On December 18, 2015, the U.S. Congress passed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The PATH Act amends certain provisions of U.S. tax law commonly referred to as "FIRPTA" by creating a general exemption for "Qualified Foreign Pension Funds" from U.S. taxes imposed pursuant to FIRPTA on gain from dispositions of U.S. real property interests (USRPIs) by non-U.S. persons.
In general, a non-U.S. person (including a foreign corporation) should not be subject to U.S. federal income tax on gain from the sale of U.S. assets. FIRPTA generally provides that gain or loss from the disposition of USRPIs is taken into account when determining a non-U.S. person’s income that is effectively connected with a U.S. trade or business (ECI), which is subject to direct U.S. federal income tax and therefore triggers a U.S. tax filing obligation. USRPIs include both direct interests in U.S. real property and interests in United States real property holding corporations (USRPHCs), which generally are U.S. companies with at least 50% of their value being attributable to USRPIs. Foreign corporations that invest directly in U.S. real property (rather than through a USRPHC) may also be subject to a 30% branch profits tax as a result of recognizing ECI from the disposition of USRPIs.
Qualified Foreign Pension Funds
Section 323 of the PATH Act creates and distinguishes a Qualified Foreign Pension Fund and provides that FIRPTA does not apply to dispositions of USRPIs (or capital gains distributions from U.S. REITs) held directly (or indirectly through one or more partnerships) by a Qualified Foreign Pension Fund or an entity all of the interests of which are held by a Qualified Foreign Pension Fund. This provision also generally should exempt a Qualified Foreign Pension Fund's disposition of direct investments in USRPIs from branch profits tax, because income from investments in USRPIs would no longer be considered ECI. As a result, gain from dispositions of USRPIs by a Qualified Foreign Pension Fund generally should not be subject to U.S. tax.
An entity that is a trust, corporation, or other organization or arrangement generally will be a Qualified Foreign Pension Fund if it meets the following requirements:
- it is organized under the law of a country other than the U.S.;
- it is established to provide retirement or pension benefits to current or former employees (or their designees) of one or more employers in consideration for services rendered;
- it has no single participant or beneficiary with more than a five percent interest;
- it is subject to government regulation and provides annual information reporting about its beneficiaries to the tax authority of its country of organization or operation; and
- under the laws of its country of organization or operation, (i) otherwise taxable contributions to it are deductible or excluded from its gross income or taxed at a reduced rate, or (ii) tax on its investment income is deferred or taxed at a reduced rate.
For pension funds sponsored by foreign governments, the exemption for Qualified Foreign Pension Funds is materially different from the exemption for foreign governments under Section 892 of the U.S. Internal Revenue Code of 1986 in a number of key aspects. Governmental pension plans that have made or intend to make investments in U.S. real property should consider whether this new exemption may qualify them for more favourable U.S. tax treatment in respect of such investments.