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Considering A Merger Or Acquisition? We’ve Got You Covered.

Wherever you invest, Leo Berwick’s M&A tax services can assist you in facilitating the sale, purchase, or merger of a company.

FIRPTA: The Basics

 

  • The Foreign Investment Real Property Tax Act (FIRPTA) of 1980 was a response to increasing foreign ownership of US real property.

  • FIRPTA imposes capital gains tax on foreign investors (Transferors) who sell or dispose of US real property interests (“USRPIs”), which includes distributions.

  • Applies to corporations holding USRPIs equal to 50% or more of total assets (a “USRPHC”).

  • Foreign investors are usually not subject to US capital gains tax, but FIRPTA is the big exception: If FIRPTA applies, the foreign investor must file US tax returns.

  • FIRPTA is implemented via a withholding tax — so even if a transaction isn’t subject to FIRPTA, the Transferor may still need to provide certificates of non-foreign status or other documentation to avoid FIRPTA withholding.
    • Some states may also have their own version of FIRPTA when it comes to state tax.

    Why is FIRPTA important?

    • FIRPTA’s US tax implications can diminish the return to foreign investors.

    • Foreign investors often require investment funds to make a “best effort” or “reasonable best effort” to invest in a manner that would avoid imposing FIRPTA liability and US tax filing obligation on investors.

    When does FIRPTA apply?

     

    • FIRPTA applies at sale and any other transactions involving USRPIs.
    • USRPI is broad: it includes land and building, as well as any corporations that holds USRPIs (making them a USRPHC)
    • If a corporation is a USRPHC, any sale of its shares is subject to FIRPTA for five years.
    • EXAMPLE: A foreign investor buys shares in Corp X (a USRPHC) on December 31st, 2021.

    • At the end of the following year, Corp X ceases to be a USRPHC.
    • The next day, foreign investors sells their Corp X shares. Even though Corp X is no longer a USRPHC on that date, the investor is still subject to FIRPTA because of the USRPHC five-year rule. The investor will still have to pay US capital gains tax and file a US tax return to report those gains.
    • FIRPTA can also affect less-obvious (intangible) assets, like licenses tied to real property.

    Supporting every part of your FIRPTA jounrey