The Foreign Investment in Real Property Tax Act of 1980, P.L. 96-499 (FIRPTA), subjects a foreign person's gains and losses from disposition of a U.S. real property interest (USRPI) to U.S. federal income taxation as if those gains or losses were effectively connected with a trade or business within the United States (Sec. 897(a)(1)). Sec. 1445 sets forth the withholding obligations of the parties involved in a foreign person's disposition of a USRPI. Because a foreign person's investment in a USRPI may occur indirectly, such as through a partnership, Sec. 1446 withholding requirements also may arise when that partnership has effectively connected income allocable to a foreign partner. It is important to understand when the withholding rules under Secs. 1445 and 1446 are triggered and how these two obligations are coordinated when complying with U.S. withholding and reporting responsibilities.
Sec. 1445 Rules
Generally, Sec. 1445 (a) imposes a 10% withholding tax on the gross amount realized on a disposition of a USRPI by a foreign person. For FIRPTA purposes, "disposition" is defined broadly as "any transfer that would constitute a disposition by the transferor for any purpose of the ... Code and regulations thereunder" (Regs. Sec. 1.897-1(g)). Dispositions meeting this definition include sales of a USRPI by a foreign individual, foreign corporation, or domestic partnership that has a foreign partner and certain distributions by a domestic corporation, real estate investment trust, or regulated investment company to a foreign shareholder. This withholding tax must be withheld by the transferee, unless certain conditions for exemption or reduction of the amount are met, and must be reported and remitted by the transferee no later than the 20th day after the date of the transfer (Regs. Sec. 1.1445-1(c)(1)).
Sec. 1446 Rules
In addition to the Sec. 1445 obligation, the Sec. 1446 withholding rules also may apply in the case of a partnership that receives effectively connected income allocable to its foreign partners. A partnership, foreign or domestic, that has income effectively connected with a U.S. trade or business must pay a withholding tax on its effectively connected taxable income (ECTI) allocable to its foreign partners (Regs. Sec. 1.1446-1(a)). This withholding, which is required whether or not distributions were made during the partnership's tax year, generally is imposed at the highest corporate tax rate if the foreign partner is a...