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Alex Gelinas
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212.573.8159 agelinas@sglawyers.com
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On December 18, 2015, President Obama signed into law a bill that significantly reforms the provisions of the Internal Revenue Code that were originally added 35 years ago by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). The Protecting Americans from Tax Hikes Act of 2015 (the "PATH Act") also includes extensions of a number of tax relief provisions that expired at the end of 2015. The PATH Act makes foreign capital investment in U.S. real estate, energy and infrastructure assets more attractive by expanding certain exemptions from FIRPTA and clarifying the application of certain FIRPTA provisions to REITs and their shareholders.
|. FOREIGN PENSION FUNDS EXEMPTED FROM FIRPTA TAXATION
One of the most significant provisions of the PATH Act is the addition of a complete exemption from FIRPTA for "qualified foreign pension funds" and "entities" wholly owned by such funds, effective on the date of enactment. A foreign pension fund is "qualified" if it is subject to government regulation and certain reporting requirements in its home jurisdiction, is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees, has no greater than 5 percent beneficiaries, and enjoys tax benefits on either contributions or investment income in its home jurisdiction. The new exemption applies to direct investments and investments made through partnerships (including private equity funds). The PATH Act provides for certain details to be addressed by Treasury Regulations. It appears that the "entities" eligible for the FIRPTA exemption could include a U.S. or foreign "blocker" corporation that is wholly owned by a qualifying foreign pension fund. This exemption will, for the first time, permit foreign pension funds, including some governmental funds, to hold control positions in REITs without losing their FIRPTA exemption.
Note that the regular rules of the Internal Revenue Code other than FIRPTA still would apply to the foreign pension fund. Therefore, a foreign pension fund that invested in a partnership that was engaged in a U.S. business (real estate or non-real estate) would still be subject to U.S. federal income tax on its share of the partnership's "effectively connected" U.S. business income in the same manner as other non-U.S. persons making an investment in a U.S. business partnership.
Here are some examples of what can be done in light of the changes made by the PATH Act:
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