GloBE Rules Series

ITQ G-

021

July 1, 2022

Question

A Real Estate Investment Trust (REIT), located in jurisdiction X, is the UPE of an MNE Group which is "within scope" of the GloBE rules. The REIT is in the form of a unit trust.

The REIT is widely-held by unconnected investors (unitholders). One of those investors is a pension fund, which is also located in jurisdiction X. Most of the REIT's assets are in the form of shares in land-rich companies (i.e., companies whose assets predominantly consist of immovable property) – these companies are located in X and other jurisdictions.

Under the X income tax law:

The REIT is exempt from taxation on all of its taxable profits, provided it distributes to its unitholders, within 12 months of its year-end, 100% of its taxable profits.
The unitholders are generally subject to tax on distributions from the REIT, regardless of whether they are resident in X or not.
However, the pension fund is tax-exempt on all income – this includes the distributions from the REIT.

The GloBE rules have been implemented in jurisdiction X.

If one or more of the Constituent Entities within the REIT's MNE Group have a Top-up Tax, will the REIT be subject to an IIR tax?

Answer

If the REIT qualifies as an "Excluded Entity", then it will be exempt from IIR tax: Art. 1.1.3.

The REIT might qualify as an "Excluded Entity" under either para. (e) or para. (f) of Art. 1.5.1.

I will consider para. (f) first.

Para. (f) applies to a Real Estate Investment Vehicle that is a UPE.

The definition of "Real Estate Investment Vehicle" in Art. 10.1.1 contains 3 conditions, all of which must be satisfied: (1) "the taxation of [the Entity] achieves a single level of taxation either in its hands or in the hands of its interest holders (with at most one year of deferral)"; (2) "[the Entity] holds predominantly immovable property"; and (3) "[the Entity] is itself widely held".

Based on the facts, condition (3) is satisfied.

Condition (1): The fact that a tax-exempt pension fund is a unitholder in the REIT would appear to cause condition (1) to be failed, even if the REIT distributes all of its taxable profits within 12 months of its year-end. However, the Commentary states that that would not be the case, if the pension fund satisfies the definition of "Pension Fund" in Art. 10.1.1.

Condition (2): The Commentary states that the holding of securities the value of which is linked to immovable property, qualifies as the holding of immovable property for the purposes of condition (2). Thus, condition (2) should be satisfied in this situation.

Therefore, the REIT should satisfy the definition of "Real Estate Investment Vehicle" (if it distributes 100% of its taxable profits within 12 months of its year-end), and accordingly (in that situation) it should be an "Excluded Entity" under para. (f) of Art. 1.5.1, and thus be exempt from IIR tax.

Alternatively, if the REIT does not satisfy the definition of "Real Estate Investment Vehicle", it might qualify as an "Excluded Entity" under para. (e) of Art. 1.5.1. Para. (e) refers to an Investment Fund that is a UPE. The term, "Investment Fund", is defined in Art. 10.1.1. An investment fund which is focused on the real estate sector can satisfy that definition. However, based on the facts in the question, it is not possible to conclude whether the particular REIT in the question satisfies the definition.

Do you agree?

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