FIRPTA Withholding
Withholding of Tax on Dispositions of United States Real Property
Interests
The disposition of a U.S. real property interest by a foreign
person (the transferor) is subject to the Foreign Investment in Real Property
Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United
States to tax foreign persons on dispositions of U.S. real property interests.
This includes but is not limited to a sale or exchange, liquidation,
redemption, gift, transfers, etc.
U.S. Real Property Interest
A U.S. real property
interest is any interest, other than solely as a creditor, in real property
(including an interest in a mine, well, or other natural deposit) located in
the United States If on the date of disposition, the corporation did not hold
any U.S. real property interests, and all the interests held at any time during
the shorter of the applicable periods were disposed of in transactions in which
the full amount of any gain was recognized, then FIRPTA withholding would not
apply.
Rates of Withholding
The transferee must
deduct and withhold a tax equal to 10% (or other amount) of the total amount
realized by the foreign person on the disposition. The amount realized is
the sum of
(1) The cash paid, or to be paid (principal only),
(2) the fair market value of other property transferred, or to be
transferred, and
(3) the amount of any liability assumed by the transferee or to
which the property is subject immediately before and after the transfer.
The amount realized is generally the amount paid for the property. If the
property transferred was owned jointly by U.S. and foreign persons, the amount
realized is allocated between the transferors based on the capital contribution
of each transferor. This is subject to the threshold mentioned in the section
on exceptions from FIRPTA Withholding.
A foreign corporation
that distributes a U.S. real property interest must withhold a tax equal to 35%
of the gain it recognizes on the distribution to its shareholders.
A domestic corporation
must withhold a tax equal to 10% of the fair market value of the property
distributed to a foreign shareholder if (1) the shareholder's interest in the
corporation is a U.S. real property interest, and (2) the property distributed
is either in redemption of stock or in liquidation of the corporation.
FIRPTA documents are
processed at:
Internal Revenue Service Center
P.O. Box 409101 Ogden, UT 84409.
Exceptions from FIRPTA Withholding
Generally you do not have to withhold in the
following situations; however, notification requirements must be met:
1.
You (the transferee) acquire the property for use as a home
and the amount realized (generally sales price) is not more than $300,000. You or a member of your family must have definite plans to
reside at the property for at least 50% of the number of days the property is
used by any person during each of the first two 12-month periods following the
date of transfer. When counting the number of days the property is used, do not
count the days the property will be vacant.
2.
The property disposed of is an interest in a domestic corporation if
any class of stock of the corporation is regularly traded on an established
securities market. However, if the class of stock had been held by a foreign
person who beneficially owned more than 5% of the fair market value of that
class at any time during the previous 5-year period, then that interest is a
U.S. real property interest if the corporation qualifies as a United States
Real Property Holding Corporation (USRPHC), and you must withhold on any
disposition.
3.
The disposition is of an interest in a
domestic corporation and that corporation furnishes you a certification
stating, under penalties of perjury, that the interest is not a U.S. real
property interest. Internal Revenue Code. The certification must be dated not
more than 30 days before the date of transfer.
4.
The transferor gives you a
certification stating, under penalties of perjury, that the transferor is not a
foreign person and containing the transferor's name, U.S. taxpayer identification
number, and home address (or office address, in the case of an entity).
5.
You receive a withholding certificate
from the Internal Revenue Service that excuses withholding.
6.
The
transferor gives you written notice that no recognition of any gain or loss on
the transfer is required because of a nonrecognition provision in the Internal
Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the
notice by the 20th day after the date of transfer with the:
7.
Internal Revenue Service Center
P.O. Box 409101 Ogden, UT 84409.
8.
The amount the transferor realizes on
the transfer of a U.S. real property interest is zero.
9.
The property is acquired by the United
States, a U.S. state or possession, a political subdivision thereof, or the
District of Columbia.
10.
The grantor realizes an amount on the
grant or lapse of an option to acquire a U.S. real property interest. However,
you must withhold on the sale, exchange, or exercise of that option.
11.
The disposition is of publicly traded
partnerships or trusts. However, if an interest in a publicly traded
partnership or trust was owned by a foreign person with a greater than 5%
interest at any time during the previous 5-year period, then that interest is a
U.S. real property interest if the partnership or trust would otherwise qualify
as a USRPHC if it were a corporation, and you must withhold on it.
Certifications
The certifications in items (3) and (4) are not effective if you
have actual knowledge, or receive a notice from an agent, that they are false.
Liability of Agents
The agent's liability is limited to the amount of pay the agent
gets from the transaction.
An agent is any person who represents the transferor or transferee
in any negotiation with another person (or another person's agent) relating to
the transaction, or in settling the transaction. A person is not treated as an
agent if the person only performs one or more of the following acts related to
the transaction:
·
Receipt and disbursement of any part of
the consideration,
·
Recording of any document,
·
Typing, copying, and other clerical
tasks,
·
Obtaining title Insurance reports and
reports concerning the condition of the property, or
·
Transmitting documents between the
parties.
A Withholding Agent is personally liable for the full amount of
FIRPTA withholding tax required to be withheld, plus penalties and
interest.
Forms to remit & deadlines - Reporting and Paying Tax on U.S. Real
Property Interests
Two forms are generally used for reporting and paying the tax to
the IRS regarding the acquisition of U.S. real property interests.
You must include the U.S. TIN of both the transferor and
transferee on the forms
For partnerships disposing of U.S. real property interests, the
manner of reporting and paying over the tax withheld is the same as discussed For publicly traded trusts and real estate
investment trusts, you must use Forms 1042 and 1042-S procedures for reporting
and paying over tax withheld on distributions from dispositions of U.S. real
property interests. Use Income Codes 24, 25, and 26 on Form 1042-S for
transactions involving these entities.
Form 8288
The tax withheld on the acquisition of a U.S. real property
interest from a foreign person is reported and paid using Form 8288. Form 8288
also serves as the transmittal form for copies A and B of Form 8288-A,
Statement of Withholding on Dispositions by Foreign Persons of U.S. Real
Property Interests.
Generally,
you must file Form 8288 by the 20th day after the date of the transfer.
If an application for a withholding certificate is submitted on Form 8288-B, Application for
Withholding Certificate for Dispositions by Foreign Persons of U.S. Real
Property Interests to the IRS before or on the date of a transfer and the
application is still pending with the IRS on the date of transfer, the correct
withholding tax must be withheld, but does not have to be reported and paid
immediately. The amount withheld (or
lesser amount as determined by the IRS) must be reported and paid within 20
days following the day on which a copy of the withholding certificate or
notice of denial is mailed by the IRS.
Form 8288-A
The withholding agent must prepare a Form 8288–A for each person
from whom tax has been withheld. Attach copies A and B of Form 8288–A to Form
8288. Keep Copy C for your records.
IRS will stamp Copy B (provided TIN is included only) and send it
to the person subject to withholding. That person must file a U.S. income tax
return and attach the stamped Form 8288–A to receive credit for any tax
withheld.
Application for Reduced Rate of Withholding
A reduced rate of withholding may be allowed upon the submission
and acceptance of Form 8288-B.
Withholding Certificates
The IRS will generally act on these requests within 90 days after
receipt of a complete application including the Taxpayer Identification Numbers
(TIN’s) of all the parties to the transaction. A transferor that applies for a
withholding certificate must notify the transferee in writing that the
certificate has been applied for on the day of or the day prior to the
transfer.
All applications for withholding certificates are divided into six
basic categories:
1.
Applications based on a claim that the
transfer is entitled to nonrecognition treatment or is exempt from tax,
2.
Applications based solely on a
calculation of the transferor's maximum tax liability,
3.
Applications under special installment
sale rules,
4.
Applications based on an agreement for
the payment of tax with conforming security,
5.
Applications for blanket withholding
certificates, and
6.
Applications on any other basis.
Use Form
8288-B, for
categories (1), (2), and (3) ONLY. to apply for a withholding
certificate. The IRS will normally act on an application by the 90th day after
a complete application is received. If you receive a withholding certificate
from the IRS that excuses withholding, you are not required to file Form 8288.
However, if you receive a withholding certificate that reduces (rather than
eliminates) withholding, there is no exception to withholding, and you are
required to file Form 8288
The application must be sent to:
Internal Revenue Service Center
P.O. Box 409101 Ogden, UT 84409
All applications for withholding certificates must use the
specified format.
Category (4) Applications
If the application is based on an agreement for the payment of
tax, the application must include:
1.
Information establishing the transferor's
maximum tax liability, or the amount that otherwise has to be withheld,
2.
A signed copy of the agreement proposed
by the applicant, and
3.
A copy of the security instrument
proposed by the applicant.
Either the transferee or the transferor may enter into an
agreement for the payment of tax. There are four major types of security
acceptable to the IRS. They are:
1.
Bond with surety or guarantor,
2.
Bond with collateral,
3.
Letter of credit, and
4.
Guarantee (corporate transferors).
Category (5) Applications
A blanket withholding certificate may be issued if the transferor
holding the U.S. real property interests provides an irrevocable letter of
credit or a guarantee A blanket withholding certificate excuses withholding
concerning multiple dispositions of those property interests by the transferor
or the transferor's legal representative during a period of no more than 12
months.
Category (6) Applications
These are non-standard applications
Requirement for Taxpayer Identification Numbers (TIN’s)
all transferees (buyers) and foreign transferors (sellers) of U.S.
real property interests to provide their TIN’s, names and addresses on
withholding tax returns, applications for withholding certificates, notice of
non-recognition, or elections under sections IRC 897(i) when disposing of a
U.S. real property interest.
If the transferor sends Forms 8288 and 8288-A to the IRS for
processing but does not list a TIN on the forms and does not attach a Form W-7
ITIN application, the IRS will process the forms, but will not date stamp Form
8288-A "Copy B Mailed" or forward it to the foreign transferor.
Instead, the IRS will mail Letter 3794 SC/CG to the foreign transferor,
instructing the transferor to apply for an ITIN by filing Form W-7. In
order to obtain an ITIN number for FIRPTA purposes you must complete Form W-7
or W-7SP. Select Box "h" (other) in the
"Reason you are submitting Form W-7" section of Form W-7,
and Exception 4 (explained in the instructions). Write
"Exception 4" in the write-in area to the right of Box h
(other). If a transferee does not have a TIN, and an amount withheld under
section 1445 is due to the IRS, complete Form 8288, 8288-A and mail the forms
along with the payment to Internal Revenue Service, Ogden Submission Processing
Campus, PO Box 409101, Ogden UT 84409, by the 20th day from the date of the
sale.
Form 1099-S, Proceeds From Real Estate Transactions
Generally, the real estate broker or other person responsible for
closing the transaction must report the sale of the property to the IRS using
Form 1099-S.
Amendments to Applications
An applicant for a withholding certificate may amend an otherwise
complete application by sending an amending statement to the Director, Ogden
Service Center, at the address shown earlier. There is no particular form
required, but the amending statement must provide certain information:If an
amending statement is provided, the time in which the IRS must act upon the
application is extended by 30 days.
Partnerships
If a domestic partnership that is not publicly traded disposes of
a U.S. real property interest at a gain, the gain is treated as effectively
connected income would not be subject to withholding under the FIRPTA
provisions.
Trust and Estates
You must withhold 35% on any distribution to a foreign beneficiary
that is attributable to the balance in the real property interest account on
the day of the distribution. A trust with more than 100 beneficiaries may elect
to withhold from each distribution 35% of the amount attributable to the foreign
beneficiary's proportionate share of the current balance of the trust's real
property interest account. This election does not apply to publicly traded
trusts or real estate investment trusts (REITs).
|
Foreign Tax Reporting Requirements
Monday, February 8, 2016
The Foreign Investment in Real Property Tax Act in the US ( extracts by Alok Daga from https://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding)
Thursday, January 21, 2016
Expats Issues
Recently I have had the privilege to work with number of expats (US Citizens and Green card holders living in Dubai and Doha) from Dubai and Doha, United Arab Emirates and Qatar. They have certain common questions such as
1. Do I report my foreign asset holdings in the US ?
2. What if I am not a majority shareholder in a company, do I still report income from such company in the United States?
I will attempt to answer some questions here as I feel many others would benefit from the information provided herein.
First of, as a common rule of thumb all world wide income earned by US citizen living anywhere in the world must be reported on the US 1040 tax return and all taxes must be paid on that income. US at the time of this writing does not have a tax treaty with the UAE, my guess is since UAE does not impose any tax on income for its residents, the treaty even if negotiated is unenforceable by the US. If you own shares in a corporation in any of the Gulf nations, you need to determine three basic criteria :
1. Do you own more than 50% of the company shares, do you own the majority voting stocks?
2. Do you run the daily operations of such business and make critical decisions on behalf of such company, another words you exercise control over decision making?
3. Do you maintain a bank account on your personal name in order to transact and have maintained a balance in excess of $ 10,000.00 at any time during any calendar year?
4. Do you own commercial or residential property providing rental income?
If you answer yes to any of the questions posted above, you must file certain forms to be in compliance with the US tax laws, clients have this misconception that these forms entail certain tax consequence. I have advised clients based on their unique scenario where they just had to report the assets and corporate shareholdings to the IRS in the form of financial disclosure and had not been subject to actual taxes.
In certain case where a particular client was a 15% shareholder in a foreign entity, where he did not maintain day to day activity, he simply was not required to report any income earned in the foreign company as such entity did not declare any dividends, and the income was not repatriated to the US. Another words, if you have a 15 % minority share interest in a foreign company with absolutely no control (passive) in such foreign entity. Lets review this with an example, lets say such foreign entity posts net income in the amount of $ 100,000.00 and no dividends are declared, the US minority shareholder in such entity does not have to declare his share of income earned from this entity in the US as it was not brought back to the US in the form of dividend and hence enjoys a deferment of US tax until the board of directors decide to declare a dividend. Please note that dividends declared by such entities are not subject to lower tax rate normally applied to qualifying entities. Although being a 15% shareholder you must declare your investment in such entity on a special US tax form 5471 in order to comply with the US tax code requirement.
US tax code is most complex, we advise all individuals to seek professional help for assistance in their specific compliance requirement. Our office can review your scenario and be happy to guide you accordingly. Please do not hesitate to email me at herman@hstaxes.com
1. Do I report my foreign asset holdings in the US ?
2. What if I am not a majority shareholder in a company, do I still report income from such company in the United States?
I will attempt to answer some questions here as I feel many others would benefit from the information provided herein.
First of, as a common rule of thumb all world wide income earned by US citizen living anywhere in the world must be reported on the US 1040 tax return and all taxes must be paid on that income. US at the time of this writing does not have a tax treaty with the UAE, my guess is since UAE does not impose any tax on income for its residents, the treaty even if negotiated is unenforceable by the US. If you own shares in a corporation in any of the Gulf nations, you need to determine three basic criteria :
1. Do you own more than 50% of the company shares, do you own the majority voting stocks?
2. Do you run the daily operations of such business and make critical decisions on behalf of such company, another words you exercise control over decision making?
3. Do you maintain a bank account on your personal name in order to transact and have maintained a balance in excess of $ 10,000.00 at any time during any calendar year?
4. Do you own commercial or residential property providing rental income?
If you answer yes to any of the questions posted above, you must file certain forms to be in compliance with the US tax laws, clients have this misconception that these forms entail certain tax consequence. I have advised clients based on their unique scenario where they just had to report the assets and corporate shareholdings to the IRS in the form of financial disclosure and had not been subject to actual taxes.
In certain case where a particular client was a 15% shareholder in a foreign entity, where he did not maintain day to day activity, he simply was not required to report any income earned in the foreign company as such entity did not declare any dividends, and the income was not repatriated to the US. Another words, if you have a 15 % minority share interest in a foreign company with absolutely no control (passive) in such foreign entity. Lets review this with an example, lets say such foreign entity posts net income in the amount of $ 100,000.00 and no dividends are declared, the US minority shareholder in such entity does not have to declare his share of income earned from this entity in the US as it was not brought back to the US in the form of dividend and hence enjoys a deferment of US tax until the board of directors decide to declare a dividend. Please note that dividends declared by such entities are not subject to lower tax rate normally applied to qualifying entities. Although being a 15% shareholder you must declare your investment in such entity on a special US tax form 5471 in order to comply with the US tax code requirement.
US tax code is most complex, we advise all individuals to seek professional help for assistance in their specific compliance requirement. Our office can review your scenario and be happy to guide you accordingly. Please do not hesitate to email me at herman@hstaxes.com
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