Contributed By Allen Matkins Leck Gamble Mallory & Natsis LLP
Income earned in the US by foreign investors is generally subject to a 30% withholding rate on certain income. Tenants are generally required to withhold 30% of the gross amount payable to the foreign-investor landlord. although this amount may be lower if there is a treaty between the US and the country of citizenship of the foreign investor. Foreign investors generally wish to avoid US tax reporting and the obligation to file tax returns. A foreign investor entity may form a corporation (sometimes called a “blocker corporation”), either foreign or domestic, with the foreign investor as the sole shareholder in order to avoid a direct US tax return filing obligation of such foreign investor or investors.
The Foreign Investment in Real Property Tax Act (FIRPTA) requires 15% tax of the total amount realized from the sale of real property by a foreign investor. Foreign investors may need to file for a tax refund if the amount withheld by the buyer exceeds the foreign investor’s tax liability. The 2017 Tax Cut and Jobs Act added a new provision requiring a 10% withholding on the sales of partnership interests by foreign persons for partnerships engaged in a US trade or business. This will be relevant when real estate deals are structured as sales of entity interests owning real estate rather than direct sales of the real estate.