MERLIN Properties Annual Report 2018 / English

ı 66 ı • Tax risk: The Parent and a portion of its subsidiaries qualified for the special tax regime for real estate investment trusts (SOCIMI). The transitional period for the Parent ended in 2017 and, therefore, compliance with all requirements established by the regime became mandatory. Some of the more formal obligations that the Parent must meet involve the inclusion of the term SOCIMI in its company name, the inclusion of certain information in the notes to its separate financial statements, the share price on the stock market, etc., and other obligations that require estimates to be made and judgements to be applied by management (calculation of taxable rental income, testing rental income, testing assets, etc.) that may become fairly complex, especially considering that the SOCIMI regime is relatively recent and was developed by the Directorate-General of Taxes mainly in response to the queries posed by various companies. In this regard, management, with the support of its tax advisors, assessed compliance with the requirements of the regime, concluding that such requirements except the income test were met at 31 December 2018. In the opinion of the Directors, this breach is an exceptional situation mainly due to the profit obtained by the Group on the sale of Testa Residencial SOCIMI, S.A. In this regard, and as established in section 13 of the Spanish REIT Act, which allows for the remedy of this type of breach in the following year, the Directors understand that the Group will meet the level required by law in relation to the income test in 2019 and, therefore the Parent will continue to apply the REIT regime, a situation which has been taken into account in the preparation of the consolidated financial statements for 2018. Accordingly, and also for the purpose of taking into consideration the financial effect of the regime, it should be noted that, as established in section 6 of Spanish Law 11/2009, of 26 October, as amended by Spanish Law 16/2012, of 27 December, REITs that have opted for the special tax regime are required to distribute the profit generated during the year to their shareholders in the form of dividends, once the related corporate obligations have been met. This distribution must be approved within six months from each year end, and the dividends paid in the month following the date on which the pay-out is agreed. If the Parent does not comply with the requirements established in the regime or if the shareholders at the General Meetings of these companies do not approve the dividend distribution proposed by the Board of Directors, calculated in accordance with the requirements of this Act, it would not be complying therewith and, accordingly, tax would have to be paid under the general regime, not the regime applicable to REITs.