The PATH Act did not specifically provide a withholding mechanism with respect to an acquisition of a USRPI from a QFPF. Treas. Reg. sec. 1(b)(1) provides that except as provided in Treas. Reg. sec s. 1.1445-2 and -3, transferees of a USRPI are required to deduct and withhold tax equal to 15% of the amount realized by the transferor if the transferor is a foreign person. Treas. Reg. sec. 2(b)(1) states that withholding is not required when the transferor is not a foreign person. In order to establish that the transferor is not a foreign person, the person must provide a certificate of non-foreign status. Treas. Reg. sec. 1.1445-2(b)(2) sets out the general contents of the notice and defines the term ‘foreign person’. The definition of a foreign person has been modified to exclude a QFPF as defined under Section 897G).
Accordingly, it would appear that a QFPF can provide a certificate of non- foreign status in order to avoid withholding on the disposition of a USRPI or on a distribution from a REIT. The QFPF must provide the certificate at the time of, or prior to, the transfer in order to avoid withholding. No particular form is required, but the certificate must include the following information: (i) a statement that the transferor is not a foreign person; (ii) name, address, and identifying number (i.e., an employee ID number (EIN)), and be signed under penalties of perjury.
The regulations do not provide further guidance on the definition of a QFPF and related issues. The summary, however, explicitly requests that interested parties should submit comments regarding what regulations (if any) should be issued pursuant to Section 897(l). This suggests that Treasury and the IRS recognize the need for further guidance on Section 897(l). Notably, the regulations have not addressed a mechanism for shareholders who are ‘qualified shareholders’ under Section 897(k).
Cleansing rule modifications
If a USRPHC disposes of all of its USRPIs in taxable transactions within a five-year period preceding the date of disposition of stock in the USRPHC, the stock interest ceases to be a USRPI. The PATH Act modified the cleansing rule by specifying that it does not apply to any corporation that was a RIC or a REIT at any time during the shorter of the ownership period or the five-year period ending on the date of disposition of the stock. Treas. Reg. sec. 1.897-2(f) has been modified to incorporate this change for dispositions occurring on or after December 18, 2015.
This is what you need to know.
Foreign investors should be aware that going forward, all FIRPTA- related notices must be sent to the Ogden FIRPTA unit. Further, dispositions and distributions of USRPIs that were previously subject to 10% withholding are now subject to 15% withholding. Additionally, entities that qualify as a QFPF should be aware that they can provide a certificate of non-foreign status in order to avoid withholding tax. Entities that have concerns under Section 897(l) should consider submitting comments to the Treasury and IRS.
If you believe this may apply to you, speak with a tax attorney or tax accountant familiar with FIRPTA. GUARANTEED FLORIDA TITLE, INC, does not provide legal or tax advice, but is providing this as a courtesy to remind you to seek legal or tax advice from your personal professionals.
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