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FIRPTA: A Sleeping Giant?
Many individual foreign investors in US real property are likely already aware of the Foreign Investment in Real Property Tax Act (FIRPTA), but for foreign corporations doing business in the United States, it may be a sleeping giant. Taxand USA investigates the implications of FIRPTA on multinationals.
A foreign corporation may inadvertently trigger FIRPTA, thus subjecting itself to additional tax obligations that were not contemplated. FIRPTA's implications are not only economic but also administrative because of the reporting requirements that must be fulfilled by a foreign corporation.
Under FIRPTA, any gain or loss from the disposition of a United States Real Property Interest (USRPI) by a foreign corporation will be treated as effectively connected with a trade or business and subject to US taxation at the rates applicable to US residents. A foreign corporation would generally be subject to a 35% tax on any gain from the disposition of a USRPI.
There are several exceptions to FIRPTA:
- The sale of an interest in a foreign corporation that holds a USRPI is not subject to FIRPTA to the extent that the foreign corporation did not make an election to be treated as a domestic corporation
- The sale of an interest solely as a creditor in a domestic corporation that holds predominantly US real property will not fall under the scope of FIRPTA
- An exception applies to interests in a corporation if, as of the date of the disposition of such interest, such corporation did not hold any USRPIs and all of the USRPIs held by such corporation during the 5 years prior to the date of the disposition were disposed in taxable transactions
- An exception applies for stock of a corporation that is regularly traded on an established securities market if the person held 5% or less of the stock.
FIRPTA's implications should be considered by foreign corporations on any transactions involving US real property. Foreign corporations acquiring real property in the United States should be aware of the US income tax consequences of the disposition of the real property. It is also important to recognise that transactions such as dispositions or reorganisations carried out in the course of US business may have tax implications under FIRPTA.