IRS Corrects FIRPTA Final Regulations

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April 27, 2016

Income tax withholding under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) applies to a foreign person’s disposition of a U.S. real property interest. On April 26, 2016, the IRS published a correcting amendment to the final regulations (T.D. 9751) addressing the taxation of and withholding on payments to foreign persons on certain dispositions of U.S. real property interests, under Internal Revenue Code Sections 897 and 1445. This correcting amendment is effective on April 26, 2016, and applicable on or after February 19, 2016 – the effective date of the final regulations.

In general, under Code Section 1445(e) and its regulations, certain entities must withhold tax upon certain dispositions and distributions of U.S. real property interests to “foreign persons.” The existing Treasury Regulation § 1445-5(b)(3)(ii)(A) states that “[i]n general, a foreign person is a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate, but not a resident alien individual.” The final regulations affected certain holders of U.S. property interests and withholding agents that are required to withhold tax on certain disposition of, and with respect to, these property interests. While the final regulations initially did not impact the definition of a “foreign person,” the correcting amendment revised the “but not” clause to state that a foreign person is “not a qualified foreign pension fund (as defined in section 897(l)) or an entity all of the interests of which are held by a qualified foreign pension fund.” Code Section 897(l) – recently added by the Protecting Americans from Tax Hikes Act of 2015 – provides that federal income taxation does not apply to distributions received from a real estate investment trust by a qualified foreign pension fund or an entity wholly owned by a qualified foreign pension fund.