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Finance (No. 2) Bill

That is an invaluable point and I am most grateful to my hon. Friend for his knowledge and insight into all things financial and all things American. On close companies, which my hon. Friend the Member for Rayleigh (Mr. Francois) addressed so thoroughly, one can look at that issue in conjunction with the 10 per cent. ownership rule, which, to use his terminology, falls within the yellow card regime as opposed to the red card regime that applies to close companies. One of his points was that REITs are not a unique product in the sense that there are many international comparisons. We have just heard a comparison with the United States from my hon. Friend the Member for Braintree (Mr. Newmark). It might be worth while to examine some of those international comparisons, because there are different regimes in different countries. On the internet this morning, I spotted a document produced by Ernst and Young, which is a summary of the tax treatment of REITs internationally. I will quote from it, but I should issue a word of warning; this is by no means a criticism of Ernst and Young. In my previous career as a lawyer, I was involved in collating international advice from various jurisdictions and then trying to summarise it in one document. That task is notoriously difficult to perform. We are dealing with a complex area, and it is often difficult to simplify information and obtain advice from jurisdictions in which there may be language difficulties and considerable differences that are not always appreciated when one person is collating information. However, it is interesting to note the different requirements on ownership, which relate directly to the question of close companies. In Australia, there are no minimum or maximum shareholder requirements. However, other international regimes impose more limitation or control on the ownership structure of a REIT, or equivalent vehicle, than that proposed for the UK. For example, the document says that, under the Canadian system, real estate investment trusts"““must be qualified for distribution to the public and must have at least 150 unitholders””," which is a considerably larger number. A rather different situation applies in Brazil. The document states:"““Construction companies may not hold a greater than 25 per cent. participation””," but there otherwise does not appear to be any great qualification. If hon. Members are interested in Costa Rica, the document says that ““25 or more investors”” are required, as I am sure that the Economic Secretary is well aware. In Israel, the document says:"““At least 50 per cent. of the company’s voting rights should be held by more than five shareholders””." My hon. Friend the Member for Rayleigh said that Japan already has a relatively mature REIT market. The document says that, in Japan, the"““three largest investors must own less than 50 per cent. of the units””" and that the"““10 largest investors must own less than 75 per cent. of the units in order to be listed on the Exchange””." In Korea, the document says:"““No single shareholder (including its related parties) is permitted to own more than 30 per cent. of shares””." The situation in the Netherlands is especially complex. The document says that for listed REITs, a"““Shareholder that is a Netherlands corporation must own less than 25 per cent. (directly or through related entities)””." It continues to say that a"““Shareholder that is an individual must own less than 25 per cent.””." With regard to unlisted REITs, it says:"““Shareholders that are taxable corporations (either Dutch resident or foreign) must own together less than 25 per cent.””," that a"““Shareholder that is a Netherlands corporation must own less than 25 per cent. (directly or through related entities)””" and that a"““Shareholder that is an individual must own less than 5 per cent.””" Different rules thus apply in various jurisdictions and the area is complex. There is evidence from overseas that one could pray in aid of the amendment on close companies, but, equally, evidence of more restrictive overseas requirements on the ownership of a real estate investment vehicle. It is important that we get some indication of where the Government intend to go with this. On ownership, I believe that the purpose of the 10 per cent. rule is to prevent double tax treaties being used to facilitate overseas investors acquiring more than 10 per cent. and thus enabling them to benefit from double tax treaty provisions that would reduce their tax liability. I would be interested to know whether the Government are considering expanding the proposal, especially for specific vehicles, such as pension funds, which I understand, as a matter of practice, do not to tend to pay tax on properties in the UK in any event. Are negotiations taking place with other countries on double tax treaties to try to expand the area so that REITs fall outside it, which might enable the 10 per cent. provision to be raised a higher level, such as 40 per cent.? The Government have at last progressed this matter, and we all recognise that that is a good thing. The signs are that the Government have listened to industry, particularly on the conversion charge not causing difficulties. Effectively, they have given the industry what it wanted. During this afternoon and in future we require a firm commitment from the Government that they will not abandon REITs if they find in two years’ time that REITs are costing a bit of money. We do not want REITs to be struck out like a home computer initiative of its day. The industry requires a long-term commitment. I hope that the Government will be able to demonstrate that they have that commitment during the debate.