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Extended Withholding Reach - Selling Shares in a Domestic U.S. Corporation

22/04/2014


There are potential IRS withholding obligations under the Foreign Investment in Real Property Tax Act (FIRPTA) when a non-U.S. person disposes of a United States real property interest (USRPI). USRPI refers to all U.S.-based real property, including interests in mines, wells or other natural deposits. This issue commonly arises when a Canadian resident individual (non-U.S. citizen) or Canadian corporation sells U.S.-based real estate.

This withholding also applies to the disposal of interests in privately owned U.S. domestic corporations which own a large amount of USRPI. If the fair market value of USRPI is 50% or more of the total assets, then it is considered a United States real property holding corporation (USRPHC).

Such withholdings are meant to encourage U.S. filing compliance by the non-U.S. person and protect the IRS’s ability to collect any tax owing from the disposition. As part of this initiative, the IRS requires that the non-U.S. person disposing of their interest establish if their interest in such corporation is considered a USRPHC. Such person, before the transfer date, should request the corporation to provide them with a determination. The corporation will provide notices to both the non-U.S. person and the IRS.

There are two main benefits for the non-US person to obtain this statement. First, if the company is in fact a USRPHC, the statement may help them avoid a penalty for failing to file. Second, they will be able to avoid unnecessary withholding tax by the person acquiring the interest.