The PATH Act made several notable changes to the provisions of FIRPTA. The PATH (Protecting Americans from Tax Hikes) was part of the Consolidated Appropriations Act of 2016.
The FIRPTA Exemption for Qualified Foreign Pension Funds
Section 323 of the PATH Act provides that FIRPTA does not apply to USRPIs held directly (or indirectly through one or more partnerships) by a “qualified foreign pension fund” (QFPF) and any entity, all of the interests of which are held by a QFPF. This exemption from FIRPTA also applies to Capital Gain Dividends received from a REIT. Because a QFPF is now exempt from FIRPTA tax on these dispositions and distributions, a QFPF is now exempt from FIRPTA withholding tax. 17 This provision is intended to make it easier for QFPFs to invest in U.S. real estate.
Opportunities for existing real estate that has been written to current value de-capitalized to produce current acceptable return will benefit from increased demand and restricted new supply. New development that is warranted by measurable, existing product demand can be financed with a reasonable equity contribution by the borrower. The lack of ruinous competition from lenders too eager to make real estate loans will allow reasonable loan structuring. Financing the purchase of de-capitalized existing real estate for new owners can be an excellent source of real estate loans for commercial banks. There are tax consequences that you have to deal with when you buy a real estate in the United States. You would need an Individual Taxpayer Identification Number which you will use with all your tax transactions. Your investment in real estates can be treated as a portfolio investment and will be accounted for as an investment income which can either be fixed or a periodic income. This is typically taxed at 30% on gross revenues. This tax though does not apply though to all foreign investors. Tax rates would vary depending on the tax personality the foreign investor opted for. For instance, a corporation would be taxed differently.
Many of these changes make REITs more attractive investment vehicles for foreign investors. One of the more significant changes is that certain foreign pension and retirement funds are now exempt from FIRPTA, with the result that there may be an increased deployment of foreign pension capital into the U.S. real estate market. The exemption has had an inimical effect on SIPPs. There are ambiguities in the PATH Act’s statutory language that need clarification, however, and as a result foreign pension and retirement funds are well advised to discuss the PATH Act changes with their advisors, in order to achieve maximum U.S. tax efficiency on inbound real estate investments.
Structuring Considerations for Foreign Investment in U.S. Real Estate
Proper structuring is extremely important when investing in U.S. Real Estate. Freeman Tax Law has decades of experience dealing with offshore, taxation, and corporate structuring issues. Please contact us today to schedule a free initial consultation to discuss your investment and structuring options.