The IRS recently issued (Rev. Proc. 2018-48
) which concludes that global intangible low-taxed income (GILTI) and other types of foreign income inclusions are considered qualifying income for purposes of a real estate investment trust’s (REIT) 95% gross income qualification test.
Section 856(c) provides that to qualify as a REIT, a domestic corporation must, among other things, annually satisfy the gross income requirements of Section 856(c)(2) and (c)(3). Under Section 856(c)(2), at least 95% of the corporation’s gross income must be derived from certain enumerated sources, including dividends, interest, rents from real property, and gain from the sale or other disposition of stock, securities, and real property.
Under Section 856(c)(3), at least 75% of the corporation’s gross income must be derived from a similar bur narrower set of enumerated sources, generally focused on income from real estate assets. Particularly since the addition of GILTI to the Code under Section 951A, the IRS has received requests to exercise authority to treat certain foreign income inclusions either as not constituting gross income or as qualifying gross income for purposes of Section 856(c)(2). Amounts that a REIT may be required to include in gross income under Sections 951(a)(1), 951A(a), 986(c), 1291(a), 1293(a)(1), or 1296(a) are not listed among the qualifying sources enumerated in Section 856(c)(2) or (c)(3).
Under the revenue procedure, any amounts required to be included in gross income by a REIT under Sections 951(a)(1) (except by reason of Section 965), 951A(a), 1291(a), 1293(a)(1), or 1296(a) are treated as qualifying income for purposes of Section 856(c)(2). In addition, the IRS concluded that any amounts required to be included in gross income by a REIT under Section 986(c) as foreign currency gain with respect to distributions of previously taxed earnings and profits are considered passive foreign exchange gain (as defined in Section 856(n)(3)) and, therefore, pursuant to Section 856(n)(1)(A), do not constitute gross income for purposes of Section 856(c)(2) and are excluded from the test.
Principal, Washington National Tax Office
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Director, Washington National Tax Office
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Managing Director, Washington National Tax Office
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