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Cross-Border Acquisitions Involving REIT Entities: Tax and Legal Hurdles

Ever wondered what happens when a REIT wants to buy property in another country?

It’s more complicated than just signing a deal—tax laws, ownership rules, and legal hurdles vary across borders. Without careful planning, these issues can put the entire investment at risk.

Why REITs Are Going Global

Traditionally, REITs focus on domestic markets—office buildings, malls, logistics centers, and hotels within their own country. But in recent years, more REITs have started looking across borders for two reasons: to diversify income and to access stable, high-performing assets in more mature markets.

For REITs based in Saudi Arabia, the UAE, or other Arab countries, acquiring real estate in Europe, North America, or Asia can offer access to stronger currencies, wider tenant bases, and more secure lease structures. It also allows them to attract global investors and reduce dependency on local economic cycles.

However, unlike a private real estate company, REITs operate under strict legal and tax frameworks. If not planned correctly, an international deal can threaten the REIT’s compliance status, trigger double taxation, or even violate local laws in the target country.

Legal Hurdles in Cross-Border Acquisitions

Cross-border real estate transactions involve several legal complexities, especially when a REIT is the buyer. These challenges must be understood early in the process to avoid costly delays or future legal risks.

One major issue is foreign ownership restrictions. Some countries place limits on how much property foreign entities can own or restrict ownership of certain types of land altogether. For instance, in Indonesia, foreigners cannot own freehold land, and in Thailand, foreign ownership of condominiums is capped by law. In India, foreign REITs may face barriers when trying to invest directly in commercial real estate. In these cases, REITs often must partner with local entities, use nominee arrangements, or create indirect ownership structures to stay compliant.

Another hurdle involves land law and property title systems, which vary widely. Some jurisdictions have well-established and transparent land registries, while others lack a centralized system, making it harder to verify ownership or check for encumbrances. For example, a REIT acquiring a logistics center in Eastern Europe may face unclear zoning laws or discover post-closing issues with land boundaries that weren’t obvious during due diligence.

Beyond ownership and title, many countries require government approvals for foreign investments in real estate. These may include pre-approval before acquisition, filing requirements with the central bank or real estate regulators, or mandatory reporting after closing. In some places, approvals can take months and involve multi-step legal processes in the local language.

Another layer of complexity arises when the REIT plans to finance the acquisition. Cross-border financing regulations—such as limits on foreign borrowing, restrictions on repatriating rental income, or controls over pledging local property as collateral—can delay or prevent smooth deal execution.

If not anticipated, these legal hurdles can result in regulatory penalties, ownership disputes, or even forced divestment. That’s why legal advisors, both local and international, must work hand in hand from day one of the acquisition process.

Tax Challenges in Cross-Border REIT Investments

Perhaps the biggest challenge REITs face in international acquisitions is tax-related. Without proper structuring, the REIT may face taxation in both its home country and the target country, significantly reducing returns.

A key concern is withholding tax on rental income. Many countries require foreign entities to pay tax on income earned from property located within their borders. This tax is often withheld at the source before the funds are even transferred. For example, the U.S. withholds up to 30% of gross rental income for foreign owners unless reduced under a tax treaty. Countries like Germany, France, and India also impose income taxes on foreign-owned property.

While tax treaties between countries can reduce withholding taxes, not all treaties cover REITs in the same way they do individuals or corporations. In many cases, REITs are not treated as “transparent” or “look-through” entities, which means the treaty benefits are denied. This can lead to full taxation in the host country—even if the REIT is exempt in its home jurisdiction.

Another tax complication is the capital gains tax on exit. If the REIT eventually decides to sell the foreign property, the host country may tax the profit, even if the sale is made indirectly through a foreign holding company. For instance, some countries impose capital gains tax not only on the direct sale of property but also on the sale of shares in a company that owns property. This is especially true in Australia, India, and several EU countries.

To protect themselves, REITs usually establish holding structures in jurisdictions with favorable tax treaties and clear legal protections. These structures—such as intermediate holding companies or joint ventures—must be designed with real economic substance. Many tax authorities now reject “shell” companies set up only to avoid taxes, especially under anti-abuse rules adopted in recent years.

REITs must also pay close attention to their own country’s REIT rules. In Saudi Arabia, for instance, REITs must derive at least 75% of their income from real estate and distribute 90% of their profits. If too much foreign income is classified incorrectly—or the foreign deal adds excessive non-qualifying assets—the REIT could lose its tax-favored status. This could subject all income to corporate tax and prevent further investor dividends.

Structuring Deals to Overcome Legal and Tax Risks

To navigate these challenges, REITs often use well-established structuring techniques. One common approach is to set up special purpose vehicles (SPVs) in jurisdictions that have tax treaties with both the home and host countries. For example, a Saudi REIT acquiring a property in the UK might use a Luxembourg SPV to reduce withholding taxes and simplify the repatriation of income.

Some REITs partner with local investors or developers to manage ownership restrictions. In such joint ventures, the REIT may hold a minority economic interest while retaining operational control through a management agreement. These structures also help navigate cultural and regulatory nuances that might be unfamiliar to a foreign buyer.

In some cases, REITs use sale-and-leaseback agreements instead of full ownership. This structure allows the REIT to control the property and receive rental income, without dealing with ownership restrictions in the host country. It also reduces exposure to title disputes and zoning issues.

Deal structuring must be customized for each transaction. There is no one-size-fits-all model. What works for a logistics property in Germany may not apply to a mixed-use complex in Indonesia. REIT managers need local insights, tax expertise, and legal clarity to get the structure right—both for compliance and long-term efficiency.

Due Diligence: More Important Than Ever

When it comes to international acquisitions, due diligence is not just a checklist—it’s a risk management process. REITs must examine legal ownership, property conditions, tenant quality, lease agreements, tax history, and zoning compliance. In some countries, it’s necessary to hire local investigators to check for liens, unpaid taxes, or unresolved disputes.

Environmental reviews are also critical. In developed markets, failing to meet environmental standards can lead to lawsuits or hefty remediation costs. In emerging markets, where enforcement may be inconsistent, environmental liabilities can remain hidden until after closing.

Additionally, REITs must ensure compliance with anti-money laundering (AML) and anti-bribery laws. Cross-border deals are often scrutinized by regulators, and even small violations can lead to reputational damage or sanctions—especially for publicly listed REITs.

Some REITs purchase political risk insurance when investing in jurisdictions with unstable governments or changing legal regimes. This insurance can cover losses from expropriation, currency restrictions, or civil unrest.

Case Example: A UAE REIT Acquiring a Hotel in Southeast Asia

Imagine a Dubai-based REIT is considering the acquisition of a 5-star hotel in Kuala Lumpur. The hotel is profitable, located in a tourism hotspot, and has strong occupancy.

Before the REIT can proceed, it must:

  • Ensure the Malaysian law permits foreign entities to own hotel real estate. In this case, it does—but only through a local subsidiary.
  • Set up a Malaysian SPV with a local partner to hold the title.
  • Confirm that the income from the hotel qualifies as real estate income under UAE REIT law.
  • Understand the tax implications, including Malaysia’s withholding tax on rental income and any taxes on dividends paid to the UAE parent.
  • Conduct legal and environmental due diligence, confirm tenant contracts (for long-stay units or retail), and check zoning status.
  • Report the deal to the local real estate regulator and file proper notices with the Dubai Financial Services Authority, if required.

Without careful planning, any misstep could jeopardize the deal or violate REIT rules in the UAE.

Conclusion: Know Before You Go Global

Cross-border acquisitions involving REITs are becoming more common, especially as Arab REITs mature and seek international growth. But these deals are far from routine. The legal and tax complexities require deep planning, clear strategy, and expert execution.

For REIT managers, legal counsel, and investors, success in international real estate begins with asking the right questions:

  • Can we own this property under local law?
  • What taxes will apply—both now and upon exit?
  • Does this structure protect our REIT status at home?
  • Do we fully understand the regulatory risks in both countries?

Global real estate can be a rewarding path for REITs—but only when built on a solid legal and tax foundation.

مؤسّس منصة الشرق الاوسط العقارية

أحمد البطراوى، مؤسّس منصة الشرق الاوسط العقارية و منصة مصر العقارية ،التي تهدف إلى تبسيط عمليات التداول العقاري في الشرق الأوسط، مما يمهّد الطريق لفرص استثمارية عالمية غير مسبوقة

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