Model FIRPTA Provisions

FIRPTA

Foreign investment in real property tax act states that foreign persons disposing the US real property interests are liable to an income tax. Whereas, the residents of the US are also liable to pay tax upon disposition of interests but it’s been cut from their regular income tax. The purchasers/buyers of these real estate interests are to withhold the standard 10% of the payment received.  US real property interest means an interest in real property located in the United States. It also includes sales of shares and holding corporations. The model FIRPTA provisions can be explained as follows:

            If the seller is a foreign person, the standard withholding amount of 10% can be changed to 15%. Withholding is not required when the purchaser receives a statement from the seller explaining that he is not a foreign person and also upon acquisition of shares of a publicly traded corporation. This withholding amount can be brought down after the certification from the IRS (INTERNAL REVENUE SERVICES). The exception rule is that the purchaser is not required to withhold tax if the real estate in question is used as his home (personal use) and if the purchase price of the property is not more than $300,000.

In case the transferee is not a foreign person, the same is to be disclosed to the IRS.  The PATH act, 2016, amended the laws. These will be effective after 14^th of February, 2016.

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Model FIRPTA provisions.

(1). If Seller is a “foreign person” as defined in Section 1445(f) of the Internal Revenue Code (the “Code”) or the regulations issued under it, Purchaser shall deduct and withhold from the purchase price an amount (the “Withholding Amount”) equal to 10% of the total consideration payable to Seller under this agreement (including cash paid or to be paid by Purchaser under this agreement, the fair market value of any property transferred or to be transferred by Purchaser, and any liabilities to which the Premises are subject immediately after the conveyance or which Purchaser assumes) and shall, at the Closing, remit the withheld amount with Internal Revenue Service Forms 8288 and 8288A (or any substitutions or successors) of them (the “Forms”) to the Internal Revenue Service (this process shall be referred to as “Withholding”). Seller agrees to provide Purchaser such information as Purchaser may require to properly complete the Forms. Notwithstanding the foregoing, if the Purchaser or Seller obtains a withholding certificate from the Internal Revenue Service prior to the Closing in accordance with Section 1445(b)(4) and the regulations issued under it, the Withholding Amount shall be the amount, if any, set forth in the withholding certificate (and not the amount set forth above).
(2). If Seller is not a “foreign person” as defined in Section 1445(f) or the regulations issued under it, the purchase price shall be subject to Withholding as above unless the Seller delivers to Purchaser at or prior to the Closing a certification of non-foreign status in the form required by Section 1445(b)(2) and the regulations issued under it, signed by Seller under penalty of perjury and, if requested by Purchaser, in recordable form (the “Affidavit”). The Affidavit shall not prevent Withholding if Purchaser has actual knowledge that the certification in the Affidavit is false or if Purchaser receives notice prior to Closing from an agent of Purchaser or Seller that the certification in the Affidavit is false. Furthermore, if, after the Closing, the Purchaser receives a notice from any source that the certification in the Affidavit is false, Purchaser shall deduct and withhold the lesser of (1) the entire consideration remaining to be paid to Seller under this agreement, if any, or (2) the Withholding Amount. Seller acknowledges that the Affidavit will be retained by Purchaser and will be made available to the Internal Revenue Service upon request. In the event that Seller is a foreign corporation, an Affidavit shall not prevent Withholding unless it is accompanied by a copy of the acknowledgement by the Internal Revenue Service of the Seller’s election under Section 897(i).