Exceptions to FIRPTA Withholding

If you want to learn what is a FIRPTA affidavit, you have come to the perfect place. In this article, you will get to know about the significance of the Foreign Investment in Real Property Tax Act (FIRPTA) affidavit and the conditions in which you can apply for it to get an exception from FIRPTA withholding. 

FIRPTA Withholding

FIRPTA makes it clear when someone is buying a US real property from a foreign seller, he or she is required to withhold 15% of the amount realized on the disposition and submit it to the Internal Revenue Service (IRS). 

The withholding tax represents the amount of money that is applicable to the non-US investors as per the US laws and tax code. However, it is important to note that the withholding tax can actually be more or less than the final US tax obligation. If the amount withheld is greater than the actual tax amount, then the seller can apply for a refund. 

There are certain situations in which the withholding tax might exceed the actual tax liability when the IRS has issued the FIRPTA withholding certificate, and the amount has been reduced. Whatever might be the situation, it is important for both buyers and sellers to be familiar with the regulations of FIRPTA and the exceptions to FIRPTA:

1. Seller is not considered a Foreign Person.

It is quite clear that FIRPTA withholding is only applicable when a property is being sold by a foreign person. The buyer of the United States Real Property Interests (USRPI) will not be required to withhold the amount when the seller is not a foreign person. 

In this case, it is important for the buyer to get the FIRPTA affidavit or the withholding certificate from the seller to confirm the fact that the seller has a non-foreign status as per US law. Treasury rules and regulations are followed during this process of obtaining the FIRPTA withholding certificate. 

2. Qualified Foreign Pension Funds (QFPF)

A QFPF is a trust or corporation that is established under the law of a country other than the United States of America. As the name suggests, the primary goal of a QFPF is to provide pension benefits to the employees. Such corporations follow the government rules and regulations and have to provide annual financial reports to the relevant tax authorities. 

FIRPTA withholding is not applicable on any disposition of the real property in the US that is held directly or indirectly by a QFPF or by a corporation that is fully owned by a QFPF. Even though FIRPTA is not applicable on QFPF, it is important such organizations might still be subjected to the federal income tax of the US. 

3. Publicly Traded Exception

If an organization is involved in regular trading of the stocks and is doing this through legal and well-established channels, then these stocks are not considered as USRPI in the companies that have 5% or less of such stocks in the last five years. Therefore, if a foreign person holds less than the decided percentage of the shares during the applicable period, then the transaction will not be subject to FIRPTA withholding. FIRPTA affidavit is usually needed to prove this type of exception. 

4. Domestically controlled REIT’s

Shares of a domestically controlled real-estate investment trust (REIT) are not considered USRPI. Therefore, FIRPTA withholding is not applicable to the gains made from selling the shares of a domestically controlled REIT. 

Generally, a domestically controlled REIT is the one in which less than 50% of the market value of the shares is held directly or indirectly by foreign persons during the last five years of the disposition. There are also some special rules and exceptions that might be applicable to the REIT, depending on the specific conditions. 

5. USRPHC

FIRPTA withholding is not applicable on the disposition of stock of an organization that was US Real Property Holding Corporation (USRPHC) when it does not USRPIs in the last five years of the disposition. 

Conclusion