The U.S. Foreign Investment in Real Property Tax Act (FIRPTA) imposes U.S. federal income tax on non-U.S. persons’ gains from the disposition of a U.S. real property interest. FIRPTA is particularly important to infrastructure investors because real property is an essential physical component of most infrastructure projects. The U.S. real property interests subject to tax under FIRPTA include not only direct interests in U.S. real property but also interests held through a partnership and shares in U.S. real property holding corporations.

A corporation generally is a U.S. real property holding corporation if U.S. real property interests represent at least half of the value of its worldwide real property and business assets.

Proposed rulemaking

The proposed rulemaking focuses on non-U.S. investors in partnerships that lease, improve and operate U.S. roads, bridges or other infrastructure facilities. The partnership’s principal assets are the lease, the new improvements and a governmental permit to operate the infrastructure and collect tolls. Because the facilities and the related land have no other use, the governmental permit may represent most of the value of the investment.

If the governmental permit is not a U.S. real property interest, a non-U.S. investor’s gain on the disposition of the shares of a U.S. corporation that holds the partnership interest is not subject to tax under FIRPTA. Many non-U.S. investors in U.S. infrastructure projects have taken the position that the governmental permit is not a U.S. real property interest.

In the advance notice of proposed rulemaking, the Internal Revenue Service says that it believes governmental permits to operate toll roads, toll bridges and other infrastructure are U.S. real property interests. It proposes issuing regulations explaining how it believes the permits should be treated and valued for FIRPTA purposes.


The regulations if issued as proposed generally would subject non-U.S. investors’ gains on their disposition of an interest in U.S. infrastructure projects to U.S. income tax. The characterization of governmental permits for FIRPTA purposes also may affect the treatment of the permits for depreciation purposes. Governmental permits typically can be depreciated over 15 years rather than the longer term of a lease.

The proposed regulations appear to be part of an overall review of the tax benefits given to private participants in public/private infrastructure projects, which was the subject of a U.S. Congressional hearing last July. The underlying policy question is the extent to which the cost of providing those tax benefits undercuts the public benefit realized through privatization of public infrastructure.

The advance notice of proposed rulemaking is available at

Comments are to be submitted to the Internal Revenue Service by January 29, 2009.