FIRPTA Exemption for Foreign Retirement Funds/Increase in FIRPTA Withholding Rates
Real property interests held by foreign retirement or foreign pension funds are now exempt from FIRPTA, effective for dispositions and distributions after December 18, 2015. This proposed change in the law had been an area of agreement between President Obama and the Republican Congress, and was passed with the package of “tax extenders” on December 18 (H.R. 2029).
New Section 897(l) provides that Section 897 shall not apply to United States real property interests held directly, or indirectly, through one or more partnerships, by a qualified foreign pension fund or by any entity that is wholly owned by a qualified pension fund.
For this purpose, a qualified foreign pension fund is largely what one would think of as a foreign retirement plan. It must cover employees or former employees of the sponsoring employer and it must be tax deferred or taxable at a reduced rate in the home country.
Notably, a qualified foreign pension fund must not have a single participant or beneficiary with a right to more than 5% of its assets or income. This provision means that a foreign retirement account set up for the benefit of a single individual will not qualify for this exemption from FIRPTA. For example, an individual Canadian Registered Retirement Savings Plan (“RRSP”) would not qualify for the exemption. However, a group RSSP likely would qualify for the exemption.
Section 1445 was also modified to eliminate the FIRPTA withholding on sales of real property by qualified foreign pension funds.
Increase in FIRPTA Withholding Rate.
Congress giveth and Congress taketh away. While foreign pension funds received good news with the new FIRPTA exemption, H.R. 2020 also increased the withholding rate on the sale of real property by a foreign person (Section 1445) from 10% to 15% of the gross sales price. Residences for which the amount realized does not exceed $1 million are still subject to the 10% FIRPTA withholding tax. The increase will apply to dispositions occurring more than 60 days after enactment, which means it would apply to dispositions occurring after February 16, 2016.
There is no indication in the joint committee report (JCX-144-15) as to why Congress thought the increase in the FIRPTA withholding rate was necessary. Presumably it is a revenue raiser, since undoubtedly a certain percentage of sellers do not file refund claims for excess FIRPTA withholding. In addition, for those that do file refund claims, the Treasury gets the timing benefit of the delay between the time the withholding tax is received, and the time a refund claim must be paid. This timing benefit will increase because the amount of withholding is increasing.