International Taxation Planning and Compliance
Our firm has extensive experience advising clients in complex international cross-border transactions and ensuring the minimization of tax is achieved on both sides of the border. We are focused on providing specialized advice and consultation on U.S. tax matters to foreign corporate taxpayers, domestic corporate taxpayers, U.S. citizens, U.S. residents and Non-U.S. resident taxpayers who are involved in cross-border transactions. Our firm also specializes in assisting U.S. citizens living abroad with their tax reporting obligations.
Foreign investors are generally not subject to U.S. tax on U.S. source capital gain unless it is effectively connected with a U.S. trade or business or it is realized by an individual who meets certain presence requirements. Gain from the disposition of a U.S. real property interest (USRPI), however, is treated as income effectively connected with a U.S. trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA) and is subject to tax and withholding under Code Sec. 897 and Code Sec. 1445. In recent years, FIRPTA has often been criticized as deterring foreign investment in U.S. real estate.
What is FIRPTA?
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is a United States tax law that imposes income tax on foreign persons disposing of United States real property interests. Tax is imposed at regular tax rates for the type of taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
What is a disposition?
A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations).
Who is responsible for withholding?
In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.
However, withholding may be reduced or exempt by applying for a Withholding Certificate before a disposition or restructuring foreign ownership of a USRPI by proper planning.
If you are a foreign person and currently own or looking to acquire real estate in the United States, let us help you eliminate U.S. tax exposure with competent advice that will save you thousands of dollars in taxes and help protect your investment.