The Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”), signed December 18, 2015, introduces significant changes to the Foreign Investment in Real Property Tax Act (FIRPTA), particularly concerning REITs. The reforms are generally intended to make foreign investment in U.S. real estate more attractive, though some revenue-raising measures are thrown in the mix.
Among the PATH Act’s taxpayer-friendly FIRPTA updates:
- The ownership threshold for foreign “portfolio investors” in publicly traded REITs increases from 5% to 10%. These investors are exempt from FIRPTA tax on the sale of stock of the REIT and on the receipt of capital gain dividends from the REIT (though the capital gain dividends are treated instead as ordinary dividends).
- The portfolio investor exemption applies to REIT interests held by certain widely held, publicly traded “qualified collective investment vehicles.”
- New presumption rules apply to determine whether a REIT is “domestically controlled” (i.e., whether foreign persons directly or indirectly own less than 50% by value of a REIT’s stock during the testing period).
- A publicly traded REIT can presume that all less-than-5% shareholders are US persons unless it has actual knowledge otherwise.
- If a REIT’s stock is held by a publicly traded REIT or certain publicly traded or open-ended RICs, the REIT or RIC will be treated as a US person if it is domestically controlled (and otherwise as non-US).
- Where a REIT’s stock is held by REITs or RICs not described in the preceding rule, the REIT or RIC is treated as US or non-US on a look-through basis.
- “Qualified foreign pension funds” (and entities wholly owned by such funds) are exempt from FIRPTA tax on direct investments and investments through partnerships. A foreign pension fund is qualified if it is subject to government regulation and reporting in its home country, is established to provide retirement or pension benefits to beneficiaries that are current or former employees, has no more-than-5% beneficiaries, and receives tax benefits on either contributions or investment income in its home country.
Among the PATH Act’s related revenue raisers:
- The FIRPTA withholding rate increases from 10% to 15%.
- The “cleansing rule” of Code Section 897(c)(1)(B) will not apply to REITs or RICs or any corporation if the corporation or any predecessor was a REIT or RIC during the applicable testing period.
- Dividends from REITs and RICs are not treated as dividends from domestic corporations in determining whether dividends from a foreign corporation (attributable to dividends from an 80% owned domestic corporation) are eligible for the dividends-received deduction under Code Section 245.