Contributed By McGuireWoods LLP
Foreign passive investors are generally subject to US income tax withholding on their “FDAP” (fixed, determinable, annual or periodic) income, which includes dividends and rents from real property. The 30% withholding rate on FDAP income is reduced if there is an applicable income tax treaty between the US and the foreign investor’s home country. Foreign active investors, on the other hand, are generally subject to the same rates as US taxpayers: 21% for corporations, and 37% for individuals.
When a real estate asset is sold in either an asset deal or an equity deal, tax withholding should be considered regardless of whether the foreign investor is active or passive. The Tax Cuts and Jobs Act imposed additional withholding requirements when a foreign investor sells a partnership interest. Given the heightened concerns on withholding, foreign investors may find it advantageous to invest in US real estate through a “blocker” corporation (including REITs) to alleviate withholding and other tax concerns.