Canada: Obama Plan To Exempt Foreign Pension Plans From Tax On US Real Property

On March 29, the Obama Administration issued a press release outlining its plan to encourage private investment in infrastructure. As part of its plan, foreign pension plans would be exempted from U.S. tax on gain from the disposition of U.S. real property interests, including both infrastructure and other U.S. real estate assets.

Currently, non-U.S. persons, including foreign pension plans, are subject to tax on the disposition of U.S. real property interests under the Foreign Investment in Real Property Tax Act ("FIRPTA"), codified in § 897 of the U.S. Internal Revenue Code. According to the press release, foreign investors including pension plans often cite such tax as a hindrance to investing in U.S. infrastructure projects. U.S. pension plans, on the other hand, are exempt from tax on these and other gains. Accordingly, the Administration's plan would equalize the treatment of foreign pension plan investors with those of U.S. pension plan investors by exempting these otherwise taxable gains and would thereby encourage investment by foreign pension plans in U.S. infrastructure projects.

Many foreign pension plans, including those organized in Canada, are formed by foreign governments or serve mainly governmental employees. Under current law, these pension plans may qualify for exemption from tax on gains from the disposition of non-controlling interests in U.S. corporations that hold U.S. real estate assets, including those related to infrastructure projects. The proposal would appear to expand this exemption to other foreign pension plans and to other U.S. real property assets. The Administration has not offered any other details regarding the proposed exemption.

Interestingly, the purported purpose of the Administration's plan is to encourage investment in infrastructure projects, and the plan contains several other proposals related to infrastructure investment, but the FIRPTA exemption for foreign pension plans would apply to all gains from the disposition of U.S. real property interests, even those which are not related to infrastructure projects. The proposal would, therefore, likely encourage additional investment in U.S. real estate beyond infrastructure projects.

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