8-KOther Events

DIGITAL REALTY TRUST, INC. 8-K Report, Corporate Update (Mar 19, 2014)

Filed March 19, 2014For Securities:DLRDLR-PJDLR-PKDLR-PL

Summary

This Form 8-K filing from Digital Realty Trust, Inc. (DLR) provides supplemental information regarding U.S. federal income tax considerations, superseding previous disclosures. Key updates focus on the tax treatment of certain asset dispositions, annual distribution requirements for REIT qualification, and potential withholding taxes under the Foreign Account Tax Compliance Act (FATCA). For investors, the most critical updates concern the potential tax implications of acquiring assets from C corporations and the precise requirements for maintaining REIT status through dividend distributions. The filing clarifies how certain gains from asset dispositions are handled and updates the rules for calculating the minimum distribution necessary to avoid corporate-level taxes. Additionally, it addresses the impact of FATCA on payments to foreign financial institutions, which could affect certain non-U.S. investors.

Key Highlights

  • 1Updates tax guidance on "built-in gains" for assets acquired from C corporations, clarifying that gains from like-kind exchanges (Section 1031) or involuntary conversions (Section 1033) are now excluded from this tax.
  • 2Supersedes previous guidance on the annual distribution requirements for REIT qualification, detailing the calculation which includes 90% of REIT taxable income and after-tax foreclosure property income, minus certain non-cash income adjustments.
  • 3Defines "REIT taxable income" for distribution purposes, explicitly excluding the dividends paid deduction and net capital gain, and also excluding gains subject to the "built-in gains" tax.
  • 4Provides updated information on tax rates for capital gains and dividends for non-corporate taxpayers, noting that REIT dividends are generally not eligible for the 20% qualified dividend income rate unless specific conditions are met.
  • 5Details the potential application of the 3.8% Medicare tax on unearned income for certain individual, estate, and trust U.S. stockholders.
  • 6Addresses the Foreign Account Tax Compliance Act (FATCA), explaining that a 30% withholding tax may be imposed on certain payments made to foreign financial institutions and non-U.S. entities, with specific effective dates for dividends and gross proceeds.
  • 7Clarifies that for FATCA withholding purposes, distributions may be treated entirely as dividends due to uncertainty regarding their tax characterization at the time of payment.

Frequently Asked Questions

The filing clarifies that gains from sales of property acquired through like-kind exchanges (Section 1031) or involuntary conversions (Section 1033) are now excluded from the "built-in gains" tax that could otherwise apply to assets acquired from C corporations within a ten-year period.

This filing supersedes previous guidance on REIT distribution requirements. It confirms that Digital Realty must distribute at least 90% of its REIT taxable income and after-tax foreclosure property income (minus certain non-cash income) to maintain its REIT status and avoid corporate-level taxes. The calculation of REIT taxable income for this purpose is also clarified.

Under FATCA, a 30% withholding tax may be imposed on dividends paid to foreign financial institutions and certain other non-U.S. entities unless they comply with reporting and diligence requirements. Withholding on gross proceeds from sales is also possible from January 1, 2017. Investors holding shares through foreign institutions should consult their tax advisors.

While the maximum rate for non-corporate taxpayers on capital gains is generally 20%, dividends paid by REITs are typically not eligible for the 20% qualified dividend income rate. They are generally taxed at ordinary income rates, unless specific conditions related to holding periods and the source of the REIT's income are met. 'Capital gain dividends' are taxed at rates up to 20% but may be subject to a 25% rate depending on asset characteristics.