The ultimate negative impact, however, would not be on the foreign persons investing through the “look-through” C-corporations, but rather on the other foreign investors who hold their interests directly in non-publicly traded REITs. As currently written, this proposed look-through rule would apply even to widely-held non-public domestic corporation or corporations that are owned by widely-held investment funds. This rule would prevent using intermediary “blocker” domestic C-corporations by foreign investors to qualify as non-foreign persons for D-REIT testing purposes. The Proposed Regulations apply a look-through approach to “foreign-owned domestic corporations” that are defined as any non-public domestic corporation where foreign persons hold directly, or indirectly, at least 25% of the fair market value of the corporation’s shares. The Proposed Regulations apply a “look-through” approach until you reach a “non-look-through person.” Non-look-through persons are individuals, certain domestic C-corporations (other than certain foreign-owned domestic corporations), foreign corporations, publicly traded REITs, publicly traded partnerships, an estate, and certain other entities. The proposed regulations define stock that is held “indirectly” by taking into account stock of the REIT held through certain entities under a limited “look-through” approach. Highlights of the Proposed Regulations on Domestically Controlled REITs Furthermore, the legislative history accompanying the PATH Act cited favorably the 200923001 private letter ruling as a statement of the existing law. In a 2013 legislative discussion draft, Congress considered adding new constructive ownership rules that would address the possibility of looking through C-corporations, but that proposal was not adopted by the PATH Act, while other proposals were. persons hold stock, or are treated as holding stock, in such upper tier REIT or RIC. Any stock of a REIT held by a private REIT or RIC is treated as held by a U.S. Any stock of a REIT held by a publicly-traded REIT or Regulated Investment Company (“RIC”) is treated as held by foreign person unless the upper tier REIT or RIC itself is domestically controlled. Each shareholder who owns less than 5% of a publicly traded REIT stock is presumed to be domestic. Thus, the prevailing view has been that domestic taxable C-corporations are not treated as foreign persons, even if they have a majority of foreign shareholders.Ĭertain presumption rules were enacted in the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). ![]() the actual owners of stock, as determined under § 1.857-8, must be taken into account.” Treasury regulations § 1.857-8 provide that the actual owner of REIT shares is the “person who is required to include in his return the dividends received on the stock.” Based on the plain reading of these regulations, and based on the IRS interpretation stated in a 2009 private letter ruling, 3 many taxpayers and practitioners have concluded that the words “directly or indirectly” do not require looking through domestic taxable corporate entities. Treasury regulations § 1.897-1(c)(2)(i) states that “. Unfortunately, neither Section 897 nor the Treasury regulations define precisely the term “foreign person” for purposes of the D-REIT test. One of the exceptions provides that an interest in a REIT is not treated as USRPI (and is not subject to FIRPTA taxation and withholding) if the REIT qualifies as a “domestically controlled investment entity” (“D-REIT”) within the meaning of Section 897(h)(4)(B).Ī REIT is a D-REIT if less than 50% of the fair market value of its outstanding stock is directly or indirectly held by “foreign persons” during a statutorily specified testing period (typically five years ending on the date of the disposition). To encourage foreign investment in REITs, and to lessen the compliance burden on REITs, Congress enacted numerous exceptions from this general rule. Thus, under the FIRPTA rules REITs themselves are generally treated as USRPIs, and dispositions of USRPIs by a foreign person are subject to taxation under FIRPTA and a withholding tax regime. real property interests (“USRPI”) under the definition of Section 897 2 (commonly referred to as “FIRPTA”). Most REITs 1 hold assets that consist primarily of U.S. federal income tax on dividends and on depositions of their interests in REITs. ![]() On Decemthe IRS and the Treasury Department issued a notice of proposed rulemaking (REG-100442-22) (the “Proposed Regulations”) that, among other things, affects the determination when Real Estate Investment Trusts (“REITs”) are treated as domestically controlled.Īs a general matter, absent some applicable exception, foreign investors in REITs are subject to U.S.
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