Certain foreign affiliate income inclusions qualify for REIT 95% gross income test


A recently released tax procedure (Rev. Proc. 2018-48) establishes that certain income, including “Global Low Tax Intangible Income” (“GILTI”), received by a Real Estate Investment Trust (“REIT”) ) through its foreign subsidiaries will constitute income qualifying for the 95% gross income test applicable to REITs (the “95% gross income test”), and that certain related foreign exchange gains will be excluded for purposes of the 95% gross income test. The tax procedure applies to tax years beginning after September 13, 2018; however, a REIT may elect to apply to any prior taxation year. The changes outlined in the revenue procedure significantly benefit REITs with non-US real estate assets. Specifically, prior to the publication of the income procedure, these REITs may have difficulty meeting the 95% gross income test without a private letter ruling, particularly due to the GILTI inclusions.

Qualifying income and exclusions from the 95% gross income test

Under Section 856(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”), a REIT must meet the 95% gross income test each year by earning at least 95% of its gross income from certain listed sources, including real estate rentals, dividends, interest and gains from the sale or other disposition of stocks, securities and real estate. Under Section 856(c)(5)(J) of the Code, the Secretary of the Treasury is authorized to determine whether any other item of income or gain is gross income for the purposes of the 95% gross income test and , if so, whether it is qualifying income for the purposes of this test.

Previously, the treatment of certain foreign income inclusions for the purposes of the 95% gross income test was unclear. A REIT may hold interests in certain foreign subsidiaries, including subsidiaries that may be “controlled foreign corporations” (“CFCs”) or “passive foreign investment companies” for US federal income tax purposes. , and may be required to include in gross income certain types of income or profits of such subsidiaries, whether or not the REIT has received cash distributions from the subsidiaries. In addition, under the Tax Cuts and Jobs Act (PL 115-97), each US shareholder of an SEC is subject to tax on his or her share of the SEC’s GILTI. GILTI, as a general rule, is the US shareholder’s pro rata share of income accrued within CFCs in excess of 10% of the CFC’s tangible overseas investment, less certain interest charges incurred. by CFCs. A U.S. corporation, including a REIT, is required to include GILTI in its income in a manner generally similar to Subpart F income inclusions. In June 2018, Nareit urged the Internal Revenue Service (“ IRS”) to issue guidance clarifying that GILTI amounts qualify for the 95% gross income test.

The tax procedure provides that amounts required to be included in income under Sections 951(a)(1) (except because of Section 965), 951A(a), 1291(a), 1293(a)( 1) and 1296(a) of the Code are qualifying income for purposes of the 95% gross income test. Such income includes Subpart F income, GILTI and “passive foreign investment company income” received by the REIT. In addition, the tax procedure excludes from gross income for the purposes of the 95% gross income test amounts required to be taken into account by a REIT under section 986(c) of the Code as a foreign exchange gain in respect of regarding distributions of previously taxed income. and profits.

More favorable treatment than recent private letter rulings

The tax procedure is more generous than recent private letter rulings on this topic, as some recent private letter rulings have imposed restrictions on the activity of the underlying foreign subsidiary (e.g. requiring that income earned be of a passive). Under the income process, REITs with foreign subsidiaries will not need to go through the private letter decision process to receive advice on foreign income inclusions.

In addition, the new rules may apply to the election in any prior taxation year for which the REIT is required to recognize such income or foreign exchange gain. This allows all REITs to benefit from the new favorable treatment of previous years.

The IRS released the tax procedure the same day it released the draft GILTI regulations.


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