FIRPTA 897(i) Foreign Corporation Elects to be Domestic

FIRPTA 897(i) Foreign Corporation Elects to be Domestic

FIRPTA is the Foreign Investment in Real Property Tax Act. It is designed to ensure foreign persons who have ownership of United States Real Property Interests — properly pay tax when they sell United States Real Property Interests. When it comes to U.S. tax implications of FIRPTA, it can get understandably confusing for non-residents — because in general capital gains generated from most non-business-related assets in the United States escapes tax in the United States. This does not apply to US-based real estate and other real property interests, so one of the best ways to avoid this tax implication is to avoid being a foreign person (Person means more than just individuals). Of course, there are other tax planning strategies to consider because while it will benefit you in one regard (FIRPTA), can have other tax impacts which may make it less beneficial to be treated as a domestic corporation instead of a foreign corporation. Let’s take a look at the basics of Internal Revenue Code section 897(i).

(i) Election by Foreign corporation to be treated as Domestic corporation

(1) In general If—

• • • • (A) foreign corporation holds a United States real property interest, and

      • (B) under any treaty obligation of the United States the foreign corporation is entitled to nondiscriminatory treatment with respect to that interest, then such foreign corporation may make an election to be treated as a domestic corporation for purposes of this section, section 1445, and section 6039C.

(2) Revocation only with Consent

• • Any election under paragraph (1), once made, may be revoked only with the consent of the Secretary.

(3) Making of Election

• • • • An election under paragraph (1) may be made only—

        1. (A)if all of the owners of all classes of interests (other than interests solely as a creditor) in the foreign corporation at the time of the election consent to the making of the election and agree that gain, if any, from the disposition of such interest after June 18, 1980, which would be taken into account under subsection (a) shall be taxable notwithstanding any provision to the contrary in a treaty to which the United States is a party, and

        2. (B)subject to such other conditions as the Secretary may prescribe by regulations with respect to the corporation or its shareholders. In the case of a class of interest (other than an interest solely as a creditor) which is regularly traded on an established securities market, the consent described in subparagraph (A) need only be made by any person if such person held more than 5 percent of such class of interest at some time during the shorter of the periods described in subsection (c)(1)(A)(ii). The constructive ownership rules of subsection (c)(6)(C) shall apply in determining whether a person held more than 5 percent of a class of interest.

(4) Exclusive Method of Claiming Nondiscrimination

The election provided by paragraph (1) shall be the exclusive remedy for any person claiming discriminatory treatment with respect to this section.

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