21.	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, with respect to any taxable year, we fail to maintain our qualification as a REIT, and we are not entitled to relief under the relevant statutory provisions, we would be subject to income tax at regular corporate tax rates. Even if we qualify as a REIT, we may also be subject to certain state, local and franchise taxes. Under certain circumstances, U.S. federal income tax may be due on our undistributed taxable income.

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 $780,000, $2,545,000 and $189,000 for the years ended December 31, 2016 and 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 (loss) income attributable to Paramount Group, Inc. to estimated taxable income (loss) for the years ended December 31, 2016 and 2015 and for the period from November 24, 2014 to December 31, 2014.

							Period from
	For the Year Ended December 31,						November 24, 2014
(Amounts in thousands)	2016			2015			to December 31, 2014
Net (loss) income attributable to Paramount Group, Inc.	$	(9,934	)	$	(4,419	)	$	57,308
Book to tax differences:
Straight-line and prepaid rents		(29,024	)		(36,131	)		6,927
Depreciation and amortization		95,489			104,399			11,691
Stock-based compensation		9,673			5,794			57,740
Gain on consolidation of unconsolidated joint venture		-			-			(192,891	)
Swap breakage costs		(25,367	)		(27,147	)		(11,316	)
Unrealized gain on interest rate swaps		(4,651	)		(29,586	)		(6,832	)
Earnings of unconsolidated joint ventures, including real estate investments		(3,513	)		(12,909	)		(5,347	)
Other, net		(9,561	)		7,356			20,832
Estimated taxable income (loss) (unaudited)	$	23,112		$	7,357		$	(61,888	)

Dividends distributed for the year ended December 31, 2016, were characterized for federal income tax purposes as (i) $0.273 per share or 71.8% as return of capital and (ii) $0.107 per share or 28.2% as ordinary dividends. Dividends distributed for the year ended December 31, 2016 exclude the fourth quarter 2016 dividend of $0.095 per share, which was paid on January 13, 2017 and is allocable to 2017 for federal income tax purposes.

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 fourth quarter 2015 dividend of $0.095 per share, which was paid January 15, 2016 and was 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 real estate 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 was recognized in income in the period when the change was enacted.

The following table summarizes our Predecessor’s tax position.

	Period from
	January 1, 2014
(Amounts in thousands)	to November 23, 2014
Income before income taxes	$	127,859
Total provision for income taxes		18,461
Effective income tax rate		14.4	%

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

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

⁽¹⁾

Included income that was not taxable to the Predecessor. Such income was directly taxable to the Predecessor’s unitholders and the noncontrolling interests.

⁽²⁾

The effective tax rate was calculated on income before income taxes.