On September 13, 2018, the Internal Revenue Service (the “Service”) released Revenue Procedure 2018-48 (the “Revenue Procedure”), which provides guidance on how certain items of foreign-related income are treated for purposes of determining whether a real estate investment trust (“REIT”) satisfies the 95% gross income test in section 856(c)(2) of the Internal Revenue Code (the “Code”). Specifically, the Revenue Procedure addresses the application of the 95% gross income test (the “95% test”) to amounts required to be included in gross income under sections 951(a)(1), 951A(a), 1291(a), 1293(a)(1), and 1296(a). These Code sections require income inclusions with respect to income derived by domestic shareholders through foreign subsidiaries, including “subpart F income” derived from a “controlled foreign corporation” (“CFC”), “global intangible low-taxed income” (“GILTI”), and income derived from a “passive foreign investment company” (“PFIC”). (Collectively, this Client Alert refers to these types of foreign-source income as “Foreign Inclusions”.) The Revenue Procedure also addresses the application of the 95% test to amounts required to betaken into account under section 986(c) as foreign currency gain with respect to distributions of previously taxed earnings and profits.

1. BACKGROUND -

a. REIT Income Requirements -

Among the requirements a corporation must satisfy to qualify as a REIT are two annual income tests. Under section 856(c)(2), at least 95% of a REIT’s gross income must consist of rents from real property, gain from the sale of real property, interest, dividends, and certain other types of income. Under section 856(c)(3), at least 75% of a REIT’s gross income must consist of a similar, but narrower set of income types, which are more closely tied to income from real property (the “75% test”). For instance, unless an exception for certain “qualified temporary investment income” applies,interest income only qualifies for the 75% test if it arises from obligations secured by mortgages on real property and dividends only qualify for the 75% test if they are received from another REIT.