Section 871(d) Tax on Nonresident Alien Individuals
Section 882(d) Tax on Income of Foreign Corporations Connected with United States Business
Section 897 Disposition of Investment in United States Real Property
Section 1445 Withholding of Tax on Dispositions of United States Real Property Interests
Section 6039C Returns with Respect to Foreign Persons Holding Direct Investments in United States Real Property Interests
(1) Treatment as effectively connected with United States trade or business
For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account--
(A) in the case of a nonresident alien individual, under section 871(b)(1), or
(B) in the case of a foreign corporation, under section 882(a)(1),
as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business.
(2) Minimum tax on nonresident alien individuals
(A) In general
In the case of any nonresident alien individual, the taxable excess for purposes of section 55(b)(1)(A) shall not be less than the lesser of--
(i) the individual's alternative minimum taxable income (as defined in section 55(b)(2)) for the taxable year, or
(ii) the individual's net United States real property gain for the taxable year.
(B) Net United States real property gain
For purposes of subparagraph (A), the term "net United States real property gain" means the excess of--
(i) the aggregate of the gains for the taxable year from dispositions of United States real property interests, over
(ii) the aggregate of the losses for the taxable year from dispositions of such interests.
In the case of an individual, a loss shall be taken into account under subsection (a) only to the extent such loss would be taken into account under section 165(c) (determined without regard to subsection (a) of this section).
For purposes of this section--
(1) United States real property interest
(A) In general
Except as provided in subparagraph (B), the term "United States real property interest" means--
(i) an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the Virgin Islands, and
(ii) any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes (at such time and in such manner as the Secretary by regulations prescribes) that such corporation was at no time a United States real property holding corporation during the shorter of--
(I) the period after June 18, 1980, during which the taxpayer held such interest, or
(II) the 5-year period ending on the date of the disposition of such interest.
(B) Exclusion for interest in certain corporations
The term "United States real property interest" does not include any interest in a corporation if--
(i) as of the date of the disposition of such interest, such corporation did not hold any United States real property interests, and
(ii) all of the United States real property interests held by such corporation at any time during the shorter of the periods described in subparagraph (A)(ii)--
(I) were disposed of in transactions in which the full amount of the gain (if any) was recognized, or
(II) ceased to be United States real property interests by reason of the application of this subparagraph to 1 or more other corporations.
(2) United States real property holding corporation
The term "United States real property holding corporation" means any corporation if--
(A) the fair market value of its United States real property interests equals or exceeds 50 percent of
(B) the fair market value of--
(i) its United States real property interests,
(ii) its interests in real property located outside the United States, plus
(iii) any other of its assets which are used or held for use in a trade or business.
(3) Exception for stock regularly traded on established securities markets
If any class of stock of a corporation is regularly traded on an established securities market, stock of such class shall be treated as a United States real property interest only in the case of a person who, at some time during the shorter of the periods described in paragraph (1)(A)(ii), held more than 5 percent of such class of stock.
(4) Interests held by foreign corporations and by partnerships, trusts, and estates
For purposes of determining whether any corporation is a United States real property holding corporation--
(A) Foreign corporations
Paragraph (1)(A)(ii) shall be applied by substituting "any corporation (whether foreign or domestic)" for "any domestic corporation".
(B) Assets held by partnerships, etc.
Under regulations prescribed by the Secretary, assets held by a partnership, trust, or estate shall be treated as held proportionately by its partners or beneficiaries. Any asset treated as held by a partner or beneficiary by reason of this subparagraph which is used or held for use by the partnership, trust, or estate in a trade or business shall be treated as so used or held by the partner or beneficiary. Any asset treated as held by a partner or beneficiary by reason of this subparagraph shall be so treated for purposes of applying this subparagraph successively to partnerships, trusts, or estates which are above the first partnership, trust, or estate in a chain thereof.
(5) Treatment of controlling interests
(A) In general
Under regulations, for purposes of determining whether any corporation is a United States real property holding corporation, if any corporation (hereinafter in this paragraph referred to as the "first corporation") holds a controlling interest in a second corporation--
(i) the stock which the first corporation holds in the second corporation shall not be taken into account,
(ii) the first corporation shall be treated as holding a portion of each asset of the second corporation equal to the percentage of the fair market value of the stock of the second corporation represented by the stock held by the first corporation, and
(iii) any asset treated as held by the first corporation by reason of clause (ii) which is used or held for use by the second corporation in a trade or business shall be treated as so used or held by the first corporation.
Any asset treated as held by the first corporation by reason of the preceding sentence shall be so treated for purposes of applying the preceding sentence successively to corporations which are above the first corporation in a chain of corporations.
(B) Controlling interest
For purposes of subparagraph (A), the term "controlling interest" means 50 percent or more of the fair market value of all classes of stock of a corporation.
(6) Other special rules
(A) Interest in real property
The term "interest in real property" includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon.
(B) Real property includes associated personal property
The term "real property" includes movable walls, furnishings, and other personal property associated with the use of the real property.
(C) Constructive ownership rules
For purposes of determining under paragraph (3) whether any person holds more than 5 percent of any class of stock and of determining under paragraph (5) whether a person holds a controlling interest in any corporation, section 318(a) shall apply (except that paragraphs (2)(C) and (3)(C) of section 318(a) shall be applied by substituting "5 percent" for "50 percent").
(1) In general
Except to the extent otherwise provided in regulations, notwithstanding any other provision of this chapter, gain shall be recognized by a foreign corporation on the distribution (including a distribution in liquidation or redemption) of a United States real property interest in an amount equal to the excess of the fair market value of such interest (as of the time of the distribution) over its adjusted basis.
(2) Exceptions
Gain shall not be recognized under paragraph (1)--
(A) if--
(i) at the time of the receipt of the distributed property, the distributee would be subject to taxation under this chapter on a subsequent disposition of the distributed property, and
(ii) the basis of the distributed property in the hands of the distributee is no greater than the adjusted basis of such property before the distribution, increased by the amount of gain (if any) recognized by the distributing corporation, or
(B) if such nonrecognition is provided in regulations prescribed by the Secretary under subsection (e)(2).
(1) In general
Except to the extent otherwise provided in subsection (d) and paragraph (2) of this subsection, any nonrecognition provision shall apply for purposes of this section to a transaction only in the case of an exchange of a United States real property interest for an interest the sale of which would be subject to taxation under this chapter.
(2) Regulations
The Secretary shall prescribe regulations (which are necessary or appropriate to prevent the avoidance of Federal income taxes) providing--
(A) the extent to which nonrecognition provisions shall, and shall not, apply for purposes of this section, and
(B) the extent to which--
(i) transfers of property in reorganization, and
(ii) changes in interests in, or distributions from, a partnership, trust, or estate,
shall be treated as sales of property at fair market value.
(3) Nonrecognition provision defined
For purposes of this subsection, the term "nonrecognition provision" means any provision of this title for not recognizing gain or loss.
Under regulations prescribed by the Secretary, the amount of any money, and the fair market value of any property, received by a nonresident alien individual or foreign corporation in exchange for all or part of its interest in a partnership, trust, or estate shall, to the extent attributable to United States real property interests, be considered as an amount received from the sale or exchange in the United States of such property.
(h) Special rules for certain investment entities
For purposes of this section--
(1) Look-through of distributions
Any distribution by a qualified investment entity to a nonresident alien individual or a foreign corporation shall, to the extent attributable to gain from sales or exchanges by the qualified investment entity of United States real property interests, be treated as gain recognized by such nonresident alien individual or foreign corporation from the sale or exchange of a United States real property interest. Notwithstanding the preceding sentence, any distribution by a REIT with respect to any class of stock which is regularly traded on an established securities market located in the United States shall not be treated as gain recognized from the sale or exchange of a United States real property interest if the shareholder did not own more than 5 percent of such class of stock at any time during the taxable year.
(2) Sale of stock in domestically controlled entity not taxed
The term "United States real property interest" does not include any interest in a domestically controlled qualified investment entity.
(3) Distributions by domestically controlled qualified investment entities
In the case of a domestically controlled qualified investment entity, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain.
(4) Definitions
(A) Qualified investment entity
(i) In general
The term "qualified investment entity" means--
(I) any real estate investment trust, and
(II) any regulated investment company.
(ii) Termination
Clause (i)(II) shall not apply after December 31, 2007.
(B) Domestically controlled
The term "domestically controlled qualified investment entity" means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons.
(C) Foreign ownership percentage
The term "foreign ownership percentage" means that percentage of the stock of the qualified investment entity which was held (directly or indirectly) by foreign persons at the time during the testing period during which the direct and indirect ownership of stock by foreign persons was greatest.
(D) Testing period
The term "testing period" means whichever of the following periods is the shortest:
(i) the period beginning on June 19, 1980, and ending on the date of the disposition or of the distribution, as the case may be,
(ii) the 5-year period ending on the date of the disposition or of the distribution, as the case may be, or
(iii) the period during which the qualified investment entity was in existence.
(1) In general
If--
(A) 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--
(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
(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, section 1445, and section 6039C.
Except to the extent otherwise provided in regulations, gain shall be recognized by a nonresident alien individual or foreign corporation on the transfer of a United States real property interest to a foreign corporation if the transfer is made as paid in surplus or as a contribution to capital, in the amount of the excess of--
(1) the fair market value of such property transferred, over
(2) the sum of--
(A) the adjusted basis of such property in the hands of the transferor, plus
(B) the amount of gain, if any, recognized to the transferor under any other provision at the time of the transfer.
Except as otherwise provided in this section, in the case of any disposition of a United States real property interest (as defined in section 897(c)) by a foreign person, the transferee shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition.
(1) In general
No person shall be required to deduct and withhold any amount under subsection (a) with respect to a disposition if paragraph (2), (3), (4), (5), or (6) applies to the transaction.
(2) Transferor furnishes nonforeign affidavit
Except as provided in paragraph (7), this paragraph applies to the disposition if the transferor furnishes to the transferee an affidavit by the transferor stating, under penalty of perjury, the transferor's United States taxpayer identification number and that the transferor is not a foreign person.
(3) Nonpublicly traded domestic corporation furnishes affidavit that interest in corporation not United States real property interests
Except as provided in paragraph (7), this paragraph applies in the case of a disposition of any interest in any domestic corporation if the domestic corporation furnishes to the transferee an affidavit by the domestic corporation stating, under penalty of perjury, that--
(A) the domestic corporation is not and has not been a United States real property holding corporation (as defined in section 897(c)(2)) during the applicable period specified in section 897(c)(1)(A)(ii), or
(B) as of the date of the disposition, interests in such corporation are not United States real property interests by reason of section 897(c)(1)(B).
(4) Transferee receives qualifying statement
(A) In general
This paragraph applies to the disposition if the transferee receives a qualifying statement at such time, in such manner, and subject to such terms and conditions as the Secretary may by regulations prescribe.
(B) Qualifying statement
For purposes of subparagraph (A), the term "qualifying statement" means a statement by the Secretary that--
(i) the transferor either--
(I) has reached agreement with the Secretary (or such agreement has been reached by the transferee) for the payment of any tax imposed by section 871(b)(1) or 882(a)(1) on any gain recognized by the transferor on the disposition of the United States real property interest, or
(II) is exempt from any tax imposed by section 871(b)(1) or 882(a)(1) on any gain recognized by the transferor on the disposition of the United States real property interest, and
(ii) the transferor or transferee has satisfied any transferor's unsatisfied withholding liability or has provided adequate security to cover such liability.
(5) Residence where amount realized does not exceed $300,000
This paragraph applies to the disposition if--
(A) the property is acquired by the transferee for use by him as a residence, and
(B) the amount realized for the property does not exceed $300,000.
(6) Stock regularly traded on established securities market
This paragraph applies if the disposition is of a share of a class of stock that is regularly traded on an established securities market.
(7) Special rules for paragraphs (2) and (3)
Paragraph (2) or (3) (as the case may be) shall not apply to any disposition--
(A) if--
(i) the transferee has actual knowledge that the affidavit referred to in such paragraph is false, or
(ii) the transferee receives a notice (as described in subsection (d)) from a transferor's agent or a transferee's agent that such affidavit is false, or
(B) if the Secretary by regulations requires the transferee to furnish a copy of such affidavit to the Secretary and the transferee fails to furnish a copy of such affidavit to the Secretary at such time and in such manner as required by such regulations.
(1) Cannot exceed transferor's maximum tax liability
(A) In general
The amount required to be withheld under this section with respect to any disposition shall not exceed the amount (if any) determined under subparagraph (B) as the transferor's maximum tax liability.
(B) Request
At the request of the transferor or transferee, the Secretary shall determine, with respect to any disposition, the transferor's maximum tax liability.
(C) Refund of excess amounts withheld
Subject to such terms and conditions as the Secretary may by regulations prescribe, a transferor may seek and obtain a refund of any amounts withheld under this section in excess of the transferor's maximum tax liability.
(2) Authority of Secretary to prescribe reduced amount
At the request of the transferor or transferee, the Secretary may prescribe a reduced amount to be withheld under this section if the Secretary determines that to substitute such reduced amount will not jeopardize the collection of the tax imposed by section 871(b)(1) or 882(a)(1).
(3) Procedural rules
(A) Regulations
Requests for--
(i) qualifying statements under subsection (b)(4),
(ii) determinations of transferor's maximum tax liability under paragraph (1), and
(iii) reductions under paragraph (2) in the amount required to be withheld,
shall be made at the time and manner, and shall include such information, as the Secretary shall prescribe by regulations.
(B) Requests to be handled within 90 days
The Secretary shall take action with respect to any request described in subparagraph (A) within 90 days after the Secretary receives the request.
(1) Notice of false affidavit; foreign corporations
If--
(A) the transferor furnishes the transferee an affidavit described in paragraph (2) of subsection (b) or a domestic corporation furnishes the transferee an affidavit described in paragraph (3) of subsection (b), and
(B) in the case of--
(i) any transferor's agent--
(I) such agent has actual knowledge that such affidavit is false, or
(II) in the case of an affidavit described in subsection (b)(2) furnished by a corporation, such corporation is a foreign corporation, or
(ii) any transferee's agent, such agent has actual knowledge that such affidavit is false,
such agent shall so notify the transferee at such time and in such manner as the Secretary shall require by regulations.
(2) Failure to furnish notice
(A) In general
If any transferor's agent or transferee's agent is required by paragraph (1) to furnish notice, but fails to furnish such notice at such time or times and in such manner as may be required by regulations, such agent shall have the same duty to deduct and withhold that the transferee would have had if such agent had complied with paragraph (1).
(B) Liability limited to amount of compensation
An agent's liability under subparagraph (A) shall be limited to the amount of compensation the agent derives from the transaction.
(3) Transferor's agent
For purposes of this subsection, the term "transferor's agent" means any person who represents the transferor--
(A) in any negotiation with the transferee or any transferee's agent related to the transaction, or
(B) in settling the transaction.
(4) Transferee's agent
For purposes of this subsection, the term "transferee's agent" means any person who represents the transferee--
(A) in any negotiation with the transferor or any transferor's agent related to the transaction, or
(B) in settling the transaction.
(5) Settlement officer not treated as transferor's agent
For purposes of this subsection, a person shall not be treated as a transferor's agent or transferee's agent with respect to any transaction merely because such person performs 1 or more of the following acts:
(A) The receipt and the disbursement of any portion of the consideration for the transaction.
(B) The recording of any document in connection with the transaction.
(1) Certain domestic partnerships, trusts, and estates
In the case of any disposition of a United States real property interest as defined in section 897(c) (other than a disposition described in paragraph (4) or (5)) by a domestic partnership, domestic trust, or domestic estate, such partnership, the trustee of such trust, or the executor of such estate (as the case may be) shall be required to deduct and withhold under subsection (a) a tax equal to 35 percent (or, to the extent provided in regulations, 20 percent) of the gain realized to the extent such gain--
(A) is allocable to a foreign person who is a partner or beneficiary of such partnership, trust, or estate, or
(B) is allocable to a portion of the trust treated as owned by a foreign person under subpart E of part I of subchapter J.
(2) Certain distributions by foreign corporations
In the case of any distribution by a foreign corporation on which gain is recognized under subsection (d) or (e) of section 897, the foreign corporation shall deduct and withhold under subsection (a) a tax equal to 35 percent of the amount of gain recognized on such distribution under such subsection.
(3) Distributions by certain domestic corporations to foreign shareholders
If a domestic corporation which is or has been a United States real property holding corporation (as defined in section 897(c)(2)) during the applicable period specified in section 897(c)(1)(A)(ii) distributes property to a foreign person in a transaction to which section 302 or part II of subchapter C applies, such corporation shall deduct and withhold under subsection (a) a tax equal to 10 percent of the amount realized by the foreign shareholder. The preceding sentence shall not apply if, as of the date of the distribution, interests in such corporation are not United States real property interests by reason of section 897(c)(1)(B). Rules similar to the rules of the preceding provisions of this paragraph shall apply in the case of any distribution to which section 301 applies and which is not made out of the earnings and profits of such a domestic corporation.
(4) Taxable distributions by domestic or foreign partnerships, trusts, or estates
A domestic or foreign partnership, the trustee of a domestic or foreign trust, or the executor of a domestic or foreign estate shall be required to deduct and withhold under subsection (a) a tax equal to 10 percent of the fair market value (as of the time of the taxable distribution) of any United States real property interest distributed to a partner of the partnership or a beneficiary of the trust or estate, as the case may be, who is a foreign person in a transaction which would constitute a taxable distribution under the regulations promulgated by the Secretary pursuant to section 897.
(5) Rules relating to dispositions of interest in partnerships, trusts, or estates
To the extent provided in regulations, the transferee of a partnership interest or of a beneficial interest in a trust or estate shall be required to deduct and withhold under subsection (a) a tax equal to 10 percent of the amount realized on the disposition.
(6) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations providing for exceptions from provisions of this subsection and regulations for the application of this subsection in the case of payments through 1 or more entities.
For purposes of this section--
(1) Transferor
The term "transferor" means the person disposing of the United States real property interest.
(2) Transferee
The term "transferee" means the person acquiring the United States real property interest.
(3) Foreign person
The term "foreign person" means any person other than a United States person.
(4) Transferor's maximum tax liability
The term "transferor's maximum tax liability" means, with respect to the disposition of any interest, the sum of--
(A) the maximum amount which the Secretary determines could be imposed as tax under section 871(b)(1) or 882(a)(1) by reason of the disposition, plus
(B) the amount the Secretary determines to be the transferor's unsatisfied withholding liability with respect to such interest.
(5) Transferor's unsatisfied withholding liability
The term "transferor's unsatisfied withholding liability" means the withholding obligation imposed by this section on the transferor's acquisition of the United States real property interest or on the acquisition of a predecessor interest, to the extent such obligation has not been satisfied.
To the extent provided in regulations, any foreign person holding direct investments in United States real property interests for the calendar year shall make a return setting forth--
(1) the name and address of such person,
(2) a description of all United States real property interests held by such person at any time during the calendar year, and
(3) such other information as the Secretary may by regulations prescribe.
For purposes of this section, a foreign person shall be treated as holding direct investments in United States real property interests during any calendar year if--
(1) such person did not engage in a trade or business in the United States at any time during such calendar year, and
(2) the fair market value of the United States real property interests held directly by such person at any time during such year equals or exceeds $50,000.
For purposes of this section--
(1) United States real property interest
The term "United States real property interest" has the meaning given to such term by section 897(c).
(2) Foreign person
The term "foreign person" means any person who is not a United States person.
(3) Attribution of ownership
For purposes of subsection (b)(2)--
(A) Interests held by partnerships, etc.
United States real property interests held by a partnership, trust, or estate shall be treated as owned proportionately by its partners or beneficiaries.
(B) Interests held by family members
United States real property interests held by the spouse or any minor child of an individual shall be treated as owned by such individual.
(4) Time and manner of filing return
All returns required to be made under this section shall be made at such time and in such manner as the Secretary shall by regulations prescribe.
A nonresident alien individual or foreign corporation subject to tax under section 897(a)(and any person required to withhold tax under section 1445) shall pay any tax and file any return required by this title--
(1) to the United States, in the case of any interest in real property located in the United States and an interest (other than an interest solely as a creditor) in a domestic corporation (with respect to the United States) described in section 897(c)(1)(A)(ii), and
(2) to the Virgin Islands, in the case of any interest in real property located in the Virgin Islands and an interest (other than an interest solely as a creditor) in a domestic corporation (with respect to the Virgin Islands) described in section 897(c)(1)(A)(ii).
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