LB&I International Practice Service Concept Unit

1 LB&I International Practice Service Concept unit IPS Level Number Title UIL Code Number Shelf N/A Inbound Volume 8 Repatriation Withholding Level 1 UIL 9424 Part FIRPTA Level 2 UIL Chapter N/A N/A Level 3 UIL N/A Sub-Chapter N/A N/A unit Name Taxation on the Disposition of USRPI by Foreign Persons Document Control Number (DCN) RPW/ (2016) Date of Last Update 1/22/16 Note: This document is not an official pronouncement of law, and cannot be used, cited or relied upon as such.

2 Further, this document may not contain a comprehensive discussion of all pertinent issues or law or the IRS's interpretation of current law. DRAFT Table of Contents (View this PowerPoint in Presentation View to click on the links below) General Overview Relevant Key Factors Diagram of Concept Facts of Concept Detailed Explanation of the Concept Examples of the Concept Training and Additional Resources Glossary of Terms and Acronyms Index of Related Issues 2 DRAFT IRC 1445, enacted in 1984, requires withholding on the disposition of USRPI by foreign persons.

3 Foreign persons include foreign corporations, foreign partnerships, foreign trusts and estates, NRAs and other foreign entities. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act ) was signed into law on December 18, 2015. Dispositions of REIT stock, REIT distributions and dispositions of any other Real Property Interests by a foreign person had FIRPTA withholding rate increased from 10% to 15% of the gross purchase pr ice realized on these dispositions with limited exceptions.

4 This rate increase is effective for the aforementioned dispositions occurring 60 days after December 18, 15% is required to be withheld by the withholding agent, generally the buyer/transferee, regardless of whether it is a or foreign person, and be remitted to the IRS by the 20th day after the date of transfer together with the filing of Form 8288 ( Withholding Tax Return for Disposition by Foreign Persons of Real Property Interests) and Form 8288-A (Statement of Withholding on Dispositions by Foreign Persons of Real Property Interests).

5 The NRA or foreign corporation making the disposition is required to file a income tax return (Forms 1040NR, 1120-F, etc.) to report its income effectively connected with a trade or business within the United States (ECI). The foreign corporation or NRA can claim the amount withheld as a credit against any income tax due. ! Caution: As mentioned ab ove, the rate of withholding on FIRPTA transactions has increased from 10% to 15% under the new law.

6 For the remainder of this unit , the prior law s 10% tax rate will be referenced.. Please be aware of the proper rate that should be applied for each case. General Overview Taxation on the Disposition of USRPI by Foreign Persons Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), gains or losses from the disposition of a real property interest (USRPI) by certain foreign persons are treated as gains or losses effectively connected with a trade or business within the United States.

7 Foreign persons subject to FIRPTA includes foreign corporations and nonresident aliens (NRAs). The three components necessary for FIRPTA (IRC 897) to apply to a transaction are that (1) there is a gain or loss on the disposition of (2) a USRPI and (3) such gain or loss is realized by an NRA or a foreign corporation. 3 Back to Table Of Contents DRAFT Caution: Since 2006, all FIRPTA related forms and documents are processed at the Ogden Service Center. The mailing address is: Internal Revenue Service Center, Box 409101, Ogden, UT 84409.

8 The regulations, however, have not been updated to reflect such change. ! General Overview (cont d) Taxation on the Disposition of USRPI by Foreign Persons A foreign person may request a reduced withholding if proper conditions exist and a Form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of Real Property Interests) is submitted and accepted by the IRS. There are basically six different categories that qualify for a reduced amount of, or, exemption from, withholding.

9 These categories are: 1. Non recognition or Exemption 2. Maximum Tax Liability 3. Installment Sales 4. Security Agreements 5. Blanket Applications 6. Nonstandard Applications The Form 8288-B applications are processed at the Campus by Tax Examiners and are compared with a check list to determine if proper and all required documentation is submitted. Please see Rev. Proc. 2000-35 for explanation of each withholding certificate application category and Treas. Reg. (b) for additional information.

10 This Concept unit is meant to give general information about FIRPTA. Income Tax Treaties permit the United States to tax gains resulting from the disposition of USRPIs under IRC 897. Paragraph 1 of Article 13 of the Model Treaty permits the taxation of gains of a foreign resident from the disposition of real property located in the United States. CONSULTATION: Consultation with Repatriation/Withholding IPN or your local counsel may be useful. 4 Back to Table Of Contents DRAFT Relevant Key Factors Taxation on the Disposition of USRPI by Foreign Persons Key Factors This unit analyzes the dispositions of USRPI by a foreign person.