Dispositions
of US real property interests
The Foreign Investment in Real Property Tax Act of 1980
(FIRPTA) treats a foreign person's gain or loss from the
disposition of a US real property interest as if such gain
or loss were effectively connected with a trade or business.
Both non-recognition relief and treaty relief are limited,
and significant withholding requirements are imposed to assist
tax collection.
US real property interest
A US real property interest generally includes any interest
in real property located in the United States or in the
US Virgin Islands and any interest (other than solely
as a creditor) in a domestic corporation that is
or was a
US real property holding corporation. An interest in
real property includes a direct interest in US real
property,
including land and improvements thereon, mines, wells,
and other natural deposits, and personal property associated
with real property (i.e., movable walls and furnishings).
A US real property interest does not include shares of
a domestic corporation that is no longer a US real property
holding corporation because the corporation disposed
of all its US real property interests held during
the testing
period in fully taxable transactions. A US real property
interest does not include an interest in a domestically
controlled real estate investment trust (REIT), nor does
it include an interest in a class of stock in a publicly
traded corporation or publicly traded REIT unless the
person disposing of the stock held, during the testing
period,
more than five percent of such class of stock. Further,
a foreign corporation is not a US real property interest
(except for certain foreign corporations that have elected
to be taxed as a domestic corporation). US Real Property Holding Corporation
A US real property holding corporation is a corporation
that holds US real property interests with
a fair market value
of at least 50 percent of the sum of the fair market
values of its US real property interests, plus
its interests in
real property located outside the United States and its
other assets that are used or held for use in a trade
or business. Although a foreign corporation
may be a US real
property holding corporation, an interest in a foreign
corporation is not a US real property interest other
than for purposes of determining whether another
corporation
is a US real property holding corporation. Accordingly,
a foreign person generally is not subject to US taxation
on any gain from the disposition of an interest in a
foreign corporation (unless it has elected
to be taxed as a domestic
corporation). When assets of a US real property holding corporation are
held by a partnership, trust, or estate, they are considered
to be held proportionately by the partners or beneficiaries.
Moreover, use of the assets in a trade or business by the
partnership, trust or estate will be treated as business
use by the partners or beneficiaries. This constructive ownership
rule applies to as many tiers as exist in the partnership
or trust structure.
A corporation's controlling stock interest (50 percent or
more of the fair market value of all classes of stock) in
another corporation is disregarded in determining whether
the controlling corporation is a US real property holding
corporation. Rather, the controlling corporation is deemed
to hold a proportionate part of each of the assets of the
controlled corporation, with each asset having the same status
(e.g., used in a trade or business) as in the hands of the
controlled corporation.
Real Estate Investment Trusts
In general, receipt of a capital gains distribution from
a REIT is treated as a disposition of a US real property
interest by the recipient to the extent that it is attributable
to a sale or exchange of a US real property interest by the
REIT. These capital gains distributions from REITs to foreign
persons are generally subject to withholding tax at a rate
of 35 percent. In addition, foreign recipients of these capital
gains distributions are required to file US income tax returns,
since the recipients are treated as earning income effectively
connected with a US trade or business.
Recent changes in US law remove certain REIT capital gains
distributions from the treatment as effectively connected
income, provided that:
- the
distribution is received with respect to a class of
REIT interest that is regularly traded on an established
securities market located in the United States, and
- the
foreign investor does not own more than five percent
of the class of regularly traded REIT interest at any
time
during the taxable year within which the capital gains
distribution is received.
A foreign investor is not required to file a US Federal
income tax return by reason of receiving a REIT capital gains
distribution and, in the case of a foreign corporation, such
distribution is no longer subject to the branch profits tax.
Specific Transactions
Foreign Corporate Distributions
A foreign corporation must recognize a gain on the distribution
of a US real property interest to the extent that its fair
market value exceeds the corporation's adjusted basis in
the interest. This recognition of a gain will not occur if
the distributee would, at the time of receipt, be subject
to US tax on a subsequent disposition of the US real property
interest, and if the property, in the hands of the distributee,
has a basis that is no greater than the basis of the property
before the distribution, increased by the amount of any a
gain recognized by the distributing corporation. Any provision for the non-recognition of a gain or loss
generally applies only to the exchange of a US real property
interest for another interest the sale of which would be
subject to US taxation.
Domestic Corporate Distributions
If a domestic corporation makes a dividend distribution of
a US real property interest to a non-resident alien or
foreign corporation, the basis of the US real property
interest in the hands of the distributee is limited to
the adjusted basis of the property before the distribution,
plus the amount of any gain recognized by the distributor
and any tax paid by the distributee. Sales or Exchanges of Interests in Partnerships, Trusts
or Estates
Under regulations, sales or exchanges of interests in partnerships,
trusts, or estates are treated as sales or exchanges of US
real property interests to the extent attributable to the
US real property interests owned by a partnership, estate
or trust.
Contributions to Capital
A non-resident alien or foreign corporation must recognize
a gain on the transfer of a US real property interest to
a foreign corporation as a contribution to capital or as
paid-in surplus, despite the general non-recognition rules
applying to these transactions. The amount that must be
recognized is the fair market value of the US real property
interest in excess of the sum of its adjusted basis and
any other gain recognized by the transferor.
Domestic Corporation Treatment
A foreign corporation that holds US real property interests
which are entitled to nondiscriminatory treatment under an
applicable treaty may elect to be treated as a domestic corporation,
thereby treating the sale of its all stock as effectively
connected with a US trade or business. This election is the
only remedy for a non-discrimination claim under a treaty
with respect to the US real property interest of the foreign
corporation.
Withholding Requirements
The buyer of any US real property interest generally
is required to deduct and withhold a tax equal to 10
percent of the amount realized by the foreign seller
disposition of the property. Exemptions from withholding
are allowed when:
- The
seller furnishes to the buyer an affidavit stating
that the seller is not a foreign person.
- A
non-publicly traded domestic corporation furnishes to
the transferee an affidavit stating that the domestic
corporation
is not a US real property interest.
- The
property is acquired by the transferee for his or her
use as a residence and the amount realized on the
disposition does not exceed $300,000.
- The
disposition is of shares in a class of stock in a corporation
or a REIT that is regularly traded on an established
securities market and the shareholder did not own more than 5 percent of the stock the corporation or REIT at any time during the taxable year.
Special withholding rules apply in the following situations:
- A
domestic trust or estate must withhold a tax equal
to 35 percent of any gain realized on the disposition
of a US real property interest to the extent that
the gain is distributed to a foreign beneficiary.
- A
domestic partnership is required to withhold a tax
equal to 35 percent on any gain realized on the disposition
of a US real property interest to the extent the gain
is allocable to a foreign individual or corporation.
- A
foreign corporation is required to withhold a tax
equal to 35 percent of the amount of gain recognized
on certain distributions of US real property interests.
- A
US corporation that is a US real property interest
is required to withhold a tax equal to 10 percent
of the amount realized by a foreign shareholder on
a distribution of property in connection with a redemption
of stock or in connection with a corporate liquidation.
- A
domestic or foreign partnership, trust or estate must
withhold a tax equal to 10 percent of the fair market
value of any US real property interest distributed
to a foreign partner or beneficiary where the transaction
would be taxable under FIRPTA regulations.
- The
transferee of a partnership interest or of a beneficial
interest in a trust or estate will be required to
withhold a tax equal to 10 percent of the amount realized
on the disposition, to the extent required under future
Treasury regulations.
Disclaimer
|
"The
information contained herein is of a general nature and
is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it
will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough
examination
of the particular situation.
KPMG and the KPMG logo are registered trademarks of KPMG
International, a Swiss cooperative.
© 2006 KPMG LLP, the
Canadian member firm of KPMG International,
a Swiss cooperative. All rights
reserved."
|
|
|
