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From: Richard Kahn
Sent: 12/24/2015 12:52:15 AM
To: Jeffrey Epstein [jeevacation@gmail.com]
Subject: Fwd: Alert: FIRPTA and REIT Reform Provisions in the New Tax Law Open Door to Increased Foreign Investment in
U.S. Real Property Interests
Importance: High
Richard Kahn
HBRK Associates Inc.
575 Lexington Avenue, 4th Floor
New York, NY 10022
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Begin forwarded message:
From: Sadis & Goldberg Tax Group <
Date: December 23, 2015 at 3:02:13 PM EST
To
Subject: Alert: FIRPTA and REIT Reform Provisions in the New Tax Law Open Door to Increased
Foreign Investment in U.S. Real Property Interests
Reply-To:
TAX ALERT
DECEMBER 23, 2015
FIRPTA and REIT Reform Provisions in
New Tax Law Open Door to Increased
Foreign Investment in U.S. Real
Property Interests
For further information about this Alert,
please contact:
Steven Etkind
Partner
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212.573.8412
setkind@sglawyers.com
Alex Gelinas
Partner
212.573.8159
agelinas@sglawyers.com
Please feel free to discuss any aspect of
this Alert with your regular Sadis &
Goldberg contact or with any of the
partners whose names and contact
information can be found at the end of
the Alert.
On December 18, 2015, President Obama signed into law a bill that significantly reforms the provisions
of the Internal Revenue Code that were originally added 35 years ago by the Foreign Investment in
Real Property Tax Act of 1980 (FIRPTA). The Protecting Americans from Tax Hikes Act of 2015 (the
"PATH Act") also includes extensions of a number of tax relief provisions that expired at the end of
2015. The PATH Act makes foreign capital investment in U.S. real estate, energy and infrastructure
assets more attractive by expanding certain exemptions from FIRPTA and clarifying the application of
certain FIRPTA provisions to REITs and their shareholders.
I. FOREIGN PENSION FUNDS EXEMPTED FROM FIRPTA TAXATION
One of the most significant provisions of the PATH Act is the addition of a complete exemption from
FIRPTA for "qualified foreign pension funds" and "entities" wholly owned by such funds, effective on
the date of enactment. A foreign pension fund is "qualified" if it is subject to government regulation
and certain reporting requirements in its home jurisdiction, is established to provide retirement or
pension benefits to participants or beneficiaries that are current or former employees, has no greater
than 5 percent beneficiaries, and enjoys tax benefits on either contributions or investment income in
its home jurisdiction. The new exemption applies to direct investments and investments made
through partnerships (including private equity funds). The PATH Act provides for certain details to be
addressed by Treasury Regulations. It appears that the "entities" eligible for the FIRPTA exemption
could include a U.S. or foreign "blocker" corporation that is wholly owned by a qualifying foreign
pension fund. This exemption will, for the first time, permit foreign pension funds, including some
governmental funds, to hold control positions in REITs without losing their FIRPTA exemption.
Note that the regular rules of the Internal Revenue Code other than FIRPTA still would apply to the
foreign pension fund. Therefore, a foreign pension fund that invested in a partnership that was
engaged in a U.S. business (real estate or non-real estate) would still be subject to U.S. federal income
tax on its share of the partnership's "effectively connected" U.S. business income in the same manner
as other non-U.S. persons making an investment in a U.S. business partnership.
Here are some examples of what can be done in light of the changes made by the PATH Act:
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A. Raw Land Investment. A qualifying foreign pension fund invests in a partnership that buys raw land
in the United States. (This could be a vacant lot, timberland, oil and gas or mineral property, or other
property interests that qualify for treatment as real property for federal income tax purposes.) The
investment is a capital asset, as the partnership is not engaged in business. The partnership later sells
the property to a developer, or the pension fund sells its partnership interest. Under prior law, the
foreign pension fund's non-business capital gain would automatically be subject to US federal income
tax because of FIRPTA. Under the new law, the foreign pension fund's long-term or short-term capital
gain is exempt from U.S. income tax and FIRPTA withholding because FIRPTA does not apply.
B. Equity Kicker Mortgage Loan Investment. A foreign pension fund acquires an ownership interest
in a mortgage loan secured by U.S. real property. The loan includes stated interest plus an equity
kicker (e.g., additional interest equal to a share of gain realized on sale of the property). Such an
equity kicker loan is treated as a U.S. real property interest under FIRPTA. Under prior law, gain
realized by the foreign pension fund upon sale of the loan would automatically be subject to U.S.
income tax under FIRPTA. Under new law, the gain realized on the sale of the mortgage loan would
be exempt from U.S. income tax. (This conclusion is based on the assumption that the foreign pension
fund is a mere investor and not engaged in an active lending business in the U.S.)
C. U.S. Blocker Corp. Investment. A foreign pension fund wants to make an equity investment in a
U.S. real estate business that is organized as a partnership. The foreign pension fund forms a U.S.
corporation to acquire the partnership interest and the corporation is capitalized with a mix of equity
and debt held by the shareholder. The corporation is subject to U.S. income tax on its net income, but
gets to deduct interest paid or accrued on the debt held by the shareholder. The foreign corporation
later sells the stock of the corporation. Under prior law, the gain on sale of the stock would be subject
to U.S. income tax because the corporation was a "U.S. real property holding corporation" under
FIRPTA. Under new law, FIRPTA does not apply to the foreign pension fund, so the capital gain on sale
of the stock is exempt from U.S. income tax. Note that the U.S.-source interest paid to the foreign
shareholder could be subject to U.S. withholding tax under the regular rules of the Code, but if the
pension fund is organized in a jurisdiction that has a tax treaty with the U.S. (e.g., UK, Germany,
France, China, Japan, etc.), these interest payments could be exempt from U.S. withholding under such
tax treaty.
2. FIRPTA EXEMPTION FOR INVESTMENTS IN PUBLICLY TRADED REIT STOCK INCREASED FROM 5
PERCENT to 10 PERCENT
For publicly traded REITs, the PATH Act opens the door to increased investment by expanding the
current statutory exemption from FIRPTA for small portfolio investments by non-U.S. persons. The Act
provides all foreign investors (not just pension funds) can now own up to 10 percent of the stock of a
publicly traded REIT without triggering FIRPTA tax. Under prior law, FIRPTA tax would apply upon the
foreign investor's sale of stock of the publicly traded REIT or the receipt of certain distributions from
such REIT if the foreign investor holds more than 5 percent of the REIT's stock.
3. CLARIFICATION OF THE EXEMPTION FOR INVESTMENTS IN DOMESTICALLY CONTROLLED REITS
The PATH Act includes important clarifying presumptions that will allow publicly traded REITs and their
shareholders to rely with greater confidence on the current law FIRPTA exemption for gains realized
on sales of stock in "domestically controlled" REITS. In determining whether a REIT is domestically
controlled, the REIT is now permitted to presume that any owner of less than 5 percent of any publicly
traded shares of the REIT is a U.S. person, unless the REIT has actual knowledge to the contrary.
4. REVENUE RAISING PROVISIONS RELATING TO FIRPTA AND REITs
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The PATH Act includes certain revenue raising provisions to offset, in part, the tax revenue loss
anticipated to result of the above-described tax reform provisions of the Act. Such revenue raisers
include (among other technical changes) the following provisions:
A. Increase in FIRPTA Withholding Rate. The purchaser of a U.S. real property interest from a non-
U.S. person was previously required to withhold 10 percent of the purchase price under FIRPTA. The
PATH Act increases this rate to 15 percent for dispositions occurring after the 60th day following
enactment, but maintains the 10 percent rate for sales of residential property for between $300,000
and $1,000,000. This provision is not a tax increase but is designed to ensure that FIRPTA withholding
collects a sufficient portion of the taxes owed.
B. Restriction on REIT Spin-offs. In recent years, it has become increasingly common for large
corporate taxpayers to reduce their tax bills by contributing real estate used in their businesses to a
subsidiary, spinning off the subsidiary in a tax free transaction under Code section 355, and then
having the spun-out corporation making a REIT election. The PATH Act curtails such activity by (i)
providing that neither the distributing corporation nor the spun-out corporation can make a REIT
election for ten years after that corporation was involved in a Section 355 transaction and (ii) denying
tax-free treatment to spin-offs in which the distributing corporation or spun-out corporation (but not
both) is a REIT.
5. CONCLUSION
The revisions to the FIRPTA and REIT rules discussed above represent a potentially large expansion of
the incentives for foreign investment in U.S. real property interests, especially for foreign pension
funds. Sponsors of U.S. real property investment funds and foreign investors with interests in U.S. real
estate assets should review the new provisions to determine whether such persons could benefit from
such U.S. tax law changes.
Sadis & Goldberg LLP
Please feel free to discuss any aspect of this Alert with your regular Sadis & Goldberg contact or with
any of the partners, whose names and contact information are provided below.
Alex Gelinas, 212.573.8159,
Daniel G. Viola, 212.573.8038,  dviola@sglawyers.com
Danielle Epstein-Day, 212.573.8416, depstein@sglawyers.com
Douglas Hirsch, 212.573.6670, dhirsch@sglawyers.com
Erika Winkler, 212.573.8022, ewinkler@sglawyers.com
Jamie Kim, 212.573.8034, jkim@sglawyers.com
Jeffrey Goldberg, 212.573.6666, jgoldberg@sglawyers.com
Jennifer Rossan, 212.573.8783, kossan@sglawyers.com
John Araneo, 212.573.8158, jaraneo@sglawyers.com
Lance Friedler, 212.573.8030, Ifriedler@sglawyers.com
Mitchell Taras, 212.5738417,  mtaras@sglawyers.com
Paul Fasciano, 212.573.8025, pfasciano@sglawyers.com
Ron S. Geffner, 212.573.6660, rgeffner@sglawyers.com
Sam Lieberman, 212.573.8164, slieberman@sglawyers.com
Steven Etkind, 212.573.8412, setkind@sglawyers.com
Steven Nuttier, 212.573.8424, shuttler@sglawyers.com
Yehuda Braunstein, 212.573.8029, ybraunstein@sglawyers.com
Yelena Maltser, 212.573.8429, ymaltser@sglawyers.com
agelinas@sglawyers.com
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If you would like copies of our other Alerts, please visit our website at www.sglawyers.com and choose
"Library".
The information contained herein was prepared by Sadis & Goldberg LLP for general informational
purposes for clients and friends of Sadis & Goldberg LLP. Its contents should not be construed as legal
advice, and readers should not act upon the information in this Tax Alert without consulting counsel. This
information is presented without any representation or warranty as to its accuracy, completeness or
timeliness. Transmission or receipt of this information does not create an attorney-client relationship with
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