Recently, the Connecticut Department of Revenue Services issued an informat-ional publication explaining its position on the application of the Connecticut Corpor-ate Business Tax on real estate investment trusts (REITs) and revised a previously issued publication on the implications of the state’s economic nexus provisions to foreign (non-U.S.) companies.

The Department’s newly issued guidelines treat REITs in a manner that is similar to the Internal Revenue Code, but the Department strays in certain areas. IP 2010(21) (Dec. 1, 2010). For corporation business tax (CBT) purposes, REITs carrying on business in Connecticut are subject to tax on their net income under Conn. Gen. Stat. § 12-217 and must file a separate company Form CT-1120. However, unlike the federal treatment, a dividends paid deduction is not allowed for CBT purposes if the REIT is a “captive REIT.” A captive REIT is, subject to certain exceptions, a REIT where more than 50% is owned or controlled by a single entity and where the REIT is not regularly traded on an established securities market. On the flip side, while REIT distributions are generally not eligible for a dividends received deduction, the Department explained that Connecticut law provides for such a deduction if the dividend is received (1) from a REIT that was incorporated prior to April 1, 1997, and that had more than $500 million in real estate assets contributed to it prior to that date, or (2) from a captive REIT that is taxable in Connecticut.

In addition, the Department provided apportionment guidance applicable to REITs. Generally, REITs apportion income in the same manner as C corporations (i.e., using the payroll, property, and double weighted sales factors). However, the Department explained that REITs that meet the definition of “financial services company” pursuant to Conn. Gen. Stat. § 12-218b(a)(6) “can” apportion income under rules applicable to financial services companies (i.e., using a single sales factor). It is unclear whether the Department’s use of the word “can” in IP 2010(21) was intended to provide a REIT that meets the definition of “financial services company” with an option as to which apportionment regime to utilize. This flexibility is not available to other financial services companies in Connecticut.

With respect to economic nexus, the Department issued IP 2010(29.1) on December 28, 2010, clarifying the Department’s recent explanation of economic nexus legislation in Connecticut and, in particular, the economic nexus implications for certain foreign (non-U.S.) companies. Pursuant to Conn. Gen. Stat. § 12-216a, a company has nexus in Connecticut if the company “has substantial economic presence” that is “evidenced by a purposeful direction of business toward [Connecticut].” The Department’s position is that the economic nexus provisions are not intended to apply to corporations that are treated as foreign corporations under the Internal Revenue Code and that have no income “effectively connected with a United States trade or business.” While the Department intends to “administratively adhere” to this guidance, it is seeking to amend Conn. Gen. Stat. § 12-216a to clarify any ambiguity