Real Estate Ownership in the

U.S. by a foreign investor

Issues and Planning

US Withholding and
Reporting
Withholding Tax

Certain types of U.S. source income are subject to

gross basis taxation by the U.S. when earned by
foreign companies or nonresident aliens
• Tax is collected through a withholding mechanism
and is generally 30% for fixed or determinable
annual or periodic income (FDAP)

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Withholding Tax

Items that qualify as FDAP:

• Dividends
• Interest
• Rent
• Royalties
• Salaries and Wages

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Withholding Tax

Income that is exempt from withholding:

• Interest from bank deposits, certain OID, portfolio interest

• Dividends from 80/20 companies
• Capital Gain, unless it relates to US real property
• Compensation for services performed outside the U.S.
• Income effectively connected with a U.S. trade or business (but
the NRA becomes liable to file U.S. Taxes – other issues must
be considered)

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Withholding Tax

Withholding Obligations
• The payor of items potentially subject to withholding
(withholding agent) must determine if they have any
withholding obligation.
• The foreign payee (taxpayer) must provide the
documentation necessary to determine the correct
amount of withholding tax.

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Withholding Tax

Withholding Obligations
• A withholding agent is any person having control of an
item of income (such as FDAP) of a foreign person
subject to withholding
• A withholding agent is obligated to withhold a U.S. tax
of 30% on payments subject to withholding (or lower
treaty rate where applicable)

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Withholding Tax

Withholding Obligations
A withholding agent can withhold at less than 30%,
as appropriate if he/she can reliably associate a
payment with valid documentation that provides
the recipient is either a U.S. person or a foreign
person subject to reduced rate of withholding
under a tax treaty with the U.S.

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Withholding Tax

A Valid Withholding Certificate meets the

following conditions:

• Made on a fully complete and signed Form W-8

• Made while a Form W-8 is still valid
• Is received prior to making the payment
• The IRS has not notified the withholding agent that the
Withholding Certificate information is incorrect or unreliable

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Withholding Tax

Forms W-8 (Withholding Certificates)

W-8BEN – certifies foreign status of the beneficial owner of a

payment (may require ITIN if treaty benefits desired)
W-8ECI – certifies that payments are treated as effectively connected
with a U.S. trade or business and are exempt from withholding
W-8EXP – certifies status as certain types of foreign tax exempt
entities (governments, international organizations, central banks,
etc.)
W-8IMY – certifies status as an intermediary between the withholding
agent and the beneficial owners

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Withholding Tax

Withholding Agent’s Filing Responsibilities

• Form 1042-S – individual reporting for each payee, income

category, withholding tax rate, exemption code (if any); equivalent
to Form 1099 series for domestic payees
• Form 1042 – Annual Withholding Tax Return
• A Qualified Intermediary may create pools for all beneficial owners
within the same income and withholding tax rate category
(preserving investor anonymity)
Withholding Tax

Special Withholding Regimes

• FIRPTA Withholding – typically 10% of amount realized
upon disposition of a U.S. real property interest by a
foreign person
• Partnership Withholding on foreign partner’s share of
effectively connected income (35%)
• Reduced withholding possible where withholding
certificates are obtained
• Foreign taxpayer files U.S. tax return.
Foreign Investment in
Real Property Tax Act
“FIRPTA”
FIRPTA

General discussion
• The FIRPTA rules generally prevent the tax-free
sale of U.S. real property by foreign owners
• FIRPTA was enacted in 1980 in light of
concerns about the ability of foreigners to avoid
US tax on real estate gains
• The intention of FIRPTA was to establish
equitable treatment for foreign and domestic
investors in U.S. real property

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FIRPTA

General Rule
Under IRC § 897, the general rule is that the gain
or loss from the sale of a U.S. Real Property
Interest by a foreign corporation or non-resident
alien is treated as effectively connected income
with the conduct of a trade or business and
therefore subject to US income tax

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FIRPTA

What is a U.S. Real Property Interest (USRPI)?

• (1) Any interest, other than solely as a creditor, in real
property located in the U.S. (or U.S. Virgin Islands),
AND
• (2) Any interest, other than solely as a creditor, in a
domestic corporation UNLESS it is established that the
domestic corporation is not a U.S. Real Property
Holding Company (USRPHC)

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FIRPTA

Ownership interests in property may include:

• Leaseholds
• Life Estate
• Right to share in appreciation of value
• Options
• Installment obligations (unless taxpayer elects out of
installment treatment)

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FIRPTA

Ownership interests in property may exclude:

• Interest in real property solely as a creditor
• 5% or lower interest in a publicly traded
company

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FIRPTA

Real property may include:

• Land
• Buildings and various improvements
• Personal property associated with real
property
 e.g., hotel furnishings, furnishings connected
with rental of office space, property used in
farming or mining

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FIRPTA

US Real Property Holding Company (USRPHC)

• A U.S. or foreign company qualifies as a USRPHC
if the following fraction is 50% or more on any
testing date:
 FMV of USRPIs, OVER
 FMV of USRPIs + FMV of foreign real property +
assets held/used in the taxpayer’s trade or business
• This test is conducted over a five-year testing
period

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FIRPTA

USRPHC
• Assets held/used in a trade or business may include:
 Cash and securities
 Inventory
 Depreciable trade or business property
 Goodwill and other intangibles
• The above assets must be held or used in the taxpayer’s
business and must satisfy the requirements of Reg. § 1.897-
1(f) to be included in the USRPHC analysis

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FIRPTA

USRPHC Subsidiaries
If a company holds a controlling interest in
another corporation, the parent is treated as
owning a proportionate share of the
subsidiaries assets for purposes of
determining whether the parent is a USRPHC

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FIRPTA

USRPHC Determination Dates

• Date USRPI is acquired
• Last day of taxpayer’s tax year
• Date non-U.S. real property is disposed of
• Date trade or business assets are disposed
of
• Alternative monthly determination dates

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FIRPTA

USRPHC Status
• Once a domestic corporation is classified as a USRPHC,
any interest in the corporation is treated as a USRPI for
the five year period after that date.
 Exception - where all USRPIs have been sold by the
company in transactions where the full amount of realized
gain is recognized (Cleansing rule of 897(c)(1)(A))
• The following are not USRPI;
 “Domestically controlled” real estate investment trusts
 A 5% owner of publicly traded interests in public companies
 A 5% percent owner of interests in public companies that
are not regularly traded

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FIRPTA

USRPHC Presumption
• It is presumed that a domestic company is a USRPHC unless
established otherwise by:
 The domestic company certifies that is has not been a
USRPHC during the five-year period ending on the date of
the transaction by providing a non-USRPHC statement; or
 Requesting the IRS to determine USRPHC status

• A non-USRPHC statement must be obtained by a foreign

shareholder in order to avoid withholding on the disposition of
an interest in the domestic company

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FIRPTA

What is the impact of USRPHC status?

• Withholding 10% of the proceeds is required on
the transfer of an interest in a USRPI by a foreign
person under IRC § 1445(a)
• If a U.S. partnership disposes of a USRPI then the
partnership is required to withhold the applicable
amount that is allocable to the foreign partners
(IRC § 1446, Treas. Reg. § 1.1445-5(c)(1)(ii)

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FIRPTA

• Other exceptions
 Personal residence sale of $300,000 or less
(IRC § 1445(b)(5))
 Transaction is eligible for non-recognition and
proper notice is provided to transferee and
IRS (Treas. Reg. 1.1445-2(d)(2))

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FIRPTA
• New Developments - Reasonable Cause Relief
 Prior to June 27, 2008, taxpayers had to request a private letter ruling
under Regs. § 301.9100-3 (“9100 relief”) to seek relief for late FIRPTA
filings

 Under Rev. Proc. 2008-27 there is a new application procedure for

relief for the failure to withhold without going through the 9100 relief
process

 The Rev. Proc. requires that the taxpayer file a completed statement
or notice when it becomes aware of the failure to file the required
statements or notices and explain how the taxpayer’s failure to timely
file was due to reasonable cause

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FIRPTA

• New Developments - Reasonable Cause Relief

 Upon receipt of an application, the IRS will decide if the
requirements for granting relief under the Rev. Proc. have
been met

 The IRS will notify the taxpayer in writing within 120 days if it
determines that the failure to comply with the withholding
requirements under FIRPTA were not due to reasonable
cause, or if additional time is needed to make a determination

 The taxpayer can still seek 9100 relief, but only if relief has
been denied under the under the Rev. Proc.

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FIRPTA

FIRPTA Planning
• Upfront structuring
 Use of Blocker corporation
 Domestically Controlled REIT
 Equity / debt structuring

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U.S. Gift and Estate
Tax Considerations
Regarding Inbound
Investments
U.S. Estate and Gift Tax Residence Rules

• Domicile is key in addressing U.S. estate and gift taxation.

• Residency for U.S. income tax purposes is not the same as
Domiciliary for U.S. gift and estate tax purposes.
 Substantial Presence Test – objective test;
 Concept of Domicile – subjective test based on facts and
circumstances.
• Estate Tax Treaties – Income Tax Treaties.
• It is possible to be a U.S. income tax resident but not a
domiciliary for U.S. gift and estate tax purposes.

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U.S. Estate Taxation

• Non-Domiciliary subject to U.S. estate tax on the transfer of the

gross estate situated in the United States:
 U.S. real estate;
 Tangible property situated in the United States (both tangible and
intangible).
• Non-Domiciliary’s estate tax exclusion is only $60,000, as
opposed to a U.S. domiciliary which is $3,500,000.
• Marital deduction allowed only if the donee spouse is a U.S.
citizen. Qualified Domestic Trust may provide relief.

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U.S. Gift Taxation

• Non-Domiciliary subject to U.S. gift tax on the transfer of U.S. situs

property:
 U.S. real estate;
 Tangible property situated in the United States;
 Currency is defined as tangible property so (i.e. cash held in a U.S. bank account).

• However, transfers of intangible personal property are expressly excluded

from gift tax.
• Non-Domiciliary allowed the $13,000 annual exclusion per donee.
• Marital deduction allowed only if the donee spouse is a U.S. citizen. In such
case, an annual exclusion of $133,000 applies for gifts to such non-citizen
spouse.

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Individual Ownership

• Simple manner to own real

Non Resident estate.
Alien/Domiciliary • NRAD benefits from lower
individual Capital Gains tax rate.
• However, NRAD subject to U.S.
estate tax upon death. NRAD
also subject to U.S. gift tax on
transfer during life.
U.S. Real Estate • NRAD subject to liability from
creditor claims arising from direct
ownership.

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Ownership Through U.S. Corporation

• NRAD benefits from lower

Non Resident individual Capital Gains tax rate
Alien/Domiciliary on sale of USCo. However,
USCo does not enjoy lower
capital gains rate on sale of U.S.
Real Estate.
USCo • NRAD subject to U.S. estate tax
on value of USCo upon death.
• NRAD not subject to U.S. gift tax
on transfer of USCo during life.
• Provides limited liability to
U.S. Real Estate NRAD.

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Ownership Through Foreign Corporation

• NRAD not subject to income tax

Non Resident on sale of ForeignCo. However,
Alien/Domiciliary ForeignCo does not enjoy lower
capital gains rate on sale of U.S.
Real Estate.
• NRAD not subject to U.S. estate
ForeignCo tax on upon death.
• NRAD not subject to U.S. gift tax
on transfer of ForeignCo during
life.
• Provides limited liability to
U.S. Real Estate NRAD.

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Ownership through double tiered structure
and potentially a foreign trust or private
foundation

NRA / Trust / Private Foundation •ForeignCo shares are not FIRPTA

asset and disposition escapes U.S.
taxes as long as NRA remains the
owner.
•There is no Estate and Gift Tax
exposure for the NRA in the U.S..
•The trust or private foundation
works as a pre-immigration planning
tool, as well as a living disposition in
the event of succession.
•The Private Foundation (equivalent
to a trust for the U.S.) also serves
Estate taxes planning purposes for
U.S Real estate jurisdictions like Venezuela.

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Ownership Through Foreign Partnership

• Some practitioners believe an

Non Resident interest in a double tiered
Alien/Domiciliary partnership structure is not US
situs property for estate tax
purposes.
• The Internal Revenue Service
For.
does not agree with this position,
but the issue has not been
resolved by the courts.
U.S. • Preserves capital gains lower
rate of taxation.
U.S. Real Estate

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Pre-Immigration Planning

• Pre-Immigration Income Tax Planning

 Postpone residency starting date
 Accelerate income;
 Sell income producing property;
 Effectuate taxable reorganizations;
 Make “check-the-box” elections on entities to accelerate gains and
step up basis in underlying assets.
• Pre-Immigration Estate/Gift Tax Planning
 Accelerate gifts of non-situs US property and intangible property.
 Use of foreign trusts (care regarding creation within 5 years of
residency).

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 Circular 230 Disclosure

• To ensure compliance with Treasury Department

regulations, we wish to inform you that, unless
expressly stated otherwise in this communication
(including any attachments) any tax advice that
may be contained in this communication is not
intended or written to be used, and cannot be used,
for the purpose of (i) avoiding tax-related penalties
under the Internal Revenue Code or applicable
state or local tax law provisions or (ii) promoting,
marketing or recommending to another party any
tax-related matters addressed herein.

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