The IRS and the Treasury Department released final and temporary regulations (TD 9751) relating to the taxation of, and withholding on, foreign persons upon certain dispositions of, and distributions with respect to, United States real property interests (USRPIs). The regulations reflect changes made by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).
Among other things, the PATH Act increased the rate of withholding of tax on dispositions of USRPIs from 10% to 15% by amending section 1445 of the Internal Revenue Code (the Code), with an exception in the case of a disposition of property that is acquired by the transferee for his or her use as a residence with respect to which the amount realized is greater than $300,000 but does not exceed $1 million. The PATH Act also provided that the so-called “cleansing exception” will not apply to dispositions on or after December 18, 2015 if the corporation or its predecessor was a real estate investment trust (REIT) or a regulated investment company at any time during the shorter of the period that the shareholder held the interest or the five-year period ending on the date of the disposition of the shareholder’s interest in the corporation. The regulations reflect these changes.
The Treasury Department and the IRS request comments regarding what regulations, if any, should be issued pursuant to section 897(l)(3). The PATH Act added section 897(l) to the Code, providing that section 897 does not apply to USRPIs held directly (or indirectly through one or more partnerships) by, or to distributions received from a REIT by, a qualified foreign pension fund or entity wholly owned by a qualified foreign pension fund. Section 897(l)(3) provides that the Treasury Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 897(l).