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REITs in Europe: Fragmentation, EU Law and Pillar Two

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12-05-2026

REITs face persistent tax challenges when investing cross-border within the EU, as fragmented national regimes often undermine the intended single level of taxation. Drawing on recent ECJ case law and the EU Pillar Two Directive, this article, published in Finance and Capital Markets (IBFD), outlines key gaps in the current framework and their practical impact.

Key insights

REITs are significant taxpayers but face cross-border inefficiencies, as fragmented EU regimes still lead to double or triple taxation despite high tax contributions

Non-resident REITs may reclaim withholding taxes, as EU law prevents Member States from denying equivalent treatment to comparable foreign REITs, including non-EU entities

Access to the Parent-Subsidiary Directive is limited, meaning most REITs must rely on domestic rules or treaties for withholding tax relief

Pillar Two creates additional complexity for REITs, with gaps in exclusions and loss of safe harbours increasing compliance burdens and potential tax exposure

Pillar One & Pillar Two

Real Estate Private Equity & Funds

Real Estate Real Estate Taxation Customs and international trade European Tax Law

The article also proposes a coordinated EU approach built on four pillars: a guaranteed level of source-state taxation, a residence-state withholding tax exemption, consistent treatment of direct and indirect investments, and a Pillar Two framework better aligned with REIT structures.

The fragmentation problem

Member States retain full discretion in designing REIT regimes. Distribution obligations, the scope of exempt income, eligible asset definitions and investor-base rules differ considerably across the EU. As a result, the « single level of taxation » that REIT regimes are intended to achieve domestically often breaks down in cross-border structures, particularly where a REIT invests through a taxable SPV in another Member State, generating up to three layers of taxation.

Where EU law helps, and where it does not

The authors confirm that once a Member State has a domestic REIT regime, it must extend comparable treatment to non-resident REITs in objectively comparable situations. L-Fund (C-537/20) is the leading authority, supported by Fidelity Funds, F SA and UBS Real Estate. Comparability is assessed against the purpose of the national regime, typically the prevention of double taxation through a shifted level of taxation and elements such as legal form, management structure and open/closed nature do not break comparability. Importantly, the protection extends to non-EU REITs through article 63 of the Treaty on the Functioning of the European Union. The Parent-Subsidiary Directive (PSD), by contrast, is of limited use. Wereldhave (C-448/15) confirms that REITs taxed at 0% are, de facto, not subject to tax for PSD purposes. Witholding Tax (WHT) relief in the source state must therefore rest on domestic law or treaty policy.

State aid as the outer limit

The European Commission's decision on the Finnish REIT regime is clear: tax neutrality may not translate into a more favourable treatment than a direct investment. This should rule out structures where the REIT (or its SPV) is exempt at source and benefits from a source-state WHT exemption. One level of taxation in the source-state should remain.

Pillar Two: an exclusion that does not fit the structures and access to key safe harbors restricted

The EU Pillar Two Directive excludes REIVs that are ultimate parent entities, together with their 95%-owned qualifying subsidiaries. The design appears coherent in theory but fails to capture common REIT structures (REIT-over-REIT, JV between REITs, tax-exempt SPVs…). In addition, the qualification of investment entities may remove REITs and their subsidiaries from key safe harbors, adding significantly to compliance cost. The authors propose replacing the 95% participation test with a consolidation-based test, which would align the exclusion with its stated purpose.

Authors' recommendation

A harmonised EU REIT framework should rest on four cumulative pillars: (i) one guaranteed level of source-state taxation; (ii) a residence-state WHT exemption on foreign-sourced real estate income; (iii) symmetrical treatment of direct and indirect investments; and (iv) for Pillar Two, a generalised exclusion of harmonised REIT regimes, or, failing that, a simplified ETR calculation tailored to REITs, with safe harbour access for taxable subsidiaries.

The full analysis offered by our authors is published on the website of Finance and Capital Markets (IBFD).