Foreign Investment in Real Property Tax Act – Legislative Action (REIT)

Update provided by The Real Estate Roundtable

The Senate Finance Committee passed, by voice vote, an original bill offered by Senators Robert Menendez (D-NJ) and Michael Enzi (R-WY) amending the Foreign Investment in Real Property Tax Act (FIRPTA). This action represents major progress in the FIRPTA reform effort. The committee session included an extensive, 10-minute debate involving Senators Menendez, Isakson, Schumer, Wyden, and Hatch regarding the importance of pushing forward and expanding the legislation to include additional relief – specifically the FIRPTA exemption for foreign pension funds. A video clip of the Senators’ FIRPTA discussion is available here:

Below is a summary of the bill. TPAC’s working group on FIRPTA reform was heavily involved in this effort, including the specific provisions and revenue offsets:

  • In the case of publicly traded REIT stock, the bill increases from five percent to 10 percent the maximum stock ownership a foreign shareholder may hold, during the 5-year testing period, without the stock being treated as a US real property interest on disposition.
  • Likewise, also in the case of publicly traded REIT stock, the bill increases from five percent to 10 percent the ownership threshold for treating distributions of gain from sales or exchanges of US real property interests as a dividend, rather than FIPRTA gain.
  • The proposal also provides that REIT stock held by certain foreign collective investment vehicles is not a U.S real property interest, except to the extent that an investor in the collective investment vehicle holds more than 10 percent of that class of stock of the REIT (applying constructive ownership rules).
  • In addition, for purposes of determining whether a REIT is domestically controlled, the proposal provides a number of new rules and presumptions, which are described in the attached Chairman’s mark.
  • Combined, these FIRPTA relief provisions are estimated by the Joint Tax Committee to cost approximately $1.7 billion over ten years. The budgetary impact of these FIRPTA reforms is largely offset by five revenue raiser proposals. Most of these proposals generally do not impose any new tax but instead merely collect unpaid FIRPTA taxes.
  • First, the required rate of FIRPTA withholding imposed on the disposition or distribution of a U.S. real property interest would be increased from 10% to 15%, to ensure that FIRPTA withholding collects a sufficient share of amounts owed.
  • Second, US real property holding corporations would be required to make their FIRPTA status readily accessible to shareholders and the IRS through disclosures in their annual returns.
  • Third, brokers whose clients sell more than 5% of a publicly-traded U.S. real property holding corporation (10% for publicly-traded, foreign controlled REITs upon passage of the bill) would be required to withhold 15% of the proceeds of a disposition of their client’s interests in such corporation. Again, each of these provisions imposes no new taxes, but rather collects taxes that are current going unpaid in many cases.
  • Fourth, the FIRPTA “cleansing rule” exception would no longer apply when a REIT or RIC disposes U.S. real property and claims a dividends paid deduction on the subsequent distribution to shareholders.
  • Finally, for purposes of determining whether dividends from a foreign corporation (attributable to dividends from an 80% owned domestic corporation) are eligible for a dividends received deduction under Section 245 of the Code, dividends from REITs and RICs would no longer be treated as dividends from domestic corporations.

The third and fifth revenue raisers were included in H.R. 1 in the last Congress. The full JCT descriptions of the legislation are attached, including modifications to the Chairman’s bill that were made this morning.

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