United States: Congress Passes Significant FIRPTA Reforms Affecting Foreign Investment In U.S. Real Estate − Protecting Americans From Tax Hikes Act Of 2015

Last Updated: January 4 2016
Article by Gerald V. Thomas II and Michael R. Rodgers

On December 18, President Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015 (the "Act") into law. The Act, among other things, provides for substantial reforms to the Foreign Investment in Real Property Tax Act (FIRPTA), many of which are likely to facilitate a significant amount of foreign capital investment in U.S. real estate. These reforms are important for a wide range of parties, including foreign investors, real estate investment trusts (REITs), and private equity funds investing primarily in U.S. real estate.

1. Repeal of FIRPTA for Interests Held by Foreign Retirement or Pension Funds

The Act completely exempts from FIRPTA any U.S. real property interest held by a qualified foreign pension fund. In order to so qualify, the foreign pension fund must be exempt from tax or subject to a reduced rate of tax in its resident jurisdiction, or contributions to such fund must be tax-deductible in the fund's resident jurisdiction. Additionally, the fund must adhere to certain "U.S.-based" criteria; specifically, the purpose of the fund must involve the administration and provision of retirement or pension benefits to employees, no single participant may hold the right to more than 5 percent of the fund's assets or income, and the fund must be subject to local government regulation, including rules requiring the fund to report annually to local tax authorities regarding its beneficiaries. This provision applies to dispositions and distributions made after the date of enactment of the Act.

This reform reflects a clear desire to put U.S. and foreign pension funds on equal footing with respect to real estate investments in the U.S., and is likely to result in a significant increase of foreign capital investments into the U.S. real estate market. Particularly for foreign pension funds, this provision should significantly reduce the once nearly stifling effect of FIRPTA on foreign investment in U.S. real estate.

2. Increased Threshold for Publicly Traded REIT Stock

Prior to the enactment of the Act, foreign investors owning 5 percent or less of a REIT, of which any of the classes of stock is traded on an established securities market, were not subject to FIRPTA upon a sale of such REIT stock or the receipt of a capital gain dividend from the REIT. The Act increases from 5 percent to 10 percent the maximum stock ownership a shareholder may hold in a publicly traded REIT to avoid having that stock treated as a U.S. real property interest on disposition. Also, the Act contains a complex system of rules to allow certain foreign publicly traded entities (corporations and partnerships) formed in jurisdictions that have a comprehensive income tax treaty with the U.S. and have an agreement for the exchange of information with respect to taxes with the U.S. and "qualified collective investment vehicles," to own and dispose of any amount of stock in a publicly traded REIT, without triggering FIRPTA. However, if any such entities (described in the preceding sentence) have investors that hold more than 10 percent of such stock or interests, the FIRPTA exemption will be reduced by the proportionate ownership of such holder. These provisions apply to dispositions and distributions on or after the date of enactment of the Act. The increased limitation for foreign "portfolio investors" and expansion to certain types of entities (discussed above) is likely to attract additional foreign capital in publicly traded REITs.

3. "Domestically Controlled" Presumptions

Under current law, gain resulting from the sale or disposition of stock of a "domestically controlled" qualified investment entity (i.e., a REIT or RIC, more than 50 percent of the stock of which is owned by U.S. persons), is not subject to FIRPTA. Typically, many publicly traded REITs have difficulty taking advantage of this FIRPTA exception because of lack of information regarding the U.S. or foreign status of their less than 5 percent shareholders. The Act provides new presumption rules for purposes of determining whether a REIT or RIC is "domestically controlled." First, shareholders owning less than 5 percent of stock in a qualified investment entity (e.g., a REIT or RIC) that is regularly traded on an established U.S. securities market will be treated as U.S. persons, absent actual knowledge of the qualified investment entity to the contrary. Also, REIT or RIC stock owned either by a publicly traded REIT or a RIC meeting certain requirements, will be presumed to be held by a foreign person unless the "upper-tier" REIT or RIC is domestically controlled, in which case, such stock will be treated as held by a U.S. person. Additionally, any stock in a RIC or REIT that is held by a RIC or REIT that is not publicly traded will be treated as held by a U.S. person only in proportion to the stock of the upper-tier RIC or REIT that is held (or treated as held) by a U.S. person. This provision takes effect on the date of enactment of the Act.

4. RICs Now Permanently Treated as Qualified Investment Entities

Prior to the enactment of the Act, a "qualified investment entity" included both a REIT and, until the beginning of 2015, a RIC which would otherwise be considered a U.S. real property holding company. The Act permanently modifies this rule to allow such a RIC to once again qualify as a qualified investment entity. This provision applies retroactively to January 1, 2015.

5. Increased Rate of FIRPTA Withholding on Dispositions of U.S. Real Property Interests

The Act increases the rate of withholding on dispositions of U.S. real property interests (other than the sale of a personal residence where the amount realized is $1 million or less) from 10 percent to 15 percent. Such increased rate is designed to collect a greater amount of the potential tax owed. This provision is effective for dispositions occurring 60 days after the date of enactment of the Act.

6. Interests in RICs and REITs Not Eligible for "Cleansing Rule"

Currently, under the so-called "cleansing rule," a corporation, the disposition of the stock of which would give rise to FIRPTA gain, may "cleanse" itself of its U.S. real property interest designation by disposing of all of its real estate assets in a taxable transaction. The Act essentially excludes RICs and REITs from eligibility for the "cleansing rule." This provision applies to dispositions on or after the date of enactment of the Act.

7. Certain Dividends Received From Foreign Corporations Attributable to RICs and REITs

Dividends received by U.S. corporations from foreign subsidiaries are generally not eligible for a dividend received deduction unless the dividend is attributable to (i) income effectively connected with a U.S. trade or business, or (ii) any dividend received (directly or through a wholly owned foreign corporation) from an 80 percent or more controlled U.S. subsidiary (the "look through rule"). The Act provides that for purposes of the look through rule, dividends from RICs and REITs are not treated as dividends from domestic corporations. As a result, under the Act, dividends received by U.S. corporations from a wholly owned foreign subsidiary that are attributable to a dividend received from a U.S. RIC or REIT will not be eligible for a dividend received deduction. This provision applies to dividends received from RICs and REITs on or after the date of enactment of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions