US Treasury Revises Foreign Ownership Rules for Real Estate Investment Trusts

The US Treasury Department and IRS released final regulations revising rules for determining domestic control of qualified investment entities under FIRPTA. The changes increase the foreign ownership threshold to over 50% and treat qualified foreign pension funds as foreign persons.

author-image
Rafia Tasleem
New Update
US Treasury Revises Foreign Ownership Rules for Real Estate Investment Trusts

US Treasury Revises Foreign Ownership Rules for Real Estate Investment Trusts

The US Treasury Department and the Internal Revenue Service (IRS) released final regulations on April 24, 2024, revising the rules for determining whether qualified investment entities (QIEs) are domestically controlled under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). The changes primarily affect the treatment of qualified foreign pension funds (QFPFs) and increase the foreign ownership threshold from 25% to over 50% for non-publicly traded domestic C corporations.

Why this matters: The revised rules have significant implications for foreign investment in US real estate, potentially altering the global flow of capital and influencing the US real estate market. The revised rules have significant implications for foreign investment in US real estate, potentially altering the global flow of capital and influencing the US real estate market. As foreign investors and fund managers adapt to these changes, the impact on the US economy and global financial ecosystem may be substantial.

The final regulations generally follow the proposed regulations issued in January 2023, with certain changes. The 50% ownership threshold is determined by fair market value, not vote, but it remains unclear how the fair market value of stock in a non-publicly traded C corporation is determined, especially if there are multiple classes of equity. Despite this ambiguity, "the expansion of the ownership requirement to over 50% provides some relief for taxpayers."

Under the new regulations, QFPFs are treated as foreign persons for the purpose of determining domestic control. A QFPF, including any part of a QFPF or a qualified controlled entity, is treated as a foreign person, regardless of whether the fund or entity qualifies for the exception from FIRPTA. The transition rules do not apply to structures currently taking a position contrary to this aspect of the final regulations.

The final regulations introduce new rules for determining the status of certain shareholders. A person holding less than 5% of a class of QIE stock that is publicly traded on a US securities market is treated as a US person, unless the QIE has actual knowledge that the person is not a US person or is foreign controlled. Look-through treatment is required for publicly traded domestic corporations and publicly traded partnerships if the QIE has actual knowledge that the entity is foreign controlled.

Publicly traded regulated investment companies (RICs) that are not QIEs are treated as non-look-through persons, but look-through treatment is required if the QIE has actual knowledge that a publicly traded RIC is foreign controlled. The final regulations do not provide guidance on procedures for determining whether a domestic C corporation is foreign controlled or for identifying non-look-through persons.

QIEs and private funds that utilize QIEs in their structures should revisit their investor onboarding procedures and information requests in light of the final regulations. "The final regulations grant relief in the form of a 10-year transition rule for existing QIEs with respect to the new rules."

The revised rules for determining domestic control of real estate investment trusts and qualified investment entities mark a significant change in the US tax environment. The increased foreign ownership threshold and treatment of qualified foreign pension funds as foreign persons may have far-reaching implications forforeign investmentin US real estate. Real estate industry adaptations to these changes will require investors and fund managers to carefully reassess their structures and procedures in light of the new regulations.

Key Takeaways

  • US Treasury releases final regulations revising FIRPTA rules for qualified investment entities (QIEs).
  • Foreign ownership threshold increased from 25% to over 50% for non-publicly traded domestic C corporations.
  • Qualified foreign pension funds (QFPFs) treated as foreign persons for domestic control purposes.
  • New rules introduced for determining shareholder status, including look-through treatment for publicly traded entities.
  • 10-year transition rule granted for existing QIEs to adapt to new regulations.