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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)

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Not be closely held (Code Section 856(a)(6));

Satisfy annual income and assets tests (Code Section 856(a)(7));
Satisfy distribution and earnings and profits requirements (Code Section 857(a), Code
Sections 561 through 565);
Make a REIT election (Code Section 856(c)(1)); and
Have a calendar year tax year (Code Section 859).
Further, 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, or during a
proportionate part of a taxable year of less than 12 months;
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;
The requirement that a REIT not be closely held must be met only for the last half of each
taxable year.
3. THE STEPS TO BE FOLLOWED BY A NON-US CITIZEN TO FORM REIT IN US.
In order to establish a REIT in US, the Non-US Citizen is first required to be either a
Corporation, Trust or an Association under the US Code, 1986.
A. A Limited Liability Company can be best described as a hybrid between a corporation and a
partnership. 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, with the
liability protection of a Corporation.
Like a corporation, it is a separate legal entity; unlike a corporation, there is no stock and
there are fewer formalities. The owners of an LLC are called "Members", instead of
"Shareholders" "Directors" and "Officers". So in essence, its a like a corporation, with less
complicated taxation and stock formalities.

The following is the procedure for a Non-US Citizens business to be incorporated in the US
which is similar to the procedure for a Citizen of US as a an LLC i.e. A Limited Liability
Company:
1. Choose a Company Name. i.e. Clearing the chosen LLC business name for
acceptance by comparing it with existing LLC's on file.
2. Filing Articles of Organization (also known as a "Certificate of Organization") with
the state's document filing office.
3. Provide for a Registered Agent - The Registered Agent is a person or company that
must have a physical address in the state of formation, wholl be available during
business hours, and will accept and sign for official legal and state documents for the
company.
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4. Provide Names and Addresses of the People/Companies Involved (Officers,

Directors, Members, etc.).
5. 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, handling disputes, etc.)
6. 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.
7. The LLC must open a Separate Bank Account.
8. It must then apply for a business license in the local jurisdiction of the select state
where the LLC intends to conduct the business.

B. A Corporation is a separate legal entity that can shield the owners from personal liability and
company debt. As a separate entity, it can buy real estate, enter into contracts, sue and be sued
completely separately from its owners. Also, money can be raised via the sale of stock; its
ownership can be transferred via the transfer of stock; the duration of the corporation is
perpetual (the business can continue regardless of ownership). In the case of a corporation,
Income is reported completely separate via a tax return for the corporation. (Unlike in LLCs)

The Following are the Steps for incorporation as a Corporation in US which is similar to
the procedure for a Citizen of US:
1. Choosing an available Business name.
2. Applying to register in that specific state
3. Establishing a registered agent with a valid, physical address in the selected state.
4. Filing the formation document with the Secretary of State, in which the person chooses to
operate. A corporations formation document is typically referenced as the Articles of
Incorporation or Certificate of Incorporation, depending on the state.
5. Further, an application to IRS via Form W-7 has to be made in order to obtain a
Individual Taxpayer Identification Number (ITIN), which is equivalent to the Social
Security number requirement by the US Citizen.

Under U.S. tax law, a non-U.S. citizen may own shares in a C corporation, but may not retain
shares in an S corporation. 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. The U.S. tax rules dictate that non-U.S. citizens cannot be shareholders of S
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corporations. For these reasons, many non-U.S. citizens operating businesses in the United
States choose to incorporate their business as an LLC.

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. 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. It must be governed by directors or trustees
and its shares must be transferable. Beginning with its second taxable year, 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").
2. 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. 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). No more than 5 percent of a REIT's
income can be from non-qualifying sources, such as service fees or a non-real estate
business.
(b) Quarterly, 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. A REIT cannot own, directly or indirectly,
more than 10 percent of the voting securities of any corporation other than another REIT,
a taxable REIT subsidiary (TRS) or a qualified REIT subsidiary ("QRS"). Nor can a
REIT own stock in a corporation (other than a REIT, TRS or QRS) in which the value of
stock comprises more than 5 percent of a REIT's assets. Finally, 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.
3. In order to qualify as a REIT, the REIT must distribute at least 90 percent of the sum of
its taxable income. To the extent that the REIT retains income, it must pay taxes on such
income just like any other corporation.
4. In order to qualify as a REIT, a company must make a REIT election by filing an income
tax return on Form 1120-REIT.
Thus, the above stated steps as required under the US Internal Revenue Code, 1986 (S.856) are the
Procedural requirements for forming a Real Estate investment Trust in the US by a Non-US Citizen.
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