investments is (i) that real assets are only eligible for investment by an ELTIF (directly or indirectly through a portfolio company) when the individual real asset has a value of at least EUR 10,000,000 (it being understood that the European Commission has now proposed to reduce that threshold to EUR 1,000,000) and (ii) the diversification requirement. Pursuant to that diversification requirement, ELTIFs may inter alia not invest more than 10% of its capital directly or indirectly in a single real asset. This limit can be raised to 20%, provided that the aggregate value of the assets held by the ELTIF in individual real assets in which it invests more than 10 % of its capital does not exceed 40 % of the value of the capital of the ELTIF. It is however expected that the new proposed regulation will soften those restrictions for ELTIFs marketed solely to professional investors.

ELTIFs are an interesting alternative to Belgian specialized real estate investment funds (FIIS/GVBF) vehicles commonly used on the Belgian real estate market, including for the following reasons:

  • ELTIFs are not subject to the 10-year investment cap set for Belgian specialized real estate investment funds;
  • ELTIFs enjoy an harmonized European label for financial products, which allows for an EU-wide distribution to professional and retail investors; and
  • The distribution rules applicable to ELTIFs are more flexible than those for other Belgian real estate investment funds ; in particular, ELTIFs are not subject to an obligation to distribute 80% of their incomes.

We note however that, ELTIFs can only be managed by EU alternative investment fund managers authorized under the AIFM directive and specifically authorised 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 that do not as such qualify as alternative investment fund within the meaning of the Belgian AIFM regulations (for example joint ventures or investment vehicles with a single shareholder). In that case, the specialised real estate investment fund does not have to be managed by an authorized alternative investment fund manager.

What is the tax treatment of an ELTIF?

Legislation creating a new tax regime for ELTIFs has been published in the official gazette on 28 January 2022. It contains the following main features.

ELITFs corporate income treatment will be organized in accordance with article 185bis of the Belgian Income Tax Code. In other words, corporate income tax will only be applicable on a very limited tax base consisting of abnormal or benevolent advantages received and certain disallowed expenses. In most cases, this will effectively lead to neutrality from a corporate income tax perspective.

Dividend distributions are also favourably treated. In particular, whereas dividends received by a Belgian investment company are in principle taxable at the standard 25% corporate income tax rate, ELTIFs may offer their Belgian corporate investors the benefit of the DRD regime, effectively preventing taxation at the level of the investor for the corresponding incomes if several conditions are met. We note that the benefit of DRD regime is not subject to the requirement that the vehicle’s articles of association provide for an annual distribution of 80% (as it is the case ofr FIIS/GVBF and SIR/GVV).

In respect of non-Belgian corporate investors, the ELTIF’s tax regime provides for an exemption from Belgian withholding tax on distributions made by ELTIFs from dividends and capital gains on shares if specific conditions are met. Importantly, ELTIFs could also be eligible for withholding tax reductions or exemptions under Belgium’s network of tax treaties, subject however to the view that will be taken by the relevant other State.

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 a rate of 0.0925% on net assets placed in Belgium, or 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 at your disposal to discuss the above and the opportunities that this creates for your business and company.

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