[Shifting Urban Development]②Taxes Deferred Until Profits Realized... No Limit on Individual Share Ownership

Preventing Monopoly of Development Profits and Sharing with the Public
Surcharge Imposed for Breaking Public Offering Promise... Blocking "Eat-and-Run" Tactics
Lowering Barriers for Foreign Capital
"Money Flowing to Private Equity, Now into REITs"
Considering Incentives Such as Higher Floor Area Ratios and Eased Public Contribution Requirements

The government has introduced bold measures to revitalize project REITs. When a company transfers land to a REIT as a contribution in kind, the massive taxes incurred can be deferred 'virtually indefinitely,' and even after development is completed, the company is given flexibility to wind down the project. The intention is to bring real estate development finance, which has long operated outside the formal system, into the open through the REIT structure.

The most powerful incentive is tax deferral. At the end of last year, the government revised the tax law so that when a landowner contributes land to a project REIT as a contribution in kind, payment of corporate or capital gains taxes can be postponed until the REIT shares are sold and actual profits are realized. Typically, the maximum tax deferral period is six years, but for project REITs, this time limit has been removed.

During the operation phase, if the REIT is converted into a public REIT, it is excluded from the comprehensive real estate tax base, and unlike existing project finance investment companies (PFVs), there is no additional acquisition tax burden. However, land must be contributed within five years of registration, business approval must be obtained within 18 months after completion, and a public offering must be conducted within five years of business approval. The purpose of the system is to ensure that development profits, once monopolized by a few developers, are shared with the general public.

Project REITs aim to shift the traditional 'build and sell' development practice to an advanced 'build, operate, and take responsibility' model. The government has not completely blocked the option of selling assets (disposing of shares before a public offering) instead of operating them after completion. However, in such cases, deferred taxes must be paid along with an additional interest-like surcharge. The same applies if business approval is revoked or the public offering requirement is not fulfilled. These are safeguards to prevent parties from taking advantage of tax benefits without fulfilling the social responsibility of a public offering.

Some point out that if exiting without operating is allowed, project REITs are no different from PFVs. An official from the Ministry of Land, Infrastructure and Transport stated, "Project REITs are different from PFVs, which operated in the dark, because investment reports must be submitted every three months, and there are restrictions such as minimum equity ratios. Therefore, if the sole purpose is simple pre-sale, there is no reason to choose this structure."

From the date of business approval until the public offering, project REITs are not subject to the 50% cap on individual share ownership. This ownership restriction was the main reason global investors shied away from traditional REITs. The industry expects that this change will help absorb foreign capital, which previously entered less regulated PFVs or private equity funds to seek short-term gains, into the formal system.

For projects requiring large-scale funding, there are also acquisition tax savings. By structuring the deal so that investors purchase REIT shares instead of directly acquiring assets, the acquisition tax rate drops from 4.6% to about 2.2%. For a data center project worth 1 trillion won, this means taxes decrease from 46 billion won to between 20 and 30 billion won.

The government is also considering additional incentives such as increasing the floor area ratio or easing public contribution requirements. For example, if a developer takes responsibility for revitalizing a particular commercial district or supplies rental housing over a long period, these actions could be recognized as public contributions. However, since the current method of recapturing development gains focuses on physical infrastructure donations like roads and parks, it is expected to take time to build consensus with local governments.

An official from the Ministry of Land, Infrastructure and Transport said, "Local governments agree that there should be incentives for developers who take responsibility not only for development but also for operational performance."