20.	Income Taxes

The Company

We operate and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net income that we distribute currently to our stockholders. In order to maintain our qualification as a REIT, we are required under the Internal Revenue Code of 1986, as amended, to distribute at least 90% of our taxable income (without regard to the deduction for dividends paid and excluding net capital gains) to our stockholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates. Even if we qualify as a REIT, we may also be subject to certain state, local and franchise taxes.

We treat certain consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to federal and state income tax at regular corporate tax rates. Our taxable REIT subsidiaries had a combined current income tax expense of approximately $2,545,000 and $189,000 for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014, respectively, and have immaterial differences between the financial reporting and tax basis of assets and liabilities.

The following table reconciles net income attributable to Paramount Group, Inc. to estimated taxable income for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014.

				Period from
	Year Ended			November 24, 2014
(Amounts in thousands)	December 31, 2015			to December 31, 2014
Net (loss) income attributable to Paramount Group, Inc.	$	(4,419	)	$	57,308
Book to tax differences:
Straight-line and prepaid rents		(36,131	)		6,927
Depreciation and amortization		104,399			11,691
Stock based compensation		5,794			57,740
Gain on consolidation of unconsolidated joint venture		-			(192,891	)
Swap breakage costs		(27,147	)		(11,316	)
Unrealized gain on interest rate swaps		(29,586	)		(6,832	)
Earnings of unconsolidated joint ventures, including real estate investments		(12,909	)		(5,347	)
Other, net		7,356			20,832
Estimated taxable income (loss) (unaudited)	$	7,357		$	(61,888	)

Dividends distributed for the year ended December 31, 2015, were characterized for federal income tax purposes as (i) $0.289 per share or 89.2% as return of capital and (ii) $0.035 per share or 10.8% as ordinary dividends. Dividends distributed for the year ended December 31, 2015 exclude the fourth quarter 2015 dividend of $0.095 per share, which was paid on January 15, 2016 and is allocable to 2016 for federal income tax purposes.

The Predecessor

The companies included in our Predecessor’s combined consolidated financial statements operated in the U.S. as partnerships or corporations for U.S. federal income tax purposes. Our Predecessor, which owned the general partners of the Funds and consolidated them, was a corporate entity that was subject to federal, state, and local corporate income taxes at the entity level for their share of the profits and losses of the underlying investments. Our Predecessor accounted for income taxes using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current and deferred tax liabilities are recorded within accounts and other payables in the combined consolidated balance sheet. Below is a summary of the components of deferred tax liabilities.

(Amounts in thousands)	Year Ended December 31, 2013
Investment in partnerships/real estate	$	175,438
Basis adjustments		31,981
Deferred compensation		(9,886	)
Net operating losses & carryovers		(9,158	)
Valuation allowance		1,710
Other, net		(491	)
Total deferred tax liabilities	$	189,594

Upon completion of the Formation Transactions, the assets of the partnerships held by our Predecessor were contributed to the Operating Partnership, whose parent and sole general partner was the newly formed REIT. Since a REIT is effectively a non-taxable pass-through entity due to the allowance of a dividends paid deduction for US federal income tax purposes, our Predecessor’s deferred tax assets and liabilities associated with these partnerships no longer existed. Therefore, our Predecessor’s deferred tax amounts were reversed as an adjustment to equity and is reflected as “deemed contributions” in our Predecessors consolidated statement of changes in equity.

The following table summarizes our Predecessor’s tax position.

	Period from
	January 1, 2014			Year Ended
(Amounts in thousands)	to November 23, 2014			December 31, 2013
Income before income taxes	$	127,859		$	313,868
Total provision for income taxes		18,461			11,029
Effective income tax rate		14.4	%		3.5	%

The following table reconciles our Predecessor’s provision for income taxes to the U.S. federal statutory tax rate.

	Period from
	January 1, 2014	Year Ended
	to November 23, 2014	December 31, 2013
Statutory U.S. federal income tax rate	35.0%	35.0%
Income passed through to common unitholders and noncontrolling interests⁽¹⁾	(24.1%)	(31.6%)
State and local income taxes	5.5%	0.8%
Other	(2.0%)	(0.7%)
Effective income tax rate ⁽²⁾	14.4%	3.5%

⁽¹⁾ Includes income that is not taxable to the Predecessor. Such income is directly taxable to the Predecessor’s unitholders and the noncontrolling interests.

⁽²⁾ The effective tax rate is calculated on income before income taxes.