On September 13, 2018, the Internal Revenue Service (Service) published revenue procedure 2018-48(Revenue Procedure), concerning the proper treatment of certain types of income from foreign operations for purposes of the real estate investment trust (REIT) income tests after the enactment of the Trump Administration’s Tax Cut and Jobs Act of December 2017 (TCJA). The Revenue Procedure provides important and welcome relief from uncertainty to REITs with international operations.


U.S. REITs predominately invest in U.S. real estate assets. However, U.S. REITs may also invest in non-U.S. real estate assets.1 Some larger, typically publicly traded, REITs have not insubstantial foreign operations. For foreign business and tax reasons, these operations often involve the formation of one or more foreign subsidiaries, some of which are treated as “taxable REIT subsidiaries” (each a TRS) (i.e., each such TRS is treated as a normal C corporation as opposed to being disregarded as a “qualified REIT subsidiary” or disregarded entity or partnership under general check-the-box election principles). Accordingly, a TRS is subject to the regular set of international tax rules, including (a) the Subpart F rules, (b) the passive foreign investment company (PFIC) rules and, most importantly after the enactment of the TCJA, (c) the new “global intangible low taxed income” (GILTI) rules. It has been a long standing question whether Subpart F income and PFIC inclusions are good REIT income for purposes of either the 75% gross income test (i.e., income from real estate) or the 95% gross income test (i.e., income from real estate and other passive investments, such as dividends and interest on bonds or loans) because neither the statute nor the Department of the Treasury regulations thereunder nor any revenue ruling mention these types of income, thereby creating the presumption that such types of income are non-qualifying, or bad, income for REIT purposes. However, the Service has repeatedly taken the position in private letter rulings (PLRs) that such income inclusions are often good REIT income, subject to certain conditions. A similar problem was created when the GILTI rules were enacted by the TCJA, because these rules cause a domestic corporation, including a REIT, to have phantom income inclusions similar to Subpart F income inclusions with no corresponding clarification how such GILTI inclusions should be treated for REIT income test purposes.

Summary of Revenue Procedure

The Revenue Procedure provides that:

  • Any Subpart F inclusions under Section 951(a)(1)2 (other than any such inclusions pursuant to the one-time transition tax rules of Section 965) are treated as good income for purposes of the 95% REIT gross income test; this includes Subpart F income inclusions under Section 956.
  • Any GILTI inclusions under Section 951A(a) are treated as good income for purposes of the 95% REIT gross income test.
  • Any PFIC inclusions under Section 1291(a), 1293(a)(1) (relating to the so-called QEF election) and Section 1296(a) (mark-to-market regime) are treated as good income for purposes of the 95% REIT gross income test.
  • Any foreign currency gains that a REIT needs to recognize under Section 986(c) with respect to distributions from foreign subsidiaries of previously taxed earnings and profits are ignored for purposes of both the 75% and the 95% REIT gross income tests.
  • The Revenue Procedure is effective for any calendar tax year beginning after December 31, 2018. However, a REIT, which must use the calendar year as its tax year, may choose to apply this Revenue Procedure to all prior years.

Initial Observations

  • Confirming Prior PLR Practice. The Revenue Procedure confirms and expands upon the taxpayer-friendly positions taken by the Service in prior PLRs. However, in the context of Subpart F inclusions it arguably went beyond prior PLR positions because it does not require that the underlying Subpart F income results from real estate (i.e., passive rents). Under the Revenue Procedure, the source of the Subpart F income does not matter. It is always treated as good REIT income. This makes sense since Subpart F income is akin to dividend income which is clearly good income no matter what the source for the dividend payments is. In addition, the Subpart F income is good income even if it is not accompanied with a concurrent distribution of the earnings and profits associated with such Subpart F income. This has been somewhat controversial given a concurrent “distribution requirement” in the corresponding regulated investment company (RIC) rules3 and a recent PLR. Confirming the prior PLR practice and making it universally applicable4 is important because it facilitates the issuance of REIT tax opinions in connection with capital market transactions entered into by REITs.
  • Sensible New GILTI Position. The position taken by the Service makes sense because GILTI is, as a technical matter, imbedded in the Subpart F rules and its treatment is very similar to Subpart F income. It would have been strange, to say the least, for the Service to conclude that Subpart F income is good income but GILTI income is bad REIT income. It should be noted that the new GILTI inclusions, if any, will affect the REIT minimum distribution requirement (very generally speaking, 90% of a REIT’s taxable income) as compared to prior law, in which income now treated as GILTI would not have been included in a parent REIT’s income in the absence of a dividend distribution from a foreign TRS. Accordingly, after the enactment of the TCJA, a REIT with international operations may have, under certain circumstances, a structurally higher distribution requirement than before the tax reform as a result of the enactment of the new GILTI rules.
  • No Longer a Need for PLRs. Given the published PLRs of the Service in connection with Subpart F and PFIC inclusions, REITs and their advisors took different views regarding the need for obtaining a separate PLR on these questions. The Revenue Procedure makes it clear that no new PLRs are needed in this area. This should free up scarce resources within the Service.