8002 / Are there any exceptions to the tax that is imposed upon certain REIT distributions to foreign individuals under FIRPTA?

Yes. While the Foreign Investment in Real Property Tax Act (FIRPTA) imposes a 21 percent tax upon certain REIT distributions to foreign individuals and corporations (see Q 8001), this withholding requirement applies only to gains and losses resulting from a sale or exchange of a United States real property interest. Several exclusions apply to this general rule.

First, a foreign investor may avoid the 21 percent FIRPTA tax if investing in certain publicly-traded REITs. If the shares of the REIT are regularly traded in a U.S. securities market, a distribution to a foreign individual will not be treated as gain recognized from the sale or exchange of a United States real property interest if the foreign individual (or foreign corporation) does not own more than 10 percent of the REIT shares (5 percent prior to 2016) at any time during the one-year period ending on the date of the distribution.¹

Further, if the REIT qualifies as a domestically controlled qualified investment entity, distributions to foreign individuals or corporations will not be subject to the tax because the IRC defines the term “United States real property interest” to exclude interests in a domestically controlled qualified investment entity.² A domestically controlled qualified investment entity includes a REIT (whether publicly or non-publicly held) in which foreign individuals and corporations own less than 50 percent of the value at all times during the shortest of the following periods:

(1) The period beginning June 19, 1980 and ending on the date of the distribution;

(2) The five-year period ending on the date of the distribution; or

(3) The period that the REIT has been in existence.³

These rules effectively allow a foreign individual or corporation to avoid the tax imposed upon REIT distributions under FIRPTA if the foreign ownership is limited to 5 percent of a publicly-traded REIT or less than 50 percent of any other REIT.