Content area
Full text
A REIT should carefully review the foreign and U.S. tax consequences associated with any outbound investment.
Over the past year or so, several real estate investment trusts (REITs) have announced significant investments in projects and properties located outside the United States.1 The business case for these investments include bargain shopping for Japanese real estate, the saturation of certain segments of the U.S. real estate market, the economic vitality of selected markets in the European Union, or the benefits traditionally associated with holding a diversified portfolio of assets.2
Strategic tax planning should be an integral part of any real estate investment or development decision by a REIT. This is particularly true in the international context. Needless to say, a REIT's preferential treatment under U.S. tax laws does not carry over to foreign jurisdictions. Therefore, management must consider the foreign tax cost and its impact on "funds from operations." These taxes include national and local income taxes (which are often imposed at rates higher than the equivalent U.S. rates), property taxes, and transactional taxes such as capital duties, transfer taxes, and value added taxes (VAT). U.S. tax advisors must also consider the unique issues that arise from the interplay, or lack thereof, of the U.S. rules governing the taxation of REITs and outbound investments.
REITS: a brief overview
A REIT is a U.S. corporation, trust or association that is formed to hold interests in "passive" real estate investments.3 Subject to certain requirements, a REIT is treated as a partial conduit for U.S. federal income tax purposes. The conduit treatment is achieved by allowing the REIT to claim a deduction for dividends paid to its shareholders.4 The taxable income of a REIT (as adjusted) is otherwise subject to the "normal tax ... computed at the rates and in the manner prescribed in section 11."5
A REIT may be subject to other types of U.S. federal taxes. One tax that may be relevant in the international context is the tax on net income from prohibited transactions. Under Section 857(b)(6), a REIT realizes income from a "prohibited transaction" if it disposes of property held primarily for sale to customers in the ordinary course of business. This tax is assessed at a rate of 100% of the gain recognized.
...