Page 49 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
Page 47 of 55
Fileid: … tions/P515/2020/A/XML/Cycle10/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
payments of taxes withheld under section 1446 erty interest by purchase, exchange, gift, or any hold 10% of the amount realized by a foreign
do not apply to PTPs. Instead, apply the rules other transfer. person. The rate of withholding is 15% when
discussed earlier under Depositing Withheld the amount realized is in excess of $1,000,000.
Taxes. U.S. real property interest. A U.S. real prop-
Foreign corporations. A foreign corpora-
erty interest is an interest, other than as a cred- tion that distributes a U.S. real property interest
Section 1446(f) itor, in real property (including an interest in a must withhold a tax equal to 21% of the gain it
mine, well, or other natural deposit) located in
Withholding the United States or the U.S. Virgin Islands, as recognizes on the distribution to its sharehold-
ers.
well as certain personal property that is associ-
ated with the use of real property (such as farm- Domestic corporations. A domestic cor-
Section 13501 of the TCJA added IRC section ing machinery). It also means any interest, other poration must withhold tax on the fair market
1446(f), which, generally, requires the trans- than as a creditor, in any domestic corporation value of the property distributed to a foreign
feree of a partnership interest to withhold 10% unless it is established that the corporation was shareholder if:
of the amount realized on the disposition of the at no time a U.S. real property holding corpora- • The shareholder's interest in the corpora-
partnership interest. tion during the shorter of the period during tion is a U.S. real property interest, and
Notice 2018-29, available at IRS.gov/irb/ which the interest was held, or the 5-year period • The property distributed is either in re-
2018-16_IRB#NOT-2018-29, provides interim ending on the date of disposition (applicable demption of stock or in liquidation of the
guidance regarding withholding of U.S. tax rela- periods). An interest in a corporation is not a corporation.
ted to transfers of interests in partnerships, U.S. real property interest if: The corporation generally must withhold
other than PTPs, under section 1446(f). 1. Such corporation did not hold any U.S. 15% of the amount realized by a foreign person.
Notice 2018-08, available at IRS.gov/irb/ real property interests on the date of dis-
2018-07_IRB#NOT-2018-08, temporarily sus- position, U.S. real property holding corporations.
pends the application of section 1446(f) to the 2. All the U.S. real property interests held by A distribution from a domestic corporation that
disposition of certain PTP interests until further such corporation at any time during the is a U.S. real property holding corporation
guidance is issued. On May 7, 2019, the De- shorter of the applicable periods were dis- (USRPHC) generally is subject to Chapter 3
partment of Treasury and the IRS issued pro- posed of in transactions in which the full withholding and withholding under the U.S. real
posed regulations under IRC section 1446(f) amount of any gain was recognized, and property interest provisions. This also applies to
(84 FR 21198), which include withholding re- a corporation that was a USRPHC at any time
quirements in connection with transfers of PTP 3. Such corporation and any predecessor of during the shorter of the period during which the
interests. such corporation was not a RIC or a REIT U.S. real property interest was held, or the
during the shorter of the applicable peri- 5-year period ending on the date of disposition.
Form 8288 and 8288-A. Currently, to meet ods during which the interest was held. A USRPHC can satisfy both withholding provi-
the withholding, payment, and reporting re- Exception for publicly traded stock. If, at sions if it withholds under one of the following
quirements under section 1446(f), taxpayers any time during the calendar year, any class of procedures.
use Forms 8288 and 8288-A. Follow the in- stock of a domestic corporation is regularly tra- • Apply Chapter 3 withholding on the full
structions in section 5 of Notice 2018-29, avail- ded on an established securities market, an in- amount of the distribution, whether or not
able at IRS.gov/irb/ terest in such corporation will not be treated as any part of the distribution represents a re-
2018-16_IRB#NOT-2018-29. a U.S. real property interest if the beneficial turn of basis or capital gain. If a reduced
owner did not own more than 5% of the total fair tax rate applies under an income tax
treaty, see Regulations section
U.S. Real market value of that class of interests, or 10% of 1.1441-3T(c)(4)(i)(A) for the minimum with-
the total fair market value of that class of inter-
holding rate that may be applicable.
Property Interest ests in the case of a REIT at any time during the • Apply Chapter 3 withholding to the part of
shorter of the applicable periods. Certain con- the distribution that the USRPHC esti-
The disposition of a U.S. real property interest structive ownership rules apply for purposes of mates is a dividend. Then, withhold 15%
determining whether any person meets the
by a foreign person (the transferor) is subject to on the remainder of the distribution (or on a
income tax withholding under section 1445. If above ownership threshold of any class of smaller amount if a withholding certificate
stock. See section 897(c)(6)(C) for more infor-
you are the transferee, you must find out if the is obtained and the amount of the distribu-
transferor is a foreign person. If the transferor is mation on the constructive ownership rules. tion that is a return of capital is estab-
a foreign person and you fail to withhold, you Amount to withhold. The transferee must de- lished).
may be held liable for the tax. duct and withhold a tax on the total amount real- The same procedure must be used for all
Foreign person. A foreign person is a nonresi- ized by the foreign person on the disposition. distributions made during the year. A different
procedure may be used each year.
dent alien individual, or a foreign corporation The rate of withholding generally is 15%.
that has not made an election under section The amount realized is the sum of: Partnerships. If a domestic or foreign part-
897(i) of the Internal Revenue Code to be trea- • The cash paid, or to be paid (principal nership with any foreign partners disposes of a
ted as a domestic corporation, foreign partner- only); U.S. real property interest at a gain, the gain is
ship, foreign trust, or foreign estate. It does not • The fair market value of other property treated as effectively connected income and
include a resident alien individual or, in certain transferred, or to be transferred; and generally is subject to the rules explained ear-
cases, a qualified foreign pension fund. See • The amount of any liability assumed by the lier under Partnership Withholding on Effec-
Retirement and pension funds, later. transferee or to which the property is sub- tively Connected Income. A foreign partnership
ject immediately before and after the trans- that disposes of a U.S. real property interest
Transferor. A transferor is any foreign person fer. may credit the taxes withheld by the transferee
that disposes of a U.S. real property interest by If the property transferred was owned jointly against the tax liability determined under the
sale, exchange, gift, or any other transfer. A by U.S. and foreign persons, the amount real- partnership withholding on effectively connec-
transfer includes distributions to shareholders ized is allocated between the transferors based ted income rules.
of a corporation and beneficiaries of a trust or on the capital contribution of each transferor. If a foreign person disposes of an interest in
estate. a partnership in which 50% or more of the value
The owner of a disregarded entity, not the Residences. This rule applies when the prop- of the gross assets consist of U.S. real property
entity, is treated as the transferor of the property erty disposed of is acquired by the transferee interests and 90% or more of the value of the
transferred by the disregarded entity. for use by the transferee as a residence. If the gross assets consist of U.S. real property inter-
amount realized on such disposition does not ests plus any cash or cash equivalents, the
Transferee. A transferee is any person, for- exceed $300,000, no withholding is required.
eign or domestic, that acquires a U.S. real prop- Otherwise, the transferee generally must with-
Publication 515 (2020) Page 47