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Privileged and Confidential

SECTION A - INTRODUCTION
1. QUERIES
1.1 What are the Steps to be followed for setting up an REIT in US by a Non-US Citizen?
1.2 Is there any difference in the process of setting up REIT by a US Citizen and a Non- US Citizen?

SECTION B- RESEARCH AND ANALYSIS

1. WHAT IS A REIT?
The term REIT refers to a “real estate investment trust” as set forth in subchapter M of chapter 1 of
the Internal Revenue Code of 1986 (the “Code”) as follows 1:
(a) In general, For purposes of this title, the term “real estate investment trust” means a corporation,
trust, or association—
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest;
(3) which (but for the provisions of this part) would be taxable as a domestic corporation;
(4) which is neither :
(a) a financial institution referred to in section 582(c)(2), nor
(b) an insurance company to which subchapter L applies;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) subject to the provisions of subsection (k), which is not closely held (as determined under
subsection (h)); and
(7) which meets the requirements of subsection (c).

2. REQUIREMENTS UNDER THE INTERNAL REVENUE CODE s.856.
Under Section 856 of the US Code, the following elements have to be qualified by an REIT in order
to get tax exemption under the code:
 Have centralized management (Code Section 856(a)(1));
 Have transferable shares (Code Section 856(a)(2));
 Be a domestic corporation for federal tax purposes (Code Section 856(a)(3));
 Not be a financial institution or insurance company (Code Section 856(a)(4));
 Have shares beneficially owned by at least 100 persons (Code Section 856(a)(5));

1 US Internal Revenue Code (Title 26 › Subtitle A › Chapter 1 › Subchapter M › Part II › § 856)

 The requirement that a REIT not be closely held must be met only for the last half of each taxable year. unlike a corporation. with the liability protection of a Corporation.e. Like a corporation. with less complicated taxation and stock formalities. Clearing the chosen LLC business name for acceptance by comparing it with existing LLC's on file. – i. Choose a Company Name. The owners of an LLC are called "Members". A Limited Liability Company: 1. and will accept and sign for official legal and state documents for the company. A. 3. Privileged and Confidential  Not be “closely held” (Code Section 856(a)(6)). who’ll be available during business hours. there are requirements in order to maintain the status of an REIT as follows:  The entity must satisfy the 100 or more beneficial owner test only on at least 335 days of a taxable year of 12 months in which it wishes to qualify as a REIT.The Registered Agent is a person or company that must have a physical address in the state of formation. or during a proportionate part of a taxable year of less than 12 months. So in essence. In order to establish a REIT in US. Filing Articles of Organization (also known as a "Certificate of Organization") with the state's document filing office. Code Sections 561 through 565). THE STEPS TO BE FOLLOWED BY A NON-US CITIZEN TO FORM REIT IN US.  Make a REIT election (Code Section 856(c)(1)).e. 1986. there is no stock and there are fewer formalities. Trust or an Association under the US Code. instead of "Shareholders" "Directors" and "Officers". Further. it’s a like a corporation.  Satisfy distribution and earnings and profits requirements (Code Section 857(a). . Provide for a Registered Agent . the Non-US Citizen is first required to be either a Corporation. It provides easy management and "pass-through" taxation (profits and losses are added to the owner(s) personal tax returns) like a Sole Proprietorship/Partnership. it is a separate legal entity. 3. 2.  The requirements that a REIT have at least 100 beneficial owners and that it not be “closely held” do not apply to the first taxable year for which a REIT election is made. and  Have a calendar year tax year (Code Section 859). The following is the procedure for a Non-US Citizen’s business to be incorporated in the US which is similar to the procedure for a Citizen of US as a an LLC i. A Limited Liability Company can be best described as a hybrid between a corporation and a partnership.  Satisfy annual income and assets tests (Code Section 856(a)(7)).

The LLC must open a Separate Bank Account.S. In the case of a corporation. Also. Members. etc. 5. but may not retain shares in an S corporation. The LLC must then hold an Organizational Meeting (which specifies who becomes a Member or Manager and issues ownership percentage to the "owners") and adopt the LLC Operating Agreement (the rules by which LLC adopts for internal governance including adding/removing members. etc. 7. it can buy real estate. the duration of the corporation is perpetual (the business can continue regardless of ownership). The LLC must then apply for the Federal Employer Identification Number also known as an "EIN" or simply "Tax ID Number" which is a number issued by the United States Internal Revenue Service (IRS) that is somewhat like an identification number for companies. Provide Names and Addresses of the People/Companies Involved (Officers. Directors. which is equivalent to the Social Security number requirement by the US Citizen. It must then apply for a business license in the local jurisdiction of the select state where the LLC intends to conduct the business. As a separate entity. its ownership can be transferred via the transfer of stock. Under U. handling disputes. physical address in the selected state. Filing the formation document with the Secretary of State. 8. B. 4. 5. citizens cannot be shareholders of S . tax rules dictate that non-U. a non-U. Establishing a registered agent with a valid. Income is reported completely separate via a tax return for the corporation. tax law.S.). enter into contracts. Further. Applying to register in that specific state 3.) 6. 2. citizen may own shares in a C corporation.S.S. depending on the state. money can be raised via the sale of stock. (Unlike in LLC’s) The Following are the Steps for incorporation as a “Corporation” in US which is similar to the procedure for a Citizen of US: 1. A corporation’s formation document is typically referenced as the Articles of Incorporation or Certificate of Incorporation. S corporations allow shareholders (owners) to report their portion of business income and expenses on their personal income tax returns and avoid corporate level taxation. sue and be sued completely separately from its owners. The U. in which the person chooses to operate. A Corporation is a separate legal entity that can shield the owners from personal liability and company debt. Privileged and Confidential 4. an application to IRS via Form W-7 has to be made in order to obtain a Individual Taxpayer Identification Number (ITIN). Choosing an available Business name.

For these reasons. A REIT must be formed in one of the 50 states or District of Columbia as an entity taxable for federal purposes as a corporation. No more than 5 percent of a REIT's income can be from non-qualifying sources. a taxable REIT subsidiary (“TRS”) or a qualified REIT subsidiary ("QRS"). the REIT must distribute at least 90 percent of the sum of its taxable income. the value of the stock of all of a REIT's TRSs cannot comprise more than 25 percent of the value of the REIT's assets. at least 75 percent of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. such as service fees or a non-real estate business. Nor can a REIT own stock in a corporation (other than a REIT. it must pay taxes on such income just like any other corporation. 2. A REIT cannot own. more than 10 percent of the voting securities of any corporation other than another REIT. It must be governed by directors or trustees and its shares must be transferable. Thus. (b) Quarterly. Finally. TRS or QRS) in which the value of stock comprises more than 5 percent of a REIT's assets. Beginning with its second taxable year. In order to qualify as a REIT. citizens operating businesses in the United States choose to incorporate their business as an LLC.856) are the Procedural requirements for forming a Real Estate investment Trust in the US by a Non-US Citizen. An additional 20 percent of the REIT's gross income must be from the above-listed sources or other forms of income such as dividends and interest from non- real estate sources (like bank deposit interest). 3. a company must make a REIT election by filing an income tax return on Form 1120-REIT. directly or indirectly. The REIT must satisfy two annual income tests and a number of quarterly asset tests to ensure the majority of the REIT's income and assets are derived from real estate sources: (a) At least 75 percent of the REIT's annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. the above stated steps as required under the US Internal Revenue Code. a REIT must meet two ownership tests: (a) it must have at least 100 shareholders (the "100 Shareholder Test") (b) five or fewer individuals cannot own more than 50 percent of the value of the REIT's stock during the last half of its taxable year (the "5/50 Test"). In order to qualify as a REIT.S. 4. To the extent that the REIT retains income. The following is the process of forming the REIT after the incorporation of the business in the form of either an LLC or a Corporation: 1. Privileged and Confidential corporations. . 1986 (S. many non-U.

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